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The Luxury Market Faces New Challenges in the US

by Raxer X.
05/23/2023
in Luxury Goods

Recent fluctuations in the share prices of prominent luxury groups, such as LVMH, Hermes International, and Cie Financiere Richemont SA, have drawn attention to changing dynamics in the luxury goods industry. These developments suggest a shift in investor sentiment.

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As of Monday’s closing, the MSCI World Textiles Apparel & Luxury Goods Index had seen an almost 20% increase since the beginning of the year, with major players in the industry experiencing even more significant growth. The valuations of luxury brands have primarily relied on two key factors: the continued post-Covid recovery in China and a soft landing in the US luxury market. The latter, however, is currently under scrutiny.

Analysts at Citigroup Inc. have been tracking a year-long weakening trend in US credit-card spending, with no signs of improvement in April.

Several recent developments have further raised concerns. Johann Rupert, Chairman of Richemont, confirmed earlier this month that the US luxury market had been slowing since November. Additionally, Burberry Group Plc reported a 7% decline in sales in the Americas in its most recent quarter, falling behind its competitors. While the ultra-rich continue to make luxury purchases, Burberry CEO Jonathan Akeroyd noted that younger, aspirational US consumers are reducing their spending on items like sneakers, hats, and belts.

Although not a luxury brand, Foot Locker Inc.’s profit warning on Friday is also worth noting, as it may indicate a connection between its customer base and those who aspire to purchase high-end products.

Deutsche Bank AG analysts on Tuesday pointed out that the deceleration of the US market is becoming a growing concern, and this trend could have significant implications for the luxury goods industry.

For the past three years, the US, along with South Korea, has been a key driver of the luxury goods market. While Chinese regions experienced lockdowns and reopenings, American consumers, especially younger demographics, continued to invest in European luxury brands. Stimulus payments, stock market gains, and cryptocurrency profits further fueled their spending habits. As a result, luxury brands expanded their presence in the US, diversifying from traditional shopping hubs like New York and Los Angeles into locations such as Austin, Texas. While the slowdown in US luxury purchases is not currently threatening these stores, it’s essential to monitor whether luxury brands might face underperforming outlets from their expansion efforts. Investors should remember the wave of store closures in China several years ago, which followed brands opening stores in smaller cities only to witness a contraction in consumer spending.

In this context, LVMH is notably exposed, as it derived 23% of its sales from the US in the first quarter. Nevertheless, LVMH boasts some of the world’s most prestigious brands, including Louis Vuitton and Dior, and also secured 36% of its first-quarter sales from Asia (excluding Japan).

Brands attempting to rejuvenate their market positions, such as Kering SA (owner of Gucci) and Burberry, are at a higher risk. Burberry, in particular, is more susceptible to downturns among premium customers as opposed to the ultra-wealthy. Historically, it has relied on approximately 40% of its sales from Chinese shoppers (though it’s around 30% currently) and has a new star designer, Daniel Lee.

With the US market showing signs of moderation, the luxury industry is becoming increasingly reliant on Chinese consumers to sustain its momentum. So far, Chinese spending has been concentrated domestically or on trips to nearby destinations like Macau and Hong Kong, with large-scale group tours to Europe yet to resume. The trajectory of Chinese consumption is contingent on the continuation of the country’s recovery story, although some caution among shoppers has been noted.

For luxury stocks to maintain their gains throughout the year, an ideal scenario must unfold: the US market slows down, while China picks up speed, building on the strong performance enjoyed by high-end sellers in recent years. However, this best-case scenario could be disrupted by Chinese consumers losing their appetite for luxury goods or a more severe downturn in the US market.

Stay informed with supply chain news on The Supply Chain Report. Free tools for international trade are at ADAMftd.com.

#LuxuryGoods #LVMH #HermesInternational #RichemontSA #TextilesApparelLuxury #ChinaRecovery #USMarketSlowdown #LuxuryIndustryTrends #InvestorSentiment #Burberry #FootLocker #USLuxuryMarket #DeutscheBankAnalysis #LuxuryStocks #KeringSA #Gucci #USConsumerSpending #ChineseLuxuryDemand #LuxuryBrands #LuxuryMarketChallenges #EconomicTrends #HighEndRetail

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