Where Next for EU’s Luxury Sector

European luxury brands have faced challenges from slowing Chinese demand while top-tier brands focus on wealthier clients to manage the downturn, but the recovery seems exposed to macro factors.

The Underperforming Sector

Kering is the latest luxury company to feel the impact of weakness across the sector, receiving two downgrades before trading opened. Barclays cut the company to Underweight from Equalweight, with a price target lowered to just €210 from €276 previously. RBC also cut its rating from "outperform" to "perform in line with the sector", a sector that is underperforming and many analysts believe faces further downside before signs of recovery emerge.

The French luxury firm, which owns Gucci and Balenciaga, is not entirely disconnected from the market situation, however, as European luxury brands have confronted significant headwinds due to slowing demand from China. Weaker inflation reported last week in the Asian giant suggested that domestic consumer demand remained sluggish, contributing to the latest downturn for the luxury sector. European brands had grown substantially in China, building on long-established brand positioning. But China's economic recovery, attributed to lingering effects of the housing market and covid-related restrictions, is hurting demand among the country's top spenders.​

Where is the Inflection Point

The current situation does not appear to be improving in the short term, with one analyst predicting China's economy will slow to 4.6% growth this year, and 4.0% next year. Kering has been most punished by investors, along with Hugo Boss, as their share prices have fallen to almost half of what they were a year ago. Ironically, this may be because they target more accessible luxury brands, while top-tier brands focusing on the extremely wealthy have still managed during the downturn.

Analysts believe the trend for luxury brands can be summarised as "slower for longer", as sluggish consumer demand in the main market will keep profit margins under pressure. However, the very thing making Kering more vulnerable to a decline in disposable income may mean it sees a rebound faster when conditions improve. "Aspirational" luxury brands can access a broader, albeit more volatile, market. The polarisation of the sector, with higher-end, American-focused brands outperforming aspirational, China-focused brands, points to macroeconomic factors impacting performance. In other words, a recovery for Kering may rely less on actions to gain more customers or improve margins, but external factors outside its control, such as a recovery in its key market.​

Hugo Boss Near Critical Support

Hugo Boss has dipped to the 78.6% Fibonacci level of EUR 19 to EUR 81, nearing EUR 33. The share price may rebound around this level or as low as EUR 31.50, where a swing high has formed support. Should the downward trend continue, prices could fall to the bottom of the long-term range. However, a potential reversal could see the share price increase to EUR 42, a cluster between the golden Fibonacci and previous support. A break above this level may take the share price to the 50% Fibonacci retracement at EUR 50.​

Source: SpreadEx / Hugo Boss AG

Key Takeaways

Kering, which owns Gucci and Balenciaga, has seen its share price nearly halved in the past year due to slowing luxury demand in China and a broader sector downturn. Analysts believe luxury brands face a prolonged slowdown until economic conditions in China, the key market, recover. While top-tier brands have fared better, more accessible luxury brands targeting a broader consumer base are vulnerable to declines in disposable income but may also see faster rebounds when growth resumes. The luxury sector remains under pressure from macroeconomic headwinds outside companies' control.​