Turbulence in Global Luxury Sector

The global luxury sector is facing turbulence as analysts downgrade several major brands, particularly due to a slowdown in key markets like China.

Shares of Kering (EPA:PRTP) and Burberry Group (LON:BRBY) fell by 3.2% and 5.1%, respectively, at 5:51 AM ET.

Slowdown in China

Rapid growth in the Chinese luxury market is now encountering structural challenges, not just cyclical downturns. Analysts at Barclays reported significant revisions in earnings forecasts and stock ratings for key players due to the Chinese economy’s pressures.

Factors such as:
– Property market instability
– Slower GDP growth
– Weakened financial markets

These factors are squeezing disposable income, the main driver of luxury consumption. Many previous growth factors are failing, resulting in significant sales declines for luxury brands amidst a stagnating market.

Luxury Sales Decline

Luxury sales in Mainland China have turned negative, with some brands experiencing declines of up to 50% during July and August. Consumers are becoming more selective, leading to an overall stall in growth.

High-end VIP consumers, while better positioned, are also showing signs of strain as luxury demand weakens across segments. The outlook for luxury in China is dim, with recovery not anticipated until around 2027.

Downgrades and Risks

In light of these findings, Barclays downgraded Burberry‘s and Kering‘s stock ratings. Burberry, already struggling, faces the risk of turning loss-making in H1-25, leading to a downgrade from “equal weight” to “underweight”. Its price target is now GBP 540.

Kering’s flagship brand, Gucci, is also experiencing challenges, with sharp sales declines in China, leading to skepticism about its new offerings. Kering has been downgraded to “underweight” with a new price target of €210, indicating an 11% potential downside.

Broader Sector Concerns

The broader luxury sector is reflecting negative trends from summer sales, with many brands reporting double-digit declines. RBC Capital Markets downgraded Kering, stating the luxury environment is softening.

Revised Growth Expectations

The third quarter results are expected to be weaker than previously forecast. Analysts predict sector-wide growth of only 4% in 2025, down from 7%. Domestic demand in China is not expected to recover meaningfully until the latter half of the decade, despite anticipated tourism recovery.

Polarization of Brands

The luxury sector is increasingly polarized. Brands with strong equity, like Hermès, Louis Vuitton, and Brunello Cucinelli, are likely better positioned to weather the storm. Meanwhile, brands like Burberry and Gucci, which are struggling with market positioning, face greater risks.

Analysts revised price targets for major luxury brands accordingly. For example:
– LVMH: Target cut to EUR 795 from EUR 860.
– Richemont: Target reduced to EUR 150 from EUR 164.
– Hermès: Target trimmed to EUR 2,220 from EUR 2,260, reflecting cautious optimism.
– Ferragamo: Target reduced to EUR 6.9 from EUR 7.2 due to brand relevance issues.
– Swatch: Target cut to CHF 145 from CHF 153.

Conclusion

The luxury sector remains uncertain, facing structural challenges in China and global economic headwinds. Brands with strong identities might navigate better, yet overall growth appears subdued in the near term.