3 Luxury Retail Trends to Watch This Week

While saying that 2Q is likely to remain challenging for the luxury retail sector, Morgan Stanley’s Elena Mariani cited three trends to monitor - high inventory levels, persistent watch weakness, and Mainland China signs of growth.

The luxury sector witnessed an increasingly volatile operating environment, which resulted in further revenue declines and cost pressures. “Despite low expectations Q1’16 was a miss for most of the luxury names; we do not exclude further consensus downward revisions given a weak start of 2Q (and a more challenging comp base),” analyst Elena Mariani wrote.

Trend #1: High Inventory Levels

Higher-than-expected inventory growth at certain brands during Q1 point towards the clearance pressures into the back half of the year. This is particularly given that a meaningful sequential improvement is unlikely in Q2.

“Within the Wholesale channel, our US colleagues highlighted persistent discounting pressure in the region in Q2, which could worsen as trends stagnate/deteriorate,” Mariani said.

Trend #2: Persistent Watch Weakness

Watches don’t seem to have found a bottom as yet. The analyst believes a watch market recovery is unlikely in the next six months. While inventory levels continue to be elevated, there is lack of any demand catalyst in the near term, indicating that “a continued meaningful decline in watch exports could persist, in our view,” the analyst mentioned.

Trend #3: Signs Of Growth In Mainland China

Several luxury companies have indicated towards an uptick in growth in Mainland China over the past quarter. “While it is too early to extrapolate a new trend, we find these early data points encouraging, given the normalisation of Chinese purchases abroad,” Mariani stated.

CNY depreciation, price harmonization efforts by brands and development of onshore duty free shopping are expected to support volume growth in 2H.

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Mariani has an Outperform rating on Nike Inc NKE and Lululemon Athletica inc. LULU. The price target for Nike is at $69, representing 24 percent upside, the price target for Lululemon is at $71, reflecting 12 percent upside.

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Mariani has an Underperform rating on VF Corp VFC and Under Armour Inc UA. The price target for VF is at $52.50 and for Under Armour is at $32, both reflecting 15 percent downside.