(Bloomberg) — European luxury brands have lost nearly $250 billion in market value in recent months, but their stock-market clout could weaken further as China’s economic downturn worsens.
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Shares in companies that make luxury clothing, handbags and jewelry, once seen as Europe’s answer to the U.S.’s “Magnificent Seven” tech giants, have slumped as spending slumps. More ominously, there are signs that wealthy Chinese who once flocked to the luxury boutiques of Paris, Milan and Hong Kong are losing their appetite for expensive goods amid an economic downturn that may never return.
“This year will be more volatile and more painful because it comes after excessive growth,” said Flavio Sereda, investment manager at GAM UK, referring to the period immediately after the pandemic when consumers emerging from lockdown spent money on shopping and travel.
Burberry Group, the iconic British raincoat maker, has been dropped from London’s FTSE 100 stock index, which has seen its market capitalization fall 70% over the past year. Burberry is the only major brand to be removed from the index, but a Goldman Sachs index of luxury goods has seen its market capitalization fall by $240 billion since its peak in March.
Gucci-owner Kering SA and Hugo Boss AG have been the hardest hit, with their shares having almost halved in the past year. Kering, once a top 10 stock on France’s CAC 40 index, now ranks 23rd. And industry giant LVMH Moët Hennessy Louis Vuitton SE, Europe’s largest by market capitalization a year ago, has fallen to second place.
The collapse of the post-pandemic consumption bubble was made clear in recent earnings reports: Kering, Burberry and Hugo Boss issued profit warnings, while LVMH saw its flagship leather goods division post just a 1% quarterly organic revenue growth, down from a 21% increase a year ago. Only ultra-high-net-worth brands such as Hermès International SCA and Brunello Cucinelli SpA were completely spared the revenue decline.
“Slowly and long”
GAM’s Sereda, who co-manages a fund that invests in luxury stocks, expects sales to recover next year to at least the “mid single digit” levels that are indicative of the sector’s long-term trend.
But what if declining revenues and tighter margins become the new normal? Some think it could be.
The story continues
UBS analyst Susanna Puss described the outlook for the luxury industry as “more moderate growth over a longer period.” She lowered her organic sales growth forecasts for 2025 and the second half of 2024, predicting that “the industry appears to be entering a cycle of its own after several years of strength at the higher end.”
And the news flow about the impact of China’s economic slowdown seems to support that judgment.
LVMH’s luxury jewellery brand Tiffany is looking to cut the size of its Shanghai flagship store in half, Bloomberg reported. Luxury shopping malls in Hong Kong that once attracted big-spending Chinese are now nearly empty. And in Switzerland, watchmakers are seeking government aid to counteract falling exports.
Many analysts agreed with Puss and lowered their earnings and share price forecasts. Bank of America’s Ashley Wallace said consensus estimates for the second half of the year may be too high, while Morgan Stanley’s Edouard Auban lowered his price targets for LVMH and Richemont, saying they are especially vulnerable to a slowdown in China.
Some see a silver lining in slightly improved stock valuations. The MSCI Europe Textile, Apparel and Luxury Goods Index is still trading at a significantly higher level than the MSCI Europe Index, but it’s still well off the levels seen during the 2021 boom.
“A downturn is probably the best time to invest, because the industry has a clear long-term competitive advantage,” said Morningstar analyst Elena Sokolova, who sees an opportunity for Kering and predicts that Gucci could benefit from strong brand recognition when an upturn occurs.
But GAM’s Sereda prefers top-end luxury brands like Hermes.
“You don’t want to own a brand that doesn’t have brand heat and you don’t want to have meaningful exposure to the aspirational consumer,” he said. “And you certainly don’t want to have real exposure to the aspirational consumer in China.”
–With assistance from Michael Msika.
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