by
Bloomberg
Published
July 13, 2024
The markets’ pessimistic reaction to Brunello Cucinelli’s strong second-quarter earnings is a bad sign for European luxury goods companies, which are likely to face a tough task this earnings season to allay investor concerns about the sector.
Shares in the Italian cashmere house fell about 2.3% on Friday, even though its earnings came in line with expectations and it highlighted “very promising” orders for its autumn-winter collection. But the lack of a guidance update was enough to disappoint investors, who are embracing the risk of falling demand for higher-value items.
“Expectations are relatively high for absolute luxury names like Hermès, and relatively low for turnaround stories like Burberry or Kering,” said Stifel analyst Rogerio Fujimori.
“Brunello Cucinelli’s second-quarter sales performance was very strong, but the full-year consensus estimate is unlikely to change materially, hence the muted share price reaction this morning,” Fujimori added.
These concerns were reflected in analysts’ forecasts, with earnings estimates for the sector falling faster than the broader European market.
Cucinelli, like France’s Hermes International SCA, has benefited from its exposure to the ultra-wealthy, who tend to be less sensitive to any downturn in the economy. The stock has held up relatively well this year, up 4.4%, while shares of some peers such as LVMH have fallen. The MSCI Europe Textiles Apparel & Luxury Goods Index is down 13% from its peak earlier this year.
“They have been reporting stronger results than their peers recently, perhaps helped by the ‘quiet luxury’ trend,” said Jelena Sokolova, an analyst at Morningstar, of Cuccinelli. “Their slowdown means that quieter demand for others will continue.”
Among the key challenges facing luxury goods companies is the slump in Chinese demand following a post-pandemic spending boom. That has forced some high-end brands to cut prices in China to shift unsold inventory, with brands owned by companies such as Kering SA, LVMH and Burberry Group Plc resorting to discounting.
Burberry and Richemont are due to report next week. Analysts have already signaled that second-quarter results may not be strong. For example, analysts at Brian Garnier believe that first-half earnings will be impacted by the economic downturn in China, and expect mid-tier brands like Swatch to bear the brunt.
LVMH — owner of brands such as Louis Vuitton, Bulgari and Givenchy — has seen several brokers cut its price target on the prospect of weaker growth in the second quarter. Its shares are down about 2% this year.
“The sector has been downgraded in the past couple of months and is now trading at more compelling levels,” JPMorgan analyst Chiara Battistini said in a note. “However, with uninspiring first-half reports and upcoming dividend cuts, we don’t see a short-term catalyst to become more bullish at this time.”