(Bloomberg) -- For investors bracing for another gloomy results season from Europe’s luxury-goods industry, there’s potentially one bright spot — China’s stimulus blitz, which could prompt companies to signal that earnings are approaching the bottom.
The first test will come after market close Tuesday, when LVMH, Europe’s second-largest company by market value, reports results. Investors are likely to look past the actual quarterly numbers and focus instead on whether executives will flag any uptick in Chinese spending since late September, when Beijing started unleashing stimulus to boost its economy.
Stakes are high, and not just for LVMH. While the Christian Dior owner has lost over a quarter of its market cap from a peak hit in March, a Goldman Sachs Group Inc. index of luxury-related European stocks has shed more than $200 billion in value over that period, as investors questioned whether Chinese shoppers would ever regain their appetite for pricey handbags and clothing.
Beijing’s moves come too late for the third quarter’s luxury results, which analysts at Bank of America Corp. predict will show the weakest sales growth for the troubled sector since Covid. But any upbeat commentary from LVMH could offer some relief to the entire complex, and could even lift sentiment on the broader European stock market. Luxury stocks represent nearly 10% of the blue-chip Euro Stoxx 50 index.
Barclays Plc analysts Carole Madjo and Wendy Liu are seeing more interest in the luxury sector since the Chinese stimulus news. While they predict zero organic growth for the luxury giant’s key fashion and leather-goods division, the market will look “for LVMH’s take on the recent stimulus news; on some color on Golden Week performance and on travel trends.”
“Many investors believe that we are approaching the end of the earnings downgrade cycle and naturally view LVMH as an attractive name considering its status of sector proxy,” they added.
Luxury earnings have been under pressure this year, with companies such as Kering, Burberry Group Plc and Hugo Boss AG issuing profit warnings. That means expectations this season are pretty low - the sector’s 12-month forward earnings estimates have fallen by 10%. That said, data implies the turnaround is unlikely to be swift — during this year’s Golden Week holiday, Chinese citizens spent less than before the pandemic.
Overall, earnings reports will be “challenging” across the sector, said Florian Ielpo, head of macro research at Lombard Odier Asset Management. Still, he’s “placing a lot of hope in the forward guidance we get from all of those companies, because they’ll be the first witnessing whether the stimulus is working or not.”
BofA analysts are gloomier, predicting overall revenue across the sector to have declined 2% year-on-year. They also reckon it’s too early to see any signs of green shoots in China, meaning the industry could see more earnings downgrades.
They advise positioning in the highest-end names including handbag-and-scarf maker Hermes International SCA and cashmere house Brunello Cucinelli SpA. Both companies should deliver 10% revenue growth, BofA expects.
Amid the gloom there are some positives. Earnings expectations are more realistic and valuations are cheaper than previous peaks. A gauge tracking the European sector trades on around 26 times blended forward 12-month earnings, well off the lofty levels seen during the pandemic.
Some analysts are also keen to point out that Chinese demand isn’t the whole story. Zuzanna Pusz at UBS Group AG estimates Chinese consumers drove about 25% of luxury sales growth since 2015.
“Investors pay too little attention to the remaining 70% of the luxury consumers globally,” Pusz said, recommending clients focus on US, European, Middle Eastern, South Korean and Japanese consumption trends. These markets could allow the sector to notch 4% organic sales growth next year, she said.
--With assistance from Michael Msika.
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