Is the worst period for the luxury goods industry about to end?
Some luxury brands are signaling a bottoming out: Burberry's same-store sales fell by 1% in the quarter, far better than expected, leading to a surge in its stock price; Swatch Group has also observed signs of improvement in key markets. However, the continued weakness in LVMH's leather goods business may drag down the overall pace, with the European luxury goods index having dropped about 25% this year. Analysts warn that although there are signs of recovery, a full rebound will still take time
After experiencing a storm of demand slowdown and valuation decline, the luxury goods industry is showing initial signs of stabilization, and the worst phase of the industry may soon be over.
The second quarter earnings season for U.S. stocks is set to kick off this week. Although market expectations for the luxury goods industry remain pessimistic, some leading companies are beginning to signal that demand has bottomed out and is stabilizing. Nick Hayek, CEO of Swiss watch brand Swatch AG, stated to the media that initial signs of improvement have been seen in key markets.
The latest performance report from British luxury brand Burberry provides strong evidence for this. An article from Wallstreetcn noted that in the quarter ending in June, its same-store sales only declined by 1%, performing far better than analysts' previous forecast of a 3.7% drop. This better-than-expected performance drove its stock price to surge by 6.6% at one point in the London market. This positive signal is not an isolated case; previously, the earnings report from Swiss luxury giant Richemont also exceeded market expectations.
However, market optimism remains suppressed, as the upcoming earnings report from industry leader LVMH is expected to be less than optimistic, with weak performance in key categories such as leather goods potentially dragging down the recovery pace of the entire industry. Since February of this year, the MSCI Europe Textiles, Apparel, and Luxury Goods Index has seen its value decline by about a quarter.
Mixed Performance
The performance differences among luxury goods companies reveal an uneven recovery outlook.
Italian top cashmere brand Brunello Cucinelli SpA has risen against the trend, with its second-quarter sales growing by 11% after excluding currency effects, and it expects to achieve a 10% growth for the entire year. Analysts believe this is due to its strong appeal to the wealthiest class and the wealth effect brought about by the strengthening of the U.S. financial market.
In contrast, industry leader LVMH has transformed from a former top performer to one of the weakest companies. According to Bloomberg analysis, the leather goods business, which the group heavily relies on, is experiencing the most severe consumer fatigue, while the growth of its Dior brand has encountered a "hard landing" after rapid expansion, and the beverage division and Loro Piana's supply chain are facing their own challenges.
Even companies that performed better than expected are not without concerns. Burberry's latest earnings report shows a 1% decline in same-store sales, better than the nearly 4% drop expected by analysts, but this is mainly based on the low base effect of a 21% sales plunge in the same period last year.
Have Valuations Bottomed Out?
After a significant stock price correction, some investors believe that the valuations of certain luxury goods companies have already absorbed pessimistic expectations.
LVMH's forward price-to-earnings ratio is currently about 19.5 times, close to the bottom of its average level over the past five years. Prada Group's stock price has dropped by about 30% since February of this year However, not all luxury stocks appear cheap. Hermès' stock price corresponds to a price-to-earnings ratio of about 50 times its expected earnings over the next 12 months, as the market believes that the brand, with its extremely high demand for star products, will always outperform the market during economic downturns.
The Road to Recovery is Still Long
Overall, although the most intense phase of "bloodletting" may be nearing its end, the return of the industry boom that investors are looking forward to is still a long way off.
Analysts believe that while there are positive signals emerging, this is not a clarion call for a full recovery. The upcoming September Fashion Month may bring more directional guidance to the market, during which new collections may be launched by the new designers of brands such as Chanel, Dior, and Gucci.
The cautious sentiment in the market indicates that only those brands that can accurately grasp changes in consumer behavior and effectively execute their strategies will stand out in this differentiated recovery. As a Bloomberg column states, a brighter luxury market itself is a "retro trend" worth looking forward to
