By Carol Ryan 

Wealthy people used to buy designer goods on their travels. Now they might be buying them because they can't go anywhere.

On Thursday, French handbag maker Hermès became the first major luxury-goods company to report a return to growth in the third quarter. Sales at constant currencies increased 7% compared with the same period of last year. Analysts covering the stock had anticipated a slight decline.

The Chinese are driving most of the recovery, but not all. The level of demand from local European and U.S. consumers in the summer was a surprise at both Hermès and its Parisian peer LVMH Moët Hennessy Louis Vuitton, which reported its third-quarter numbers last week. In its Americas region, Hermès sales were just 5.2% below their level a year ago, even though the brand's Hawaii boutiques have been closed since August. European buyers are also offsetting some of the drop in demand from tourists in Hermès' home market.

The severity of the Covid-19 pandemic and travel restrictions in the West mean cash that would otherwise be spent on holidays or in restaurants is finding its way into the tills of designer brands. Consultants at Bain have forecast a sales decline of 20% to 35% across the global luxury-goods industry in 2020. If shoppers have fewer opportunities to spend on experiences, the high end of that range may be too pessimistic.

"The idea that we would have to wait a few years for luxury brands to get back to 2019 levels was wrong," says Bernstein analyst Luca Solca.

For now, investors are betting that the biggest luxury brands will hoover up all the spoils. Hermès stock is up 23% this year. LVMH, whose most important assets are Christian Dior and Louis Vuitton, has gained a more modest 4% as its duty-free retail and cosmetics businesses are highly exposed to airports.

The bet on top brands has form: They have grown much faster than the luxury-goods industry as a whole in recent years. Still, signs that shoppers are buying again in mature markets might be positive news for the laggards too. Shares in Burberry and Compagnie Financière Richemont, which owns Cartier as well as lots of smaller Swiss watch brands, are down around one-third and one-fifth respectively this year. They may have more potential to surprise investors than blue chips such as Hermès, whose stock rose 3% Thursday.

Selling to Chinese consumers is still crucial if luxury brands want to dig themselves out of their hole. But the recovery should be faster if shoppers close to home are splashing out too. Hermès and LVMH's flagship leather-goods division might not be the only ones to benefit.

Write to Carol Ryan at carol.ryan@wsj.com

 

(END) Dow Jones Newswires

October 22, 2020 08:53 ET (12:53 GMT)

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