Luxury market dynamics for 2024
Despite a 16% pullback from the 2023 highs, the team advises caution, indicating that the cycle of revenue and earnings downgrades is not over and could extend another 3-6 months.
Further, Bank of America anticipates a shift in company strategies, with a focus on brand investment potentially leading to reduced margins.
It projects a tempering in revenue growth for the luxury sector, estimating a 4% increase in 2024, a stark contrast to the 11% growth experienced in 2023.
The pivotal role of Chinese consumption
The luxury sector's prospects in 2024 depend heavily on Chinese consumer behaviour. "Chinese consumption will make or break the year," the analysts assert. Chinese luxury spending surged by 50% in 2023, regaining a substantial global market share.
This trend is expected to continue, with a forecasted 10% increase in Chinese spending in 2024, making up 80% of the sector's incremental revenues.
However, the recovery of demand in the crucial European region faces obstacles, mainly due to the slower restoration of flight capacities to pre-COVID levels.
Brands facing turnaround challenges
The analysis also points to specific challenges for 'turnaround' brands. These brands, which have lost market share over the past three years, now face the necessity of increased spending to support new designer collections.
"The biggest issue for the sector will be faced by the 'turnaround' brands," Bank of America comments, highlighting the particular difficulties for brands like Kering (Gucci) and Burberry in implementing product-led turnarounds.
Selective optimism in the luxury sector
Despite the overall cautious outlook, Bank of America expresses confidence in certain companies. Hermes, known for its resilience during economic downturns, is their top pick for 2024.
LVMH also receives a favourable evaluation. Despite its recent stock sell-off, the company's diverse brand portfolio and strategic market positioning make its current valuations attractive. Bank of America sets a price target for LVMH that is 32% higher than current market prices.
In contrast, Kering, Burberry, Ferragamo, and Tod's are expected to underperform. Moncler and Swatch, both downgraded to Neutral, face unique challenges: Moncler with anticipated slower growth and declining profit margins, and Swatch due to the cyclical nature of the luxury watch segment, excluding brands like Rolex, AP, and Patek Philippe which are constrained by supply.
Bottom line, the European luxury sector in 2024 stands at a crossroads, marked by a mix of caution and opportunity. Investors and sector stakeholders must navigate these complex dynamics to discern the potential risks and opportunities in this turbulent yet potentially rewarding sector.
