European luxury companies’ $240 billion rout is just the beginning

Once seen as Europe’s answer to the US “Magnificent Seven” tech megacaps, shares in companies producing high-end clothing, handbags and jewellery are languishing, sapped by a spending slump. Even more ominous are signs that China’s rich, who once flocked to upscale boutiques in Paris, Milan and Hong Kong, may not return, their appetite for pricey items extinguished by the economy’s downward spiral.

“This year is more volatile and more painful because it comes after this excessive growth,” Flavio Cereda, an investment manager at GAM UK said, referring to the period immediately after the pandemic when consumers liberated from lockdowns splurged on shopping and travel.

For Britain’s iconic raincoat maker Burberry, it’s culminating in ejection from London’s FTSE 100 stock index, with its market value down 70%. While it’s the only major brand to lose its index slot, an gauge of luxury shares compiled by Goldman Sachs has shed $240 billion in value from a March peak. Gucci-owner Kering and Hugo Boss are the worst hit, shedding almost half their value in the past year. Kering, once a top 10 stock in France’s CAC 40 index, now ranks 23rd. And industry giant LVMH Moet Hennessy Louis Vuitton, which was Europe’s largest company by market cap a year back, has slid to second place.

The deflation of the post-pandemic spending bubble was evident in recent earnings reports. Kering, Burberry and Hugo Boss issued profit warnings while at LVMH, quarterly organic revenue at its crucial leather-goods unit grew just 1%, versus 21% a year earlier. Only brands catering to the ultra-wealthy, such as Hermes International and Brunello Cucinelli, escaped the full force of the earnings downturn.

GAM’s Cereda, who co-manages a fund investing in luxury stocks, is hopeful sales will pick up next year, at least to the “mid-single-digit” levels that he says represent the sector’s long-term trend. But what if weaker revenue and tighter profit margins are the new normal? Some reckon that could be the case.