PARIS — Luxury retail activity has ground to a halt across the U.S. and Europe, and the financial toll is coming into view. Sales of high-end goods this year are set to decline as much as 20 percent to 30 percent, according to analyst reports released on Thursday.
RBC Europe highlighted the pinch the industry will feel from fewer traveling spenders, which will likely continue even when lockdowns ease up.
Tourism, which fuels some 30 percent of the sector’s revenues, will be weakened for some time as people adopt a more cautious approach to travel with only a partial repatriation of that spending at home.
This could weigh on business in the short and long term, said Piral Dadhania and Richard Chamberlain of RBC. The analysts expect revenue for the full year to fall by 7 percent to 21 percent, with a 21 percent to 58 percent decrease in earnings before interest and taxes.
Bernstein, in a report drawn up with Boston Consulting Group, sees the annual sales decline at 30 percent, noting it might take longer to bring the COVID-19 virus under control in the West than the little more than two months it took in China, where lockdown protocols were more stringent.
Luca Solca, Can Yuan and Maria Meita of Bernstein said their survey of chief executive officers and chief financial officers pegged annual revenue declines at 30 percent, with a 40 percent hit to EBITDA.
It’s time for luxury companies to hunker down in hibernation mode — reducing costs and halting production while hanging on to employees and stores, the Bernstein analysts recommended.
The virus will speed up the demise of wholesale channels, companies will buy or finance suppliers to keep them in business and, style-wise, minimalism will eclipse the recent era of maximalism, added Bernstein, warning that the coming quarters will be “the most horrible in industry history.”
For the next quarterly reports, RBC analysts are predicting LVMH Moët Hennessy Louis Vuitton revenues down by 23 percent, 16 percent for Kering, 17 percent for Moncler, 17 percent for Boss and 16 percent for EssilorLuxottica. Richemont and Burberry are expected to show declines of 37 percent and 30 percent, respectively.
RBC has outperform ratings for LVMH, Moncler, Richemont and Kering, and noted high interest in the luxury sector as valuations have declined from recent highs.
Bernstein said investors seeking high quality investments like LVMH and Hermès need to be patient and build up their positions step-by-step and be wary of unjustified rallies, while Prada and Richemont could rebound faster.
RBC pointed out that luxury business in Europe will likely be hit the most from lower tourist flows for the rest of the year because around half of such sales come from tourism, while in the Americas, the majority of sales, between 80 and 90 percent, are from local spenders.
Hong Kong will not return to its former glory, the RBC analysts predict, and brands’ big retail portfolios will be adjusted to reflect this. Aspirational luxury spending could be affected as younger consumers are more exposed to the economic fallout from the virus, they added, citing Generations Y and Z, which account for around a third of the sector’s consumers.