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An advertisement for Hugo Boss AG in Shanghai, China, appeared on May 1, 2024.
LONDON — European luxury stocks experienced a steep decline on Monday as market analysts raised concerns about weakening demand, particularly among affluent Chinese consumers.
Amid this downturn, Germany’s Hugo Boss was notably affected, showing a nearly 4% drop on the Stoxx 600 index after Bank of America Securities downgraded its rating from buy to underperform. Analysts indicated that the second half of the year would likely present significant challenges due to increasing discounting practices amidst consumer hesitance.
In a research note, BofA Securities analysts observed, “Following the significant spike in luxury consumption post-Covid in 2022, there has been a continuous decline in sector revenues. The American consumer was the first to return to pre-pandemic behavior, soon followed by their counterparts in Korea, Europe, and Japan.” They further elaborated on the struggles facing luxury consumers, stating, “With the support from the Chinese market dwindling, all groups now find themselves under financial pressure,” characterizing luxury buyers as “all shopped out” and noting a decline in both domestic and travel-driven demand from China. As a result, they project a 1% revenue decrease for European luxury brands in 2024.
Previously, in July, Hugo Boss had already revised its sales expectations, citing “ongoing macroeconomic and geopolitical challenges,” particularly concentrated in China and the U.K.
Meanwhile, shares of Britain’s Burberry saw a nearly 3% decline following a similar downgrade from the same Bank of America analysts, who lowered their target price from 700p to 475p ($6.31).
The analysts also adjusted their ratings for prominent French luxury brands LVMH and Kering, reducing their outlook from buy to neutral.
On Monday, LVMH’s stock was down 0.24%, marking the lowest rate since July 2022, according to LSEG data. Kering fell by 1.7%, while Hermes experienced a slight decrease of 0.26%.
Although the Stoxx Europe Luxury 10 index, which includes leading companies in the luxury market, maintained steady levels, it has still dropped 3.82% year-to-date.
‘Prolonged period of weakness’
Market analysts are largely unified in their pessimistic outlook regarding the luxury sector in Europe.
“The primary issue is China, which has rapidly transitioned from a minor player to a dominant force in the luxury goods market over the past decade. Currently, this market is under significant strain,” stated Jon Cox, head of European consumer equities at Kepler Cheuvreux, during an interview with CNBC’s “Street Signs Europe”.
Cox identified challenges in China’s property market as detrimental to consumer sentiment, compounded by uncertainties emerging from weak economic indicators in Europe and the political landscape presented by the upcoming U.S. election.
“The luxury goods market may face an extended period of downturn; we have already observed this trend for several quarters. Although there was hope for recovery in the latter part of the year, there are no discernible signs indicating improvement,” he said.
Particularly worrisome is the demand from younger, aspirational consumers, whose spending habits are notoriously unpredictable. This presents unique challenges for brands like Burberry that are in the midst of restructuring and repositioning efforts. “Brands such as Kering, Burberry, and Gucci have potential for turnaround, but the timing is critical,” Cox noted.
He emphasized that while investor patience can be thin, certain companies like Hermes, Richemont, and Prada currently captivate luxury buyers’ interest, positioning them advantageously.
Adding to the concerns, Susannah Streeter, head of money and markets at Hargreaves Lansdown, pointed out the risk of China imposing new tariffs on luxury goods. “The recent proposal from Brussels to implement additional duties on Chinese electric vehicles has raised alarms about reciprocal actions against well-known luxury brands. While these products are fashionable among Chinese consumers, they are not essential components for heavy industry and could become prime targets for potential tariffs,” Streeter remarked in a Monday email.
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