Luxury stocks slip as fears grow of a prolonged downturn

LONDON — European luxury stocks tumbled on Monday as analysts warned of a deteriorating demand outlook, particularly among high-spending Chinese consumers.

Germany's Hugo Boss was among the worst performers on the Stoxx 600 index by midday, down 4%, after analysts at Bank of America downgraded the stock to "underperform" from "buy." The second half is set to present a tougher consumer backdrop with higher discounting, they said.

"Following the post-Covid peak in consumption in 2022, luxury sector revenues have been sequentially slowing. The American consumer was the first to normalise, followed by the Korean, European and Japanese consumer," BofA Securities analysts wrote in a research report Monday addressing challenges across the luxury sector.

"With the only sector support fading — the Chinese consumer — all nationalities are now under pressure," they added, describing luxury consumers as "all shopped out" and Chinese domestic and travel demand as having "deteriorated." Across European luxury firms, they expect a 1% revenue decline in 2024.

Hugo Boss noted "persistent macroeconomic and geopolitical challenges," particularly in China and the U.K., when it cut its sales outlook in July.

Shares in Britain's Burberry dropped nearly 3% Monday following its own downgrade from the BofA Securities analysts, who slashed their target price on the stock to 475p ($6.31) from 700p.

They also cut ratings on French luxury giants LVMH and Kering from "buy" to "neutral."

They're not alone in their bearish view on Europe's luxury sector.

"The problem clearly is China, which emerged from being a very small player in the luxury goods industry to becoming a massive presence over the last decade or so. That is not working at the moment," Jon Cox, head of European consumer equities at Kepler Cheuvreux, told CNBC's "Street Signs Europe" on Monday.

China's property market challenges are weighing on sentiment there, combined with signs of fragility in Europe and uncertainty presented by the U.S. election, Cox said.

"The luxury goods industry could be in for a prolonged period of weakness; we've already seen it for a couple of semesters. I think most people were hoping things would improve in the second half of the year — no sign of that happening at all at the moment," he told CNBC.

Demand from aspirational buyers and fashion-forward youngsters looks particularly vulnerable as their spending patterns can be fickle — presenting a particular challenge for brands like Burberry which have restructured and are attempting to reposition, Cox noted.

"Kering, Burberry, Gucci — if you believe in those brands then ultimately they can be turned around, the problem is the timing," he said.

"It takes a lot of time and investors don't have the patience for that when you have other well-positioned companies in the luxury space, the likes of Hermes, we also like Richemont, Prada, where for now, for whatever reason, this is capturing the luxury buyer's imagination."

Susannah Streeter, head of money and markets at Hargreaves Lansdown, highlighted another issue for luxury goods firms: the potential for China to place fresh tariffs on the sector.

"The move by Brussels to proposed extra duties on Chinese EVs has led to concerns about tit-for-tat moves on big name brands. These might be sought after by Chinese fashionistas, but the latest handbags, belts or raincoats are hardly vital components for Chinese heavy industry and could be first in line to be targeted," Streeter said by email Monday.