Investing.com — The global luxury industry is in turmoil after analysts downgraded several major brands, citing an economic slowdown in key markets, particularly China.
Stock Kering (EPA:) And Burberry Group (LON:) were down 3.2% and 5.1%, respectively, as of 5:51 a.m. ET.
China’s once-fast-growing luxury market now appears to be facing structural challenges rather than just an economic downturn, according to Barclays analysts, leading to sharp revisions in earnings forecasts and stock valuations for several major companies.
The Chinese economy, long a key driver of luxury growth, is coming under pressure from a combination of economic headwinds.
Barclays analysts said in a note that a volatile property market, slowing GDP growth and weak financial markets are putting pressure on disposable income, a key driver of luxury spending.
Many of the factors that drove Chinese consumers to the luxury market over the past decade are now weakening. In this environment, the future of the luxury industry in China is looking increasingly uncertain, with brands reporting significant declines in summer sales.
Luxury sales in mainland China have turned negative, with some brands seeing a sharp decline of as much as 50% in July and August. Growth in China’s luxury market has all but stagnated as consumers have become more picky amid the economic downturn.
Although luxury VIP consumers have been somewhat insulated from the general economic downturn, they are beginning to show signs of strain as demand for luxury goods weakens across all consumer segments.
That leaves the outlook for luxury goods in China bleak, with no recovery expected until around 2027, although analysts do expect growth for luxury goods in China to return to more favorable levels.
These findings led analysts to downgrade stock ratings for two of the biggest luxury brands, Burberry and Kering.
Burberry faces further downside risks, despite being one of the sector’s weaker performers in recent years, as the brand struggles to maintain its status as a premium luxury brand and its inability to execute a disciplined full-price strategy has further eroded credibility.
“Burberry is likely to turn to a loss for the first time in the first half of 2025 and, given that the challenging environment is expected to continue into next year, profit margins may struggle to recover in the near term,” Barclays analysts said.
As a result, Burberry’s shares have been downgraded from ‘equal weight’ to ‘underweight’, with a lowered target price to £540.
Kering, which owns many of the world’s biggest luxury brands, also faces big challenges, particularly at flagship Gucci, whose sales in China have fallen sharply compared to rivals and there is widespread skepticism about the impact the brand’s latest products will have.
Gucci’s projected recovery appears to be slowing, with many analysts lowering their forecasts, and Kering’s other brands, including Saint Laurent, Bottega Veneta and Balenciaga, are not expected to grow enough to offset Gucci’s struggles.
As a result, Kering’s rating has been downgraded to “underweight” and the target price has been reduced to €210, implying a potential downside of 11%.
The downgrades reflect broader concerns across the luxury industry, with summer sales trends being particularly negative, with many brands in China reporting double-digit declines.
“We believe the luxury industry environment is gradually easing, which is likely to have a major impact on Gucci as it transitions to a new design aesthetic while juggling a new and old product mix,” analysts at RBC Capital Markets said in a statement, who downgraded Kering to “sector perform” from “outperform.”
Third-quarter results are expected to be weaker than previously expected, with many analysts revising their estimates across the board.
The impact on the luxury industry is clear, with growth set to slow in the near future. Analysts predict that overall industry growth will slow to 4% in 2025, down from 7% previously. Confidence is particularly poor in China, with flat sales seen as the best-case scenario for many brands over the next 12 months. Travel is expected to recover somewhat, with sales to overseas Chinese tourists expected to grow, but a full recovery in domestic demand is unlikely until the second half of the decade.
At the same time, the luxury sector is becoming increasingly polarized: Brands with strong assets and deep connections to luxury consumers, such as Hermès, Louis Vuitton and Brunello Cucinelli, are more likely to weather the crisis than others.
Those brands that have successfully cultivated exclusivity and desirability will remain top of mind for affluent consumers even during economic downturns. Conversely, brands in transition or with weak brand positioning, such as Burberry and Gucci, are at greater risk of losing market share.
In response to these developments, analysts revised their price targets for the big luxury brands, lowering LVMH’s target to 795 euros from 860 euros, though the company is still outperforming most other stocks.
Richemont, parent company of luxury brands such as Cartier, lowered its price target to €150 from €164. Perennial powerhouse Hermes slightly cut its price target to €2,220 from €2,260, reflecting cautious optimism about its future growth prospects. Moncler and Prada (OTC:) also slightly lowered their price targets, reflecting the overall market slowdown.
The cuts have been steeper for brands facing more significant challenges: Ferragamo, which is struggling to remain relevant, had its target price cut to 6.9 euros from 7.2 euros, while Swatch, which operates in the highly competitive luxury watch sector, had its target price cut to 145 Swiss francs from 153.
Overall, the outlook for the luxury sector remains uncertain: while the sector has historically been resilient during downturns, emerging structural challenges in China, combined with global macroeconomic headwinds, are expected to keep growth subdued in the near term.
Brands that have built strong, distinctive identities are in a better position to weather this environment, but even they will not be immune to the effects of the broader economic slowdown.