China's luxury market uncertainty dampens sales outlook

Chinese luxury downturn: Amidst a veil of uncertainty shrouding China's luxury market, investors brace themselves for a potentially sharp downturn in luxury sales as companies gear up to unveil their first-quarter results. This anticipated dip reflects subdued demand from Chinese consumers and the daunting challenge of comparing against last year's soaring sales, buoyed by the easing of COVID restrictions in mainland China.

LVMH, the largest luxury conglomerate globally, will kick off the reporting season on April 16, followed by competitors such as Kering, Prada, and Hermes a week later. Burberry and Richemont will follow suit in May.

Luxury label concerns

Last month, Kering startled investors with a surprising warning of a 10 per cent decrease in first-quarter sales, far below the 3 per cent decline expected by analysts, casting a shadow over the upcoming earnings reports. The decline was attributed to a sharp drop in sales in Asia, particularly from its flagship brand Gucci, raising concerns about the broader performance of high-end fashion labels in China.

Analysts at HSBC note that Chinese tourists in Hong Kong, Macau, and Singapore are exhibiting restrained spending habits, adding to the apprehension within the luxury sector.

The challenges faced by Kering in China have contributed to its lower valuation compared to its peers, with its stock declining by 15 per cent since the warning, while LVMH and Hermes have also experienced drops of 7 per cent and 2 per cent respectively.

Rebound uncertainty looms

There is uncertainty regarding the extent to which consumer demand for luxury goods will rebound in the near future, even as the comparative figures become less daunting. Analysts at Barclays predict that the annual growth rate for global luxury goods sales will decelerate to mid-single digits from nearly 9 per cent last year.

Given the rising cost of living, consumers have become more discerning about luxury purchases, resulting in a divergence in performance among brands. Strong performers like Louis Vuitton, Chanel, and Hermes are pulling ahead, while others like Burberry, undergoing a transformation, face challenges.

Retail growth forecast

Despite the overall slowdown, some companies are expected to fare better than others. Prada, for instance, is anticipated to see a 9.3 per cent increase in first-quarter retail sales globally, driven in part by the popularity of its Miu Miu label among younger Chinese consumers.

Looking ahead, analysts forecast flat overall sales for LVMH in the first quarter, with modest growth in its fashion and leather goods division, which includes brands like Louis Vuitton and Dior. Consensus expectations vary, with UBS citing projections of 3 per cent organic sales growth for LVMH, a 10 per cent decline for Burberry, and 13 per cent growth for Hermes for the three months ending in March.

(With Reuters Inputs)