European luxury giants LVMH and Kering SA fell, extending a rout that’s wiped out about $56 billion from the sector over the past two days, with sentiment starting to turn after a stellar rally this year.
Shares in Birkin bag maker Hermes International and UK trench coat company Burberry Group Plc also declined as investors took profits in the sector, which has been a big outperformer this year. Fears that a resurgence of Covid in China could lead to fresh restrictions and hit demand in the key luxury market, as well as worries about an economic slowdown in the US, have dented optimism this week.
The slump follows a stellar year for luxury firms’ shares, helped by China’s reopening from its Covid Zero policy and estimate-beating results in the latest earnings season. Hermes has gained more than 30% this year while Richemont, the Swiss jewelry maker that owns the Cartier brand, is up more than 20%.
“Luxury specifically may be affected by the perception that there are few near-term catalysts after a strong run of performance,” said Swetha Ramachandran, lead manager of the GAM Luxury Brands Fund. The sector “is caught in the middle of a selloff in quality growth stocks.”
Sanford C. Bernstein analyst Luca Solca agreed, saying there is likely some profit-taking happening in the sector, with US macro-economic uncertainties and the resurgence of Covid in China among reasons for declines this week. “It is the stocks that have risen the most getting a downward correction: Hermes, LVMH, Moncler,” he said.
Record valuation multiples for some stocks in the sector is also playing a part. Bloomberg Intelligence strategists Laurent Douillet and Tim Craighead warned last week that the sector was “priced for perfection” after this year’s rally.
Still, some analysts don’t see positive fundamentals for luxury companies changing.
The recent weakness is “not fundamentally driven,” Morgan Stanley analysts led by Edouard Aubin wrote in a note dated May 23. The US bank held a luxury conference in Paris this week where industry executives pointed to a “continued moderation in trends in the US, compensated though by robust trends elsewhere.”
A separate luxury conference was also held by HSBC in the French capital this week. Analyst Erwan Rambourg told Bloomberg that “the general mood this week was positive.” Both conferences were closed to the media.
Previous periods of economic uncertainty — such as 2014, 2018 and 2022 — have typically only briefly interrupted long-term outperformance for the luxury sector.
--With assistance from Julien Ponthus, Chiara Remondini, Jan-Patrick Barnert and Michael Msika.
(Updates with Bernstein and Bloomberg Intelligence comments, charts.)
