European luxury’s earnings-season wobble has helped fuel a US$200 billion wipeout in the sector’s four biggest stocks since their peak earlier in the year.
If this week’s batch of luxury results have proved anything, it is that even the strongest names are succumbing to reduced spending by wealthy Chinese shoppers.
Before industry bellwether LVMH’s tepid sales numbers stunned traders, a case could be made that a luxury slowdown was mostly confined to companies dealing with management and brand upheaval. Those problems contributed to profit warnings, most recently from Gucci owner Kering SA, which plunged as much as 10 percent on Thursday.
Instead, LVMH’s broad-based miss triggered the sharpest drop in the stock this year and shattered any lingering complacency among investors relying on Bernard Arnault’s behemoth to revive a rally in the sector. A Goldman Sachs Group Inc basket of European luxury-related stocks soared 57 percent between 2020 and 2023.
GAM UK’s Flavio Cereda is calling 2024 a “detoxification” year for luxury after the outsize growth generated during the pandemic.
“It’s a challenging year,” the investment manager said by phone.
“You have to do your homework very, very carefully.”
A cohort of European luxury stocks has drawn comparisons with Wall Street’s Tech Megacaps, for their ability to deliver fast growth and withstand swings in the economy. That label looks frayed and ill-fitting now, with Goldman’s basket of luxury names down nearly 20% since hitting a peak in March.
Chinese consumers’ purchasing power has turned from the lifeblood of the sector to a source of grave concern. While the post-pandemic period saw shoppers splurge on designer items as they escaped months of lockdowns, China’s misfiring economy has curbed spending even as demand returns to more normal levels. LVMH’s sales in the region that includes China slid 14 percent in the second quarter.
There have been profit warnings from Burberry Group Plc and Hugo Boss AG. Even Richemont, regarded as fortified by its high-end jewellery brands Cartier and Van Cleef & Arpels, was hit by a 27 percent drop in Greater China sales during the quarter, with its watchmaking division posting a 13 percent slump.
The going is even harder for underperforming companies attempting to revive their fortunes against this backdrop, compared with those with a more loyal — and often wealthier — customer base. The risk is that the weaker luxury market is leaving all but the mightiest players exposed to a prolonged downturn.
“Successful implementation of brand turnarounds seems to have become more complex in an increasingly competitive luxury market, where scale, top design talent and marketing firepower matter,” Citigroup Inc. analyst Thomas Chauvet said in a note following Burberry’s update.
There are still exclusive outposts of optimism on the luxury landscape. Brunello Cucinelli SpA, the Italian maker of upmarket cashmere clothing, has shown an ability to withstand the tough conditions. This bodes well for Hermes, which reports on Thursday, given that the Birkin-bag maker’s clientele tends to be super-wealthy. Likewise, Chinese tourists are still spending when they go abroad, something LVMH has reported from Japan.
For investors with a longer-term view, the pullback is dragging valuations to slightly more palatable levels. Bank of America Corp. analyst Ashley Wallace said the earnings-induced swoon in LVMH’s shares is an “attractive buying opportunity.”
“It is important to not lose sight over the big picture: LVMH is exposed to an industry with structural growth, high barriers to entry, a strong portfolio of brands and best-in-class management team,” Wallace said in a note.
That said, the question for those seeking an entry point rests on the timing of a recovery, and whether it will be in the second half of the year or in 2025.
With political upheaval on both sides of the Atlantic adding an element of uncertainty, investors may have to be patient.
“The second half will continue to see moderation until we see a pickup in travel and until we see more stability and certainty,” Telsey Advisory Group’s Dana Telsey said.
“So until these happen, luxury companies will have to continue to navigate the landscape with innovation in products and marketing and continuing to get closer to their customers.” — Bloomberg
