(BFM Bourse) – After a bumpy 2023, UBS and HSBC estimate that the growth of luxury groups should slow further next year, while margins would decline. In this context, what values should we prioritize?
The year 2023 has been somewhat “rock’n roll” for luxury, with a rollercoaster ride on the stock market. The pan-European sector index Stoxx Europe Luxury 10 first rose 25% between the start of the year and mid-July before falling 20% between mid-July and the end of October. Thanks to reduced market fears about inflation and the recent rise in stock markets, the sector has since recovered around 7% to now show an increase of 8% over the whole of 2023.
Luxury groups have had to face a normalization of demand, which followed the strong post-pandemic growth recorded in recent years. The United States was the first major market where this slowdown was visible, followed by Europe.
This decline in activity was reflected in company publications. For example, LVMH, very rarely, disappointed with its growth in the third quarter, posting an increase in its turnover of 9% on a comparable basis, almost half as much as in the second quarter (+17%). ). This brake was sanctioned by the market with a drop in the stock of 6.5% on the day of publication. The first capitalization of the Paris Stock Exchange is not an isolated case: Burberry plunged 11.15% in mid-November after warning that its revenue target for its 2023-2024 financial year was threatened by weakening demand, and that its operating profit could be at the lower end of consensus expectations.
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Cautious investors
After this year of 2023, which is hardly any rest, what can we envisage for the future? Last week, Stifel stressed in any case that investors were still cautious. Following its discussions with market operators, the bank noted that the latter judged that it was still “too early to buy luxury stocks”.
“Many investors have said that our current forecast of average organic growth of 7% for fiscal 2024 (with +4% in the first half of 2024) seems too optimistic given the worsening trends in Europe, the absence signs of improvement in the United States and the weakness of the macroeconomy in China, which weighs on the Chinese cluster (spending at home and abroad, Editor’s note)”, also reports Stifel.
“With high-quality stocks such as LVMH trading at more reasonable levels than before, investors are not inclined to take additional execution risks, with brands on the path to recovery or elevation such as Kering or Burberry, while the luxury sector is no longer growing as much as before. Defensive stocks like Hermès are very consensual, but being consensual has undeniably been the right decision since the start of the year,” continues the bank .
A brake on growth
For its part, UBS published a recent note on its expectations for the year 2024, which appear to be rather cautious. “Prospects 2024: a call for caution”, is the title of this note.
The Swiss bank expects growth in the sector of 6% on a comparable basis – and 5% excluding Hermès -, driven above all by price increases of 3%. This figure of 6% is significantly lower than the annual average of 10% recorded by the industry since 2016, according to UBS. The Swiss bank also estimates that Chinese consumers should fuel 60% of growth in 2024.
“After years of sustained sales growth thanks to a favorable macroeconomy, an increased level of product innovation, younger consumers, and latterly a return to higher prices (on average +6% since 2020 compared to +1% previously ), we expect the sector to enter a period of more moderate growth,” develops the Swiss establishment.
In terms of profitability, UBS does not believe that luxury groups will maintain their operating margins, anticipating a decline in this margin of 40 basis points (0.4%), on average, to around 25.6%.
HSBC confident for the United States
HSBC is in a relatively similar niche although a bit more engaging. In a note published Tuesday and entitled “goodbye stellar growth”, the Sino-British bank explains that it expects growth of 8% for all the luxury groups in its coverage for the year. next, after 35% in 2021, 15% in 2022 and 11% in 2023.
“Investors should focus on a dull first half of 2024 and the dynamics of luxury stocks could remain moderate for another 5 to 6 months,” judges the bank.
However, a notable point is that HSBC is relatively enthusiastic about the United States where the bank expects growth of 7% next year, compared to 5% for China and 2% for Europe. “We remain more optimistic (for the United States, Editor’s note) than the investors we are talking to, for several reasons,” HSBC underlines.
The bank estimates that the negative impact on growth due to the evaporation of aspirational customers (a category of consumers less financially well-off than the average luxury customer and who focuses on products a little lower in the range and more in the spirit of the times) has passed. She also considers that the euro-dollar parity is more favorable to the spending of American customers on their territory rather than abroad (which also partly explains HSBC’s weak growth forecast in Europe). Last point: the establishment notes that the groups have recently increased their number of stores in the United States.
Hermès for UBS, LVMH for HSBC
In this context, which actions can stand out? UBS explains that it prefers more defensive stocks, because they are best able to resist in the event of a potential recession. As such, UBS praises the resilience of Hermès which “defies gravity”, and anticipates growth for the saddler of 11% next year, on a comparable basis. This is simply the preferred value of the establishment.
UBS also appreciates Richemont, the Swiss owner of Cartier, whose shares it considers too cheap given its business and margin prospects, as well as Hugo Boss, because it believes that its growth potential is ignored by the walk.
Concerning LVMH, UBS went from “buy” to “neutral” on the value. Although it appreciates the stock, the bank nevertheless believes that the valuation is at the right level. “In the current context of a sector with less certainty and after several years of outperformance compared to its competitors, we believe that the group’s market share gains may have to take a break for a consolidation phase,” also explains the establishment.
For Kering, UBS notes the group’s efforts to breathe new life into its flagship label, Gucci. “However, we believe that in the current context of slowdown in the sector, this (the recovery, Editor’s note) could take time and continue to put margins under pressure, which, combined with significant execution risks, means that, despite its low valuation, the stock could remain in a range,” explains the bank.
The luxury stocks least appreciated by UBS are, however, the British leather goods company Burberry, the bank expressing doubts about its recovery, as well as the Italian Salvatore Ferragamo, whose brand dynamic appears to be “weak”, according to the establishment.
HSBC, for its part, explains that it prefers LVMH to play the sector’s rebound in the second half of 2024, due in particular to its stronger than average exposure to the United States. It expects revenue growth of 9% on a like-for-like basis for the number one luxury brand next year. The stock offers “growth and visibility at a reasonable price”, she judges, and could “benefit from being the first that investors might turn to when they see less risk in the sector”.
For Hermès, HSBC anticipates growth of 12% in 2024, the best performance of its coverage. If the bank also praises the defensive qualities of the title, the saddler nevertheless turns out to be too expensive for its taste, with an expected earnings multiple for 2024 of 45 compared to 19.8 on average for the luxury sector. Like UBS, HSBC is also cautious about the recovery of Gucci and therefore about the evolution of Kering shares.
Apart from French stocks, HSBC is buying Richemont, the Italian Moncler and Prada as well as the British luxury watch distributor Watches of Switzerland. The bank is more cautious, with advice to “keep” on Burberry and Swatch.
Julien Marion – ©2023 BFM Bourse
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