by Mimosa Spencer

PARIS (Reuters) – The doubling of the price of gold in two years as well as U.S. tariffs and a weakening dollar have made it harder to defend gross margins for players in the high-end goods industry, such as LVMH, owner of U.S. jeweler Tiffany.

“Each of these factors alone could be offset by high-end jewelry and watch players, but all together it becomes very difficult to keep profit margins safe from erosion,” observed Jon Cox, head of Swiss equities at Kepler Cheuvreux.

Gold surpassed $4,000 an ounce last week to hit a record high as investors sought safety amid economic and geopolitical uncertainty and expectations of further U.S. interest rate cuts.

PRESSURE ON MARGINS SHOULD DRIVE PRICES

“There will definitely be pressure on margins,” added Jon Cox, noting that brands would likely implement price increases to consumers gradually.

LVMH, the world’s largest luxury conglomerate, is expected to report stable third-quarter sales when it reports results on Tuesday, with fashion and leather goods down 4% and watches and jewelry up 1%, according to a VisibleAlpha consensus cited by HSBC.

Jewelry brands including Tiffany and Bulgari (LVMH), Cartier, Van Cleef & Arpels (Richemont) and Boucheron (Kering) have recently outperformed their fashion-focused partners.

At LVMH, sales of watches and jewelry stagnated in the first half and profit fell 13%. Its fashion and leather goods division, which includes Louis Vuitton and Dior, saw its profit fall 18% on turnover down 7%.

Watches and jewelry represent more than 12% of LVMH’s sales, and fashion represents around half of the group’s sales.

Tiffany and Bulgari are among LVMH’s top five brands in terms of annual revenue, according to HSBC estimates.

BE CAREFUL ON THE IMPLICATION OF COST INCREASES

Despite gold’s sharp rise, the metal represents only a small portion of luxury jewelry brands’ production costs, accounting for just 10% of jewelry sales on average, according to Manuel Lang, equity analyst, consumer goods at Vontobel.

That percentage falls to between 5 and 8 percent for very high-end designer brands, said Luca Solca, an analyst at Bernstein.

Thus, “even a modest increase in retail prices could offset increases in the price of gold,” noted Luca Solca.

As brands seek to reduce pressure on margins, they should be careful in passing on price increases to consumers so as not to erode demand, other analysts said.

For Swiss company Richemont, which focuses more on jewelry than rivals and has outperformed peers, that didn’t translate into upward revisions to profit forecasts due to factors such as policy rates and gold prices, which were “completely beyond their control,” said Zuzanna Pusz, an analyst at UBS.

(Written by Mimosa Spencer; Etienne Breban; edited by Augustin Turpin)

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