Prada, Gucci, Louis Vuitton Brace For Sales Slump As China's Economic Turbulence Hits Luxury Market

The luxury goods industry is preparing for a substantial decline in sales, attributed to China’s subdued demand and challenging comparisons with the sales spike following the COVID-19 pandemic last year.

What Happened: Investors are bracing for a sharp fall in sales as luxury brands reveal their Q1 results. The anticipated decline is linked to weak demand from China, and Reuters reported that compared with last year, when COVID-19 restrictions were lifted in mainland China, a sales surge was resulting.

LVMH Moet Hennessy Louis LVMUY, the world’s largest luxury conglomerate, will be the first to announce results on Apr. 16, followed by competitors Kering PPRUF, Prada PRDSY, and Hermes International HESAF a week later. Burberry Group BURBY and Compagnie Financière Richemont SA CFRUY will report in May.

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A surprise warning from Kering last month that Q1 sales would be down by 10% rather than the expected 3% has already cast a pall over the reporting season. The group attributed the sales slump in Asia to its star label, Gucci. This underperformance has sparked worries that other luxury fashion labels might struggle in China.

“We’ve got a lasting crisis and we don’t know where things are heading,” said Olivier Abtan, a consultant with AlixPartners. He characterized the slump as unparalleled, stating that “all growth engines have been off for a number of quarters.”

HSBC analysts have also observed that Chinese tourists in Hong Kong, Macau, and Singapore appear to be spending less. This uncertainty impacts the valuation of companies like Kering, which is trailing its competitors.

Why It Matters: The luxury sector’s outlook is clouded by geopolitical tensions and economic uncertainties in China. The U.S. Treasury Secretary, Janet Yellen, recently warned Chinese banks and exporters against aiding Russia's military capacity, citing potential sanctions. This development could further dampen China’s economic prospects and impact the luxury sector.

Furthermore, tensions are escalating in the South China Sea, with President Joe Biden expected to express serious concerns over China's increasing activities in the region. These geopolitical issues, coupled with the ongoing economic challenges, are likely to impact further consumer sentiment and spending in China, a key market for luxury brands.

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