LONDON — RBC Capital Markets has sounded another warning bell about the fate of the luxury goods market, and said Compagnie Financière Richemont, which specializes in fine jewelry, could be the hardest hit of all the major groups.
On Monday the bank sent out two separate reports, the first of which dialed down expectations for growth at Richemont, and the second laying out “reasons to be cautious” about luxury overall.
RBC downgraded Richemont’s share price target to 130 Swiss francs from 170 Swiss francs for the next 12 months based on new, and lower, earnings estimates.
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On Monday, Richemont’s shares closed down 0.6 percent at 111.30 Swiss francs.
The report, penned by Piral Dadhania and his team, said despite the quality of Richemont’s stock, “we are less confident on its near to midterm outlook, reflecting our expectation of moderating luxury sector trends.”
Dadhania added that Richemont could be particularly vulnerable to the normalization in spending given the higher price points of hard luxury, “and, arguably, the higher feel-good factor required” to purchase fine jewelry.
The bank cut its earnings estimates by 8 percent for fiscal 2025 (which begins in April 2024) and downgraded the stock to “sector perform,” which means that Richemont is expected to perform in line with comparable luxury stocks.
“The luxury cycle is turning, and despite Richemont’s strong momentum in recent years, we believe [fiscal 2025] consensus estimates are too high. More broadly, hard luxury, specifically watches, is likely to be more challenging as Rolex supply is increasing and could cannibalize non-Rolex brands, to an extent, in our view.”
Richemont key high-end watch brands in its portfolio include Cartier, IWC, Panerai and Piaget.
Regarding Richemont, the RBC team said it is expecting a 5 percent uptick in organic revenue growth for fiscal 2025 versus consensus estimates of 7.5 percent. The report said with 5 percent organic revenue growth, “Richemont can protect margins.”
By region, RBC estimates that the Europe, Middle East and Africa region will grow 3 percent; the Americas 2 percent; Asia-Pacific, 8 percent, and Japan 6 percent.
The traveling Chinese consumer might also weigh on revenue growth.
The RBC report said given Richemont’s global, harmonized pricing, “there is less incentive, particularly for the Chinese consumer, to purchase overseas, in our view. As a result, Richemont’s key brands (Cartier and Van Cleef & Arpels) may not benefit as much as Chinese outbound travel continues to recover.”
For fiscal 2024, the current financial year, the bank has reduced Richemont’s revenue estimate by 2 percent and EBIT, or earnings before interest and taxes, by 5 percent.
Richemont, which also owns Buccellati, Chloé and Dunhill, has already begun to feel some of the shocks of a slowdown in the sector.
In July, following Richemont’s first-quarter results announcement, shares closed down more than 10 percent at 137.90 Swiss francs. The luxury goods giant had reported a 2 percent contraction in sales in the key Americas region, and a miss on projections in Asia Pacific.
It saw sales in APAC climb 40 percent, while RBC had been anticipating a 41 percent gain.
In a separate report on luxury overall, also written by Dadhania and his team, RBC reiterated its bearish view on the sector.
As reported in August, RBC said moderating trends among aspirational customers, the normalization of spending, and consumers’ potential return to experiential pursuits, such as travel and dining out, would take a toll on growth in the luxury sector.
It noted that, overall, the fiscal 2024 earnings estimates for the luxury companies it covers are 3 to 8 percent below consensus.
RBC said its outperform-rated stocks are LVMH Moët Hennessy Louis Vuitton and Kering. It also upgraded EssilorLuxottica to sector perform, with a 165 euro price target.
In the report, the bank also doubled down on its grim projections for luxury, arguing that 2023 marks the end of a “supercycle” for the sector.
It said the size of the luxury market is around 25 percent above 2019 levels, and the compound annual growth rate over the past four years has been “above longer-term averages” for the majority of companies under RBC’s coverage.
“This is not sustainable, and we expect moderating revenue growth trends from here,” the report said, adding that the aspirational consumer, an important driver for luxury in recent years, is “less visible” today.
The statement echoed that of many a luxury goods retailer, including Mytheresa.
Last month, Mytheresa’s chief executive officer Michael Kliger said aspirational shoppers have temporarily lost their appetite for luxury.
“Reality has sunk in following a crazy moment of spending” during the pandemic, said Kliger. He added that there is “too much stock in the market as well as promotional fatigue,” and it will take some time before that less wealthy shopper returns.
As reported, in fiscal 2023 Mytheresa’s business with its top customers grew by 30 percent in terms of gross merchandise value.
Kliger said the top 3 percent of customers now account for 40 percent of GMV. Net-a-porter and Neiman Marcus have noted similar trends.
RBC also argued the macro headwinds that luxury is facing are “the worst in decades.” The bank said that average consumers have less residual income in their pockets due to higher inflation and interest rates, “which is likely to impact spending.”
The bank looked at historic luxury downturns, which it said have occurred three times since 2010. It said that, on average, they last for four quarters and bring a 12 percent decline in shares.
On an even more grim note, RBC said comparing the expected downturn with historic ones may be limited, given differences in interest rates, inflation and the macro situation in China, “which suggests this current downturn could be more pronounced.”