MILAN — The coronavirus pandemic could drive revenues of the luxury goods sector down an average 12 percent in 2020 and cause profits to fall by 40 percent, according to Equita.
Equita luxury goods analyst Paola Carboni identified companies that are better positioned to weather the storm in her updated analysis on the luxury sector in light of COVID-19.
Carboni believes the brands that have more opportunities to recover starting from the second half of the year are those with a stronger market position; are more prepared on the digital front, and in terms of marketing and CRM. In the post-emergency scenario, the fear of contagion and social distancing could continue to slow down physical shopping. Brands less reliant on tourism will also be in a better position “as we think that domestic spending will recover faster,” said Carboni, given that “travel limitations could be extended for a longer period of time.”
Business will pick up faster for companies with less exposure to European and American customers, who are expected to need a longer recovery time compared with Asians and especially the Chinese, favored by a stronger economy. In addition, the latter have “tackled the contagion in a more drastic and faster way,” and see luxury shopping as “a bigger priority,” Carboni said.
Those brands that offer more carryover products will see better margins. Seasonal products are more exposed to the risk of unsold stock with a consequent pressure on gross margin, continued Carboni. Companies with stable costs will be ahead of the game, compared with those that have projects that were not completed in 2019.
Equita sees 2021 as a year of recovery and normalization, “even if in a deteriorating macro context. Looking back to the worst crisis yet, in 2009, in the following year the sector’s sales were already 5 percent above the pre-crisis levels and even 12 percent above for the more established players that normally overperform the aggregated sector. In this case, we are more prudent given the exceptional size of the current shock in economic and financial terms, with in particular limited visibility on the recovery of the European and American customers and on the impact of shrinking tourism on the sector.”
In fact, Equita concluded by forecasting 2021 revenues for luxury goods companies only 1 percent up compared with 2019, or 15 percent over 2020, and profits still 7 percent below 2019. “Given the uncertainties, we do not see the sector’s valuations as attractive in general. We see room for a selective approach to brands with more quality and better positioned in terms of the appeal of the brand, its digital [strength], its exposure to Asian clientele,” such as Moncler and Kering.
Separately, in its April Jefferies Insights, the investment bank’s U.S. and European economists “recently cut forecasts, highlighting that the economic impact of a pandemic is very different from anything else they have ever seen. Typically in a downturn, an economy loses momentum and a recession builds, instead of being actively slowed while the damage reverberates. We do not appear to be heading for a normal recession, and the U.S. Economics team does not currently forecast a recession this year.”
The effects of the pandemic are still difficult to forecast but Jefferies’ economists “believe that the economy will remain intact and functioning. They also are in broad agreement that what is important now is for both fiscal and monetary policy responses to be measured and prompt,” while lamenting a “lacking” response in the euro area in terms of support of the European markets.
Jefferies also analyzed the impact of the COVID-19 on M&A activity, which its analysts expect “will experience historically low volumes until the economic environment normalizes.” Before that moment, the forecast is for M&A activity to “rapidly evolve to a range of transactions that will include the following broad themes:
• Stock-for-stock mergers within industry verticals where relative ownership is the main driver, not absolute valuation of the acquirer or target. These transactions will be driven by the even greater need for scale in this new economic environment.
• Equity investments by companies and private equity firms to establish toe-hold positions in quality companies that need bridge equity capital but are not willing to sell at depressed values, and potentially providing a natural path to acquisition when valuations recover.
• Sponsor-led acquisitions that are funded entirely with cash equity to eliminate the need for external financing and to capitalize companies with less leverage. “Acquirers pursuing cash acquisitions may also need to employ structuring tools to bridge valuation gaps, including earn-out structures in private transactions and contingent value rights in public deals.”