After losing nearly a quarter of a trillion dollars in market value in recent months, European luxury companies may see their stock market clout diminish as China’s economic downturn worsens.
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Once considered Europe’s answer to the U.S. “Magnificent Seven” tech giants, shares in companies that make high-end clothing, handbags and jewelry are now languishing, drained by a slump in spending.
Making matters worse are signs that China’s wealthy, who once flocked to high-end boutiques in Paris, Milan and Hong Kong, may not be returning, their appetite for expensive goods having been quelled by the economic downturn.
“This year is more volatile and more painful because it’s coming after this hypergrowth,” said Flavio Cereda, an investment manager at GAM UK Ltd, referring to the period immediately after the pandemic when consumers freed from quarantine went on a shopping and travel spree.
For iconic British raincoat maker Burberry Group Plc, the high point was being kicked off London’s FTSE 100 stock index, with its market value down 70% in the past year.
While it was the only major brand to lose its slot on the index, the Goldman Sachs luxury stock benchmark has lost $240 billion in value from its peak in March.
Kering SA and Hugo Boss AG, the owner of Gucci, were the hardest hit, losing nearly half their value in the past year. Kering, once a top 10 stock on France’s CAC 40 index, is now ranked 23rd.
Industrial giant LVMH Moët Hennessy Louis Vuitton SE, Europe’s largest company by market capitalization a year ago, has slumped to second place.
The deflation of the post-pandemic shopping bubble was evident in recent earnings reports. Kering, Burberry and Hugo Boss issued profit warnings, while at LVMH, quarterly organic revenue at its key leather goods unit grew just 1%, compared with 21% a year earlier.
Only brands catering to the ultra-wealthy, such as Hermes International SCA and Brunello Cucinelli SpA, escaped the full force of the earnings decline.
“Slower for longer”
GAM’s Cereda, who co-manages a fund that invests in luxury stocks, expects sales to pick up next year, at least to the “mid-single digits” level that he says represents the sector’s long-term trend.
But what if weaker revenues and tighter profit margins become the new normal? Some think so.
UBS analyst Zuzanna Pusz described the outlook for the luxury sector as “slower for longer.” Cutting her estimates for organic sales growth in 2025 and the second half of 2024, Pusz predicted that “the industry seems to be entering its own cycle, after several years of high-priced growth.”
And news about the impact of China’s slowdown appears to back up that sentiment.
Tiffany & Co., LVMH’s premium jewelry brand, is looking to halve the size of its flagship store in Shanghai, Bloomberg reported.
Hong Kong’s luxury malls, once a draw for Chinese shoppers, are now nearly empty. And in Switzerland, watchmakers are seeking state aid to cope with a slump in exports.
Many analysts have echoed Pusz, cutting earnings and stock estimates. Bank of America Corp.’s Ashley Wallace said consensus expectations for the second half of the year may be too high, while Morgan Stanley’s Edouard Aubin called LVMH and Richemont particularly vulnerable to a slowdown in China, lowering his stock targets for both companies.
Some see upside in slightly more reasonable stock valuations. While the MSCI Europe Textiles Apparel & Luxury Goods Index still trades at a hefty premium to the MSCI Europe Index, it’s far from its 2021 heyday.
“The sector clearly has a competitive advantage over the long term, so a downturn is probably the best time to invest,” said Morningstar analyst Jelena Sokolova.
She sees opportunity in Kering, and predicts that Gucci’s strong brand recognition will allow it to capitalize when a turnaround finally occurs.
GAM’s Cereda, however, prefers high-end luxury names like Hermès.
“You don’t want to own a brand that has no brand appeal, and you don’t really want meaningful exposure to the aspirational consumer,” she said. “And you certainly don’t want real exposure to the aspirational consumer in China.”