According to experts and executives, the sustained decline in China’s luxury expenditure is not expected to recover this year, exacerbating a downward spiral that has shaved about $200 billion off the sector’s value in recent months.
Concerns regarding weakness in China, where middle-class consumers have reduced spending on expensive things, have been bolstered by profit warnings from Burberry (BRBY.L), opening a new tab. Hugo Boss, as well as a 27% decline in quarterly sales in China, Macau, and Hong Kong from Richemont (CFR.S), opens a new tab this week.
China made up 16% of the 362 billion euros ($393.8 billion) in luxury expenditure that was done globally in 2018, according to consulting firm Bain. However, figures released on Monday revealed that the second-biggest economy in the world expanded far more slowly than anticipated in the fourth quarter due to a lengthy fall in real estate and job instability that impeded a shaky rebound.
Industry expectations and investor concerns
In the luxury industry, expectations for the second-quarter earnings season were already low, but a string of negative stories has crushed hopes for a second-half rebound.
Following a recent visit to the nation, Bernstein analysts declared, “China is in the repair shop.” The owner of Cartier, Richemont, released its quarterly sales report on Tuesday, allaying investors’ concerns about the weak demand on China’s mainland.
As per Bain’s June prediction, the global luxury industry would see its lowest year since the pandemic’s peak. Consequently, the wealthiest individuals in China are choosing to dress more subtly rather than to show off their wealth.
According to Reuters’ calculations based on LSEG data, investors have been alarmed by jitters over China, which has caused the industry to lose 180 billion euros since March.
About 85 billion euros, or a significant chunk of that, came from LVMH (LVMH.PA), opening a new tab, the second-most valuable listed firm in Europe until ASML surpassed it in June.
Market performance and future projections
JPMorgan analysts stated that positive business indicators are required to back up projections for the second part of the year. Co-manager of GAM’s investment strategy for luxury goods Flavio Cereda stated he was still waiting for any indication of a rise in discretionary spending.
He declared, “We’re not seeing it.” The fund owns high-end equities such as Richemont, LVMH, Prada, Hermes (HRMS.PA), Ferrari (RACE.MI), and Hermes.
The industry leader LVMH, which owns Tiffany & Co., Dior, and Louis Vuitton, will release its results on July 23. Kering and Hermes will follow on July 24 and 25, respectively.
Visible Alpha consensus predictions indicate that while Kering, which is rebranding its flagship brand Gucci, is projected to report a 9% decline in second-quarter sales, LVMH’s organic sales growth is expected to be stable from the prior quarter and up 3% year-over-year.
Quarterly reports are also likely to demonstrate that ultra-wealthy consumers are still spending big money on luxury products at the top of the market, which is now doing better.
Hermes, the manufacturer of Birkin bags that retail for over $10,000, is the only significant luxury stock that has increased in value during the previous 12 months. For the second quarter, a revenue increase of 13% is anticipated.
Brunello Cucinelli (BCU.MI), an Italian luxury brand, has resisted the industry slowdown by opening a new tab. Because of its emphasis on upscale consumers in China, it revealed this week that the first-half sales increase was close to 15%.
Permanent downside
For many years, the luxury industry has depended on China’s robust demand for high-end products; the Chinese market tripling in size between 2017 and 2021, according to Bain.
After Beijing lifted the COVID-19 lockdowns in early 2023, the wealthy and middle class splurged on luxury goods, including handbags to designer fashion; but, as the housing crisis worsened early last year, the pent-up shopping began to wane.
While Chanel has stated that it intends to continue investing in new stores in the mainland as it is catching up with rival brands, other brands may decide to halt their expansion plans in China due to the protracted downturn.
As large portions of Europe’s fashion capital are closed off to consumers, the Paris Olympics may negatively impact luxury sales even further. This would postpone the possibility of positive profit momentum for luxury companies returning, according to UBS analyst Zuzanna Pusz.
With a 7% growth in the second half of the year, she predicted 4% organic growth from the industry this year.
(Tashia Bernardus)