Shares of European luxury concerns are experiencing another downward wave today, after British luxury brand Burberry (BRBY.UK) indicated for the second time in the past three months that it expects lower annual profits. The company made clear that it is seeing a strong global slowdown in demand. As a result, investors are being forced to readjust valuation multiples for many fashion companies. Shares of fashion holdings such as LVMH (MC.FR) and Kering (KER.FR) are trading down 1.5% and 3% today, respectively, erasing almost entirely the improvement in sentiment in recent weeks.The industry is also not helped by a marked slowdown in domestic demand in China, where deflation is taking place. The consumer price index fell in December for a third consecutive month, raising concerns over sales of European luxury brands.
Burberry 'scares' luxury sector
The warning for Burberry is particularly negative, as it came in the midst of a 'restructuring' that comes just after the debut of a new collection (early fall 2023), by new designer Daniel Lee. Another announcement from the company signals that sales are looking weak and will be harder to recover from. Sales slowed in December, a theoretically record month.
- Revenue indicators performed very poorly. Fourth-quarter sales fell 7% year-on-year to £706 million, with lower, comparable sales (PoP) posting a 4% decline. Revenues in Q4 2023 rose slightly, by 3% in Asia-Pacific, noting that the comparative period is Q4 2022 (lockdown in China), making a 3% increase look worrisome. What's more, revenues fell by 5% in Europe and by as much as 15% on average in North and South America
- The company expects operating profit for Q4 in. 2023 in the range of between £410 million and £460 million, compared to £550 million to £668 million forecasts. These estimates are almost 20% lower than those in a previous announcement when the company asserted that they would be 'at the lower end of forecasts' i.e. around GBP 550 million. It also reported that it estimates an unfavorable impact due to exchange rates, which could reduce revenues by £120 million and profits by roughly £60 million.
Fashion fads falter
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From 2020 until the first quarter of 2023, the luxury goods sector was doing well. Valuations rose at a time when the market expected companies' margins and revenues to be immune to inflation. However, this has not been the case. The fashion industry as a whole has seen a slight rebound over the past few months after a wave of sell-offs in the two, middle quarters of 2023
- The rebound was driven by expectations of monetary easing by central banks. It has now been almost completely erased on shares of LVMH (MC.FR) or Kering (KER.FR), among others. Indeed, it seems that the shares of manufacturers whose exposure to China was a significant contributor to performance (Kering, Swatch, among others) are under pressure, but Burberry's results suggest that demand for luxury is also weakening in the 'Western' market
Burberry (BRBY.UK, D1 interval) and LVMH (MC.FR, D1 interval)
Burberry's shares are recovering some losses, after a panic opening. Looking at the dynamics of previous strong downward impulses, a potential rebound could take the stock to the 15 GBP level, where we see the 71.6 Fibonacci retracement of the March 2020 upward impulse.
Source: xStation5
LVMH shares have also managed to erase some of the declines and are trying to get back above €668 per share, the 71.6 Fibonacci retracement of the 2020 upward wave. The RSI near 26.6 points signals a strong oversold condition, the magnitude of which has approached levels from the Covid-19 crash.
Source: xStation5
