UBS Downgrades Swatch Group and Moncler, Citing Soft Demand in Luxury Markets

UBS has downgraded shares of Swatch Group AG and Moncler, highlighting weak demand in key luxury markets, particularly in China, and a tough outlook for the luxury goods sector as a whole.

The brokerage has changed its rating on Swatch from “neutral” to “sell,” reducing its 12-month price target to CHF127 from CHF178. Similarly, Moncler’s rating was downgraded from “buy” to “neutral,” primarily due to diminishing demand and challenging macroeconomic conditions affecting consumer spending.

Swatch is expected to experience an extended downturn, largely due to its substantial exposure to the Chinese market, which constitutes about 35% of its sales and is currently struggling with weak demand. UBS predicts that Swatch’s EBIT margin may decrease to around 9.5% by 2028, a steep decline from its previous peak of 25% in 2012.

The earnings estimates for Swatch have also been drastically cut, with a forecast reduction of 24% for fiscal year 2024, and even larger declines of 47% and 48% anticipated for fiscal years 2025 and 2026, respectively. UBS pointed to weakening sector data, particularly in Asia, where Swatch is heavily reliant, and indicated that recent positive figures from Swiss Watch Exports may have been influenced by exceptional events, such as the Watches & Wonders exhibition in Shanghai.

Expectations for Swatch’s revenue include a decline of 12.6% for fiscal year 2024, followed by a slight recovery of 0.7% in fiscal year 2025. The company’s EBIT is projected to fall significantly, with an anticipated drop of 63.1% in fiscal year 2024, although a modest recovery is expected in the subsequent years.

Moncler, another prominent player in the luxury market, is also encountering difficulties, particularly in its main European and Chinese markets. While the company has enjoyed strong demand for luxury outerwear, analysts at UBS caution that demand may soften as consumer spending in vital markets slows due to macroeconomic challenges.

UBS has reduced Moncler’s 12-month price target to €53 from €63, voicing concerns about a potential prolonged downturn in demand for aspirational luxury brands. The research indicates that the recovery in China is likely to be slower than anticipated, which poses a critical risk for Moncler. Furthermore, the decline in demand for luxury items among aspirational consumers in Europe and the U.S. adds further pressure to Moncler’s sales outlook.