(News Bulletin 247) – The American bank has gone from buy to neutral on the two luxury groups as part of a review of its advice on the entire sector. The establishment is counting on starving growth next year of barely 3% for the industry.

Having struggled for several months on the stock market, luxury will still struggle to get back on its feet in the short term. At least that is the observation made by Bank of America on Monday.

In a sector note, the institution has combed through its projections for the entire sector. This has led it to lower, on average, by 20% its price targets on the stocks it covers.

Bank of America is cautious about the luxury dynamic, counting on a 1% decline in its revenues excluding currency effects (for all of its covered companies) in the second half of the year, followed by growth of barely 3% in 2025. This will lead to pressure on margins and a lack of growth in operating income.

The bank notes that the only factor supporting the sector, namely a rebound in Chinese consumption, is now fading. Other customers, i.e. Americans, Europeans and Japanese, have all entered a phase of normalisation of demand.

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“Part of this trend has already been reflected in stock prices (-15% in one month). The luxury sector is trading at a 2024 expected price/earnings multiple of around 20, at the lower end of its recent ratio range of 20-25, but with limited visibility on a re-acceleration in revenue growth, it is difficult to identify a catalyst for a re-rating (an appreciation of stock market multiples, editor’s note)”, explains the establishment.

For the bank, the sector must be innovative and deliver new things. “The industry must return to creativity, fashion content and novelty at 1,000-2,000 euros to generate greater engagement (as it did in 2016),” it considers.

In view of this unpromising context, Bank of America has lowered its opinion on four stocks in the sector, including two French ones.

The institution went from “buy” to “neutral” on both LVMH and Kering. On the Paris Stock Exchange, these downgrades penalize both stocks a little. LVMH drops 0.3% and Kering falls 2.7% early this afternoon.

LVMH is not immune to the slowdown

For Kering, the bank believes that management “is doing the right things to (recover, editor’s note) the Gucci brand.” However, this recovery is taking place in a “difficult demand” environment and the risk of downward pressure on the group’s earnings expectations “is still high,” argues Bank of America.

As for LVMH, the institution considers that its stock is the best indicator of the entire sector. “In this phase of normalization of luxury spending, we do not believe that the company is immune,” warns Bank of America. However, the bank notes that the quality of its management and its portfolio of brands “will help” it weather the storm.

Regarding Hermès, Bank of America confirmed its buy recommendation, while lowering its price target by 18% to 2,300 euros.

The American establishment also lowered its advice on the Italian Zegna, going from “buy” to “neutral”, as well as on the German Hugo Boss, downgrading it from “buy” to “underperform”.