Anti-crisis luxury in China

Louis Vuitton and Loro Piana, along with Hermès, Miu Miu, Prada, and Moncler, are the fashion houses that continue to thrive in China despite the crisis. Chanel and Dior are also performing well, as are the Richemont group’s jewelry brands, which have shown great stability. This is because local consumers continue to view jewelry, particularly gold jewelry, as a form of investment.

Barclays analysts Carole Madjo, Wendy Liu, and Anchal Agarwal have returned from a trip to mainland China with a more optimistic outlook than initially anticipated. They observe that «both industry sentiment and revenue growth expectations in this market are better than we anticipated. However, there are clear divergences in trends among brands. Some are presenting significant challenges, such as those of Kering», the experts explain, recalling the warning issued last week by the french conglomerate. Kering expects a 20% decline for its flagship brand, Gucci, in the first quarter of 2024 due to weakness in the Chinese market. Barclays is favoring defensive names and has upgraded its rating on Lvmh stock, shifting it from equal weight to overweight.

«We believe that the sector will remain polarized, with the top players being those with greater exposure to high-end consumers, a higher level of pricing power, or strong brand momentum», the analysts explain. «We have received particularly positive feedback about Louis Vuitton and Loro Piana in China, which are both part of the Lvmh group, so we are raising our target price from 825 to 937 euros on this stock. Although sales for the first and second quarters may be modest compared to previous years, Bernard Arnault himself has already addressed this matter during the year-end conference call. We do not anticipate any major issues in the main fashion & leather goods division; thus, we expect the French giant to rebound to a healthier growth rate by the second half of the year». The analysts are also confident in Lvmh’s ability to maintain its margin in this segment. «While the shares have shown strong performance, Lvmh’s performance since the beginning of the year has trailed behind that of other overweight-rated stocks such as Prada, Richemont, Hermès, and Moncler. We find this discrepancy unjustified considering the high quality associated with the French company».

Since the first trading day of January, Lvmh shares on the Paris stock exchange have surged by 15% to nearly 830 euros. However, this growth falls short in comparison to competitors, with Prada soaring by 45%, Hermès by 25%, and Moncler by 23%. Regarding Chinese luxury consumers, they remain cautious. However, there has been a slight improvement compared to last year, though a definitive turning point has not yet been reached. The real estate market slump continues to have a negative impact on consumer wealth and confidence. «There is less traffic and fewer lines outside stores. However, people are still going out and making purchases», Barclays reassures. «From our discussions with industry insiders, organic luxury growth in China is projected to range between 0% and 5% this year, with high-end spenders driving the momentum».

This is especially encouraging news given the investment bank’s earlier prediction that luxury goods growth in mainland China would fall to mid-single-digit levels. «Taking this feedback into consideration, we revised our forecasts and now anticipate flat growth rates in China», Barclays explains. «However, we remain cautious and lean toward the lower end of this range, as we have yet to see a shift in consumer sentiment. Furthermore, some brands, such as Gucci, Burberry, Tod’s, and the Swatch group, are facing challenges».

Meanwhile, Chinese spending on luxury goods overseas is still recovering, with Chinese consumers showing an increased propensity for travel. Travel is gradually becoming more accessible thanks to increased flight capacity and reduced visa processing times. «Currently, the majority of Chinese luxury spending remains concentrated in Asia. Nevertheless, our discussions indicate a growing interest in travel to the Middle East and Europe, with France remaining a favored destination», Barclays concludes. «We anticipate Chinese offshore spending to increase by approximately 50% this year, accounting for 40% of Chinese luxury sales compared to last year’s 30%. Overall, we forecast 15% growth in the Chinese luxury market, both onshore and offshore, in 2024». Thus far, soft luxury appears to lead the market, closely followed by jewelry, while the watch segment exhibits a more subdued performance. The ultimate winners and losers in this dynamic landscape are yet to be seen. (All rights reserved)