The luxury returned to the spotlight last week in the wake of two events that have moved the sector a lot: the measures of support from China and the news on the front M&A (Moncler). But the sector, which has been in crisis for some time due to the slowdown of the world economy, especially in China, will remain in difficulty also in 2024 and 2025.
The recent Chinese move
The week started very well, with the central bank of China which announced new measures to support the economy, to relaunch internal consumption and demand, lowering the reference interest rate to 1.85% and entering liquidity for 234.6 billion of yuan. A crucial move also in view of the holidays at the beginning of October, which will last a week, from the 1st to the 7th of the month (the golden week for Labor Day).
China has strategic importance for the luxury sector, which generates a large portion of the turnover of the large Asian economy, which purchases a lot of gold and jewellery, but also high fashion items.
The ferment in M&A
What brought the sector back to its appeal were the M&A operationswhich suggest a certain interest in the sector, in particular the advance of the big French company LVMH on the Italian Moncler (Louis Vuitton) in which it acquired an indirect stake through an investment in Double R, the special purpose vehicle of Remo Ruffini, CEO of the company famous for its down jackets
How opinions on Moncler change
For analysts of Equita Sim, the operation has “positive implications for the stock, both from one point of view technician (purchases in the next 18 months up to 2.7% of the capital) both from a point of view substantialas this deal confirms theinvestment attractivenessor in society and the group’s solid long-term prospects.” However, any speculative scenarios on the stock are judged to be “premature in the short/medium term”. no “impacts for LVMH” seensince, following the operation, the French holding company would only hold 4% of the capital. However, one is expected for Moncler outperformance compared to its peers (competitors)
For JP Morgan instead, the agreement for Moncler recalls the investment of LVMH in Tod’swhich was labeled “friendly support”. “Although LVMH has long experience in promoting sector consolidation – explains the investment bank – it has also demonstrated that it can serve as a minority shareholder and partner even in the long term.”+
Luxury is still in a difficult moment
Despite the stimulus just announced by China, luxury is going through a critical moment. To the last one Luxury Good Conferenceand Mediobanca, an event that brings together the main listed luxury companies with the main international investors, held to coincide with Milan Fashion Week, it emerged that the consumer has become more price sensitive and the demand for luxury goods proves more elastic.
At a geographical level, the demand in Europe appears resilientsupported by local customers and tourism, while the worse situation can be seen in Chinaas the economy is struggling to restart, consumer confidence is at very low levels, the Real Estate market is in a negative spiral and the stock market remains under pressure. This results in a double-digit drop in traffic in shopping malls and in the search for a more sober aesthetic by Chinese consumers. Hong Kong and Macau, after last year’s recovery, continue to suffer from the decline in tourists, while a positive note comes from Japan, now a more attractive tourist destination thanks to the depreciation of the yen.
And analysts see no lights (for now)
Analysts’ expectations are not the most comforting. The analysts of Jefferies they don’t see “no appreciable improvement for the luxury market in the second half of the year after fragile demand in the first half”, due to the “slowdown in China, reduced travel spending and uncertainty in the United States”.
For Bank of America growth modest of revenues from the luxury sector will continue in 2024 and 2025 (-1% expected in the second half of 2024 and +3% in 2025), inducing a pressure on margins and then one lack of EBIT growth. And this is because the positive signals coming from the USA are contrasted by the weakness of China, which is only at the beginning of a negative phase of the cycle. This is why the investment bank lowered the luxury sector’s 2025 EPS below consensus. The investment bank then downgraded LVMH, Kering, Zegna to Neutral e Hugo Boss at Underperform to reflect a more challenging scenario in 2024-25 and risks to earnings. Only three stocks remain with a Buy rating: Hermes, Brunello Cucinelli and Pandora. Looking at Italian companies, Brunello Cucinelli’s TP was cut to 100 euros per share (-17%), that of Zegna to 9.8 dollars per share (-25%), that of Moncler to 55 euros per share (- 21%), that on Prada at 60 Hong Kong dollars (-14%), that on Salvatore Ferragamo at 5 euros per share (-33%).
