Luxury Sector Faces Slower Sales Growth

By Andrea Figueras

The luxury sector is expected to report slower sales growth when companies give quarterly updates in the coming weeks. The industry is grappling with a weaker-than-expected recovery in China, which will likely weigh on sales, as well as a normalization of consumption patterns compared to the strength of the past few years. Here’s what you need to know ahead of the earnings season:

What to Watch

Revenue Slowdown

Third-quarter results will be a moment of truth for the luxury industry, highlighting the pace of the slowdown in revenue growth, according to Bank of America analysts. Bank of America forecasts sector revenue to grow 5% at constant currency for the quarter, slowing from a 17% rise in the second quarter and a 16% increase in the first. The luxury market is now 25% bigger than it was in 2019, before the pandemic, noted RBC Capital Markets analysts. A moderation in growth rates seems inevitable and, while cyclical downturns have happened in the past, the current picture of higher interest rates, inflation, and challenges in China suggests that the deterioration could be more pronounced this time around, RBC said.

Weak Recovery in China

According to analysts at RBC Capital Markets, China’s economic difficulties indicate that its contribution to the luxury sector may continue to be subdued in the coming quarters. Factors such as volatility in the property market, youth unemployment, the decoupling of Western economies from China, depreciation of the Chinese yuan, and deflationary pressures have all had a significant impact on the country’s economic performance, which in turn could affect the luxury sector. Stifel analysts Rogerio Fujimori and Daniele Alibrandi noted that these factors are particularly important for luxury sales momentum since a whopping 70% of Chinese household wealth is tied to property, while younger consumers have been driving the luxury goods story in China.

Resilience Test

Luxury companies have managed to achieve a rebound in sales since the pandemic, thanks to various factors including brand strength, effective management, and high entry barriers, as stated by analysts at BofA. They also emphasized that pullbacks in the sector usually present buying opportunities, and they believe that this time will likely be no different. However, UBS analysts caution that the industry will not fully recover its valuation until the market has absorbed the normalized growth rates.