PARIS — Europe's high-flying luxury sector is losing altitude as pessimism rises among investors.
Shares of PPR, Burberry and other high-end players fell Thursday as Deutsche Bank and Goldman Sachs lowered profit estimates and ratings.
In a report, Deutsche Bank analyst Jamie Isenwater forecast "a continued slowdown in global luxury demand in 2009," pegging organic growth for next year at 6 percent versus 7.1 percent for 2008, and cutting 2009 earnings-per-share forecasts by 8 percent on average.
"While there are obvious attractions to the sector...visibility remains low and consensus forecasts too high," he wrote. "The industry faces considerable risks over the next years."
The investment firm downgraded Swatch and Luxottica, leaving no "buy" recommendations in the sector.
Also on Thursday, Goldman Sachs issued a report on European retail and downgraded seven stocks, including Burberry, PPR and Safilo. Compagnie Financière Richemont, Essilor and Puma are on its "conviction buy" list.
Rising inflation, declining purchasing power and weak consumer confidence are among the factors propelling the downturn. For 2008 and 2009, Deutsche Bank revised U.S. spending from 5 percent growth to 1 percent and Japanese domestic consumption to a 2 percent decline from 2 percent growth. Europe spending was trimmed from 2 percent growth to a 1 percent decline.
Hermès International was upgraded to "neutral" as takeover speculation continues to fan the stock price, while Richemont was upgraded, partly because of its high exposure to watches, Goldman's preferred market segment.
But most of the news was grim, with Goldman arguing that the operating environment for retail and luxury has become more challenging because of increased raw materials prices, sourcing cost inflation and trading down among consumers.
"We remain negative on the U.K. and expect further de-ratings in Europe," the Goldman report said.
Shares in PPR dropped 7.9 percent Thursday to close at 60.70 euros, or $94.76 at current exchange, in trading on the Paris Bourse. LVMH shed 3.4 percent to 62.27 euros, or $97.21.
In Milan, Benetton closed down 4.8 percent to 6.75 euros, or $10.54; Bulgari fell 4.7 percent to 6.07 euros, or $9.48; Luxottica decreased almost 3 percent to 14.36 euros, or $22.42; Safilo dropped 4.1 percent to 1.27 euros, or $1.98, and Tod's declined 3.84 percent to 32.07 euros, or $50.06.
Goldman downgraded Benetton to neutral although the clothing retailer said Wednesday that preliminary estimates of first-half revenues indicated growth of around 5 percent at constant exchange and confirmed its guidance for 2008.
Burberry saw its share price close down 6.2 percent to 403 pence, or $7.96, on the London Stock Exchange Thursday. The British luxury goods brand will issue a first-quarter trading update next week.
Most of Europe's big luxury players will begin reporting second-quarter sales later this month.
But shares of the biggest players have been on a downward trajectory, a fact reflected in this year's ranking of France's richest families by Challenges magazine, which was released Thursday.
Bernard Arnault, chairman and chief executive of LVMH Moët Hennessy Louis Vuitton, slipped from the top slot to number two, largely because of weakness in the share prices of LVMH and Carrefour. François Pinault fell three spots to seventh place due to his 40 percent stake in PPR, whose share value has halved over the past year. (For related story, see Fashion Scoops on page 10.)
"We've seen a lot of movement today and over the course of the year because of greater uncertainty about spending power in more mature markets around the globe," said John Guy, senior retail and luxury goods analyst at MF Global. "Italy, the U.K., Spain and Japan have already identified weaknesses."
Characterizing the market as "nervous," Guy said fundamental valuation metrics are largely overlooked in the face of negative momentum, and strong currency headwinds.
"There's a lack of visibility in the marketplace," he explained. "There's concern that more mature markets in Europe will decline rapidly and that the market is thinking that it's 2001 all over again. I don't think that's the case as luxury companies' regional exposure is very different today. We also don't have SARS [severe acute respiratory syndrome] or a new conflict to impact travel and tourism."
Guy noted companies with an "affordable" luxury positioning, such as Coach, Tiffany, Burberry and Tod's, could face a tough second half, "whereas other companies can continue to perform well in a tougher markets, like LVMH, Richemont and Hermès. Hermès, for example, is extremely exclusive and high end and its consumers will carry on spending, even if it's not to the same extent, the decline in sales will be relatively small."
Investor confidence in the so-called accessible luxury segment has even led some listed brands like Mariella Burani Fashion Group to consider going private.
The Italian group confirmed last week that the majority shareholder, the Burani family, plans to tender an offer via a special purpose vehicle for part or all of the outstanding stock, which could lead to a delisting from the Milan Stock Exchange's STAR segment for small companies. Mariella Burani fell 2.76 percent to 15.31 euros, or $23.90, on Thursday.
HSBC downgraded Italy's Tod's to neutral last week on assumptions of the underperformance of its leather goods and a worsening economic outlook for the rest of the year.
HSBC believes Tod's will suffer as the climate hinders diversification, although Tod's, which reported an 8 percent gain in first-quarter operating profits following revenue growth across all brands, confirmed in May its forecast to achieve "good" growth in revenues and earnings come full year.
In an HSBC research report released Thursday, analysts Antoine Belge and Erwan Rambourg noted Hermès is the only stock it covers that has risen this year — on acquisition rumors. "But we believe it is the least likely to go," they wrote.
Calling its "uberresilience" unjustified, HSBC reiterated its "underweight" rating and a target price of 76 euros, or $118.64. Shares in Hermès International closed down 3.1 percent to 89.94 euros, or $140.41.
In the meantime, retailers have also been sounding warning bells. Shares of Carrefour, the world's second-biggest retailer after Wal-Mart, skidded 8.6 percent in trading to close at 31.64 euros, or $49.39, on the Paris Bourse Thursday. It was the biggest percentage loser in Europe in the day's trading.
Carrefour and Wal-Mart, along with investment fund TPG Capital, were planning to bid for control of the Russian retailer Lenta, a privately held chain of hypermarkets that is holding a tender for the sale of a controlling stake, Reuters reported, citing sources close to the sale.
Carrefour's second-quarter sales rose 6.7 percent at constant exchange, below analysts' expectations and in tandem with warnings about a floundering economy, demanding higher promotional activity to stimulate spending.
There were some bright spots in Thursday's reports, however. Deutsche Bank's Isenwater cited the robust nature of the luxury sector and noted that "the industry has never seen an annual sales decline, with plus 3 percent the worst recorded in 2002."
Isenwater also increased his forecasts in the fast-growing emerging markets of Russia and the Middle East, due to high oil prices. Deutsche Bank contends that "emerging markets' performance will be better than mature markets over the short and medium term."
In a separate development, Hedge fund Viking Global said it has upped its stake in Burberry from 12,583,400 shares to 15,258,400 shares, bringing its holding to 3.5 percent.
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