The luxury sector is going through a really difficult time. These companies, which experienced a powerful post-covid boom and became among the big stars of a pessimistic market about the economy in 2022 and part of 2023, are going through a major crisis. The main European luxury stocks assume with growing anxiety that their reality has completely changed. Even if, after the results, everyone thought that the crisis had happened, the falls have not stopped following the latest reports in which analysts give in to a deeper problem: the blow will be longer, more devastating and crueler than expected.
The luxury sector has traditionally been an unbreakable shield in times of economic slowdown and inflation. This sector represents life insurance for European markets and the European economy. The reason is that it is counter-cyclical and, as Charles Stanley explains, “even if these companies are not totally immune to what is happening around them, the sector has a wealthy and prestigious clientele that bring luxury items. This means that today’s big brands will not be as affected by recessions or the cost of living crisis.”
In this sense, having a sector that continues to grow, create jobs and improve the stock market in dark times is a real life insurance for a European economy that is approaching a slowdown. And this does not mean that it is a niche or a small sector for Europe. French luxury and its strong presence in the world have led European companies in the sector bills 800 billion euros per year, In other words, they represent almost 4% of the region’s GDP.
Although the sector, as conditions improved in early 2023, saw a major stock market explosion in January, it has already collapsed by 18% since March. Leading the way is the flagship, LVMH, parent company of Louis Vuitton, Sephora, Tiffany’s, among others. The Arnault empire has fallen by 18% since the beginning of the year. KeringGucci’s parent company did so by 43%, Christian Dior 18%, Burberry 58% and Hugo Boss still 44%. Honourable exceptions have been saved, such as Richemont (+2%), Hermes (+1%) or Prada (+12%). That is, they are all showing significant declines since reaching their March highs.
Several factors have a determining weight. One of them concerns prices. One of the factors of post-covid success is that after the lockdown and with huge savings imposed on consumers, demand has skyrocketed. Something that has allowed companies not only to sell more, but also to do so at higher prices. Although the boom in demand seemed to be already buried, it now seems to have ended. the bull with the prices.
From Bain&Company they explained that between 2019 and 2022 Prices increased by 22%. Faced with this situation, KPMG explained that, although it is a very flexible sector when it comes to imposing these changes on its customers, the reality is that there is “a natural limit” that “discourages consumption”. The market must now readjust after having gone, in many cases, too far with these higher prices, as defended by the Italian company Tod’s in its results published last week.
Although the paradigmatic value is undoubtedly China. Forecasts continue to indicate that Asian giant to become world’s largest market luxury goods by 2025, according to the latest reports from Bain and Bernstein. Furthermore, these hopes have grown especially in the case of the European industry, which in the last decade has exploded openings in the country. The Asian giant represents 35% of Gucci’s sales, 27% of Louis Vuitton’s and 26% of Hermès’. In fact, it is a market in strong growth, tripling its size between 2017 and 2021, according to the consultancy.
This is why the recovery that this country has shown has changed everything for some companies that had launched en masse into this market. Even if the Chinese economy is growing at a strong pace of 4.7%, which is below target And The purchase of such products (and consumption in general) has suffered a critical slowdown due to a slower-than-expected recovery. Morningstar analysts cite the downsizing of LVMH-owned Tiffany’s at a flagship store in Shanghai as an example of the weakness in luxury stocks on Thursday.
“Concerns about demand in China have affected the luxury sector“, said Jelena Sokolova. The analyst said the reduction in the flagship store could indicate “a possible domino effect” and added that “this is a space to watch.”
That’s why warnings from companies themselves have shaken the sector. In July, LVMH announced that its profit had fallen by 6.5% and that it was cutting its forecast for China. A weakened and less dynamic economy than expected had led to its decline. The Asian giant went from 35% of its income to 30%The firm’s CEO, Bernard Arnault, mentioned during the presentation that “complicated quarters” are ahead.
A few days earlier, Hugo Boss had announced that sales prospects for the whole of 2024 would be in the range of 4,200 to 4,350 million euros, while its previous ceiling was 4.450 million. All this is weighed down by the “persistent macroeconomic and geopolitical challenges” in reference to China. They have issued two profit warnings for Watch with 20% less sales in the Asian country and at Burberry.
Analysts give up
At this point, everyone knew that the market was affected, but far from recovering in this new scenario, analysts threw oil on the fire by anticipating a complicated future. One of the latest to do so was HSBC. In its latest article, the company said that what we have experienced has been a “cruel summer” that has brought a new paradigm… but that this is only the beginning.
It’s a shift that has left investors off their game. HSBC had previously been banking on a powerful recovery after months of anxiety, but the firm has completely changed its view. “Given the downgrade in our estimates, we no longer expect a comeback to double-digit growth in the third or fourth quarter of 2024and this despite the fact that we have a much simpler basis for comparison,” the analysts say. “Our new forecasts take into account the weak macroeconomic environment and the flow of negative sector news received during the summer.” In summary, a At the sector level, they are forecasting organic growth over one year of 3% in the third quarter and 4% in the fourth quarter.
“European consumers They adopted a wait-and-see attitude“We are likely to be victims of ‘greed’, with many brands raising prices post-Covid simply because they might get by rather than as a simple reflection of inflationary pressures,” analysts say. China is “holding back on spending despite strong economies.”
“We now factor in a longer slowdown in luxury revenue growth, which will likely translate into greater pressure on margins.”
The only place where consumption has remained strong and is a lifeline for many of these companies is Japan. However, the land of the rising sun offers very low returns compared to China, which had been the big bet of the market in recent years. In fact, Kering explained in its latest results that it would tactically raise prices in this market to reach save some of this drop in profits. For next year, analysts said they expected growth of 7% in 2025 and a return to high single-digit growth “as early as the first quarter of 2025.”
Bank of America also cut its estimates for the sector, but was even more pessimistic. The firm, which had previously recommended buying most of these stocks because the huge declines had left heavyweights like LVMH “cheap,” now placed virtually all companies in “neutral.” Specifically, the companies in which he has made aggressive cuts are LVMH, Kering, Hugo Boss… among others.
“We now take into account a longer slowdown in growth luxury sector revenues, which will likely translate into additional pressure on margins,” Bank of America analysts led by Ashley Wallace wrote in a note, adding that this is likely to continue in the second half of this year and into 2025. In short, the crisis is going to last for a while.
These two are just two of the voices that make up a veritable chorus of doom. Analysts Jefferies and Goldman Sachs have also warned markets in separate reports that the outlook for the Asian market decline is worse than expected. Goldman says the industry will not grow this year, lower its forecast by 5% so far. “We expect a challenging half-year. While stocks have priced in some weakness, we continue to see progressive downside risks.”
At the same time, Jefferies cut its 2025 earnings before interest and tax estimates. Analyst James Grzinic downgraded Burberry and Swatch Group to “underperform” and cut LVMH’s price target by 13% to €600. One company involved has been particularly concrete in its commitment to the duration of the crisis. Specifically, Diego Della Valle, chairman of Italian luxury shoe brand Tod’s, said last week that he thought it would last between seven and eight months Now, the complicated path that the entire sector must follow.
It remains to be seen whether the pessimism is excessive or whether the luxury sector is managing to turn the situation around. In any case, the companies themselves recognize that winter has arrived and that before that they must assume a complete turnaround in their strategy. The luxury giants will now have to embark on a painful path to profitability that, it seems, will be longer than expected and will leave exposed an industry that is absolutely essential for Europe.
