Bank of America Downgrades European Luxury Stocks

Bank of America Securities has assessed the European luxury goods market, anticipating that the slowdown in this sector will persist into the latter half of 2024 and into 2025.

According to analysts at Bank of America Securities, the luxury consumer appears to have reached their limit in spending. They noted in a recent report that muted revenue growth for the sector is expected to continue, projecting a decline of 1% in the latter half of 2024 and a modest increase of 3% in 2025, which will likely impose pressure on profit margins without any growth in earnings before interest and taxes (EBIT).

The analysts specifically highlighted a decline in spending from the Chinese consumer, which had been the primary driver of revenue growth in early 2024. In the first quarter, luxury spending in China grew by 10%, followed by a 4% increase in the second quarter, which contributed nearly all of the sector’s revenue growth. However, demand has fallen in the third quarter, both in domestic purchases and travel-related spending. The bank forecasts a decrease of 1% in Chinese luxury spending for the latter half of 2024, expecting it to remain flat in 2025, with significant risks of further decline.

The bank has adjusted its projections to accommodate an extended slowdown in revenue growth for the luxury sector, likely resulting in increased pressure on profit margins. As a consequence, they have lowered their earnings per share (EPS) estimates for 2025 by an average of 17%, which places them 12% below the consensus estimates.

Additionally, Bank of America Securities has downgraded several luxury brands: LVMH, Kering, and Ermenegildo Zegna have all been moved from “buy” to “neutral,” while Hugo Boss has been downgraded from “buy” to “underperform.” This is in response to the challenging outlook for 2024 and 2025 and the associated earnings risks. The bank has also reduced their price targets for these companies by an average of 20%.

At the same time, they now rate only three luxury stocks as “buy”: Hermes, Brunello Cucinelli, and Pandora.