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 has been 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, the iconic British raincoat maker, has been dropped from London’s FTSE 100 stock index after its market capitalization fell 70 percent. Burberry is the only major brand to be removed from the index, but the Goldman Sachs luxury goods index has lost $240 billion in market capitalization since its peak in March. Gucci-owner Kering and Hugo Boss have been the hardest hit, with their market capitalizations falling by almost half over the past year. Kering, once a top 10 stock in France’s CAC 40 index, is now in 23rd place. And industry giant LVMH Moët Hennessy Louis Vuitton, 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, and LVMH saw its flagship leather goods division post just a 1% quarterly organic revenue increase, down from a 21% increase a year ago. Only ultra-rich brands like Hermès International and Brunello Cucinelli were completely spared the revenue decline.
GAM’s Mr. Sereda, who co-manages a fund that invests in luxury stocks, expects sales to bounce back next year to at least the “mid-single digit” levels he calls the industry’s long-term trend. But what if declining revenues and tighter margins become the new normal? Some think that could happen.