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Luxury brands Burberry (LSE:BRBY) and Kering (LSE:0IIH) experienced significant declines on Monday after Barclays downgraded its recommendation on the shares to ‘underweight’ from ‘equalweight’ due to concerns about China's structural issues.
Barclays analysts, following a two-week tour across Greater China and meetings with over 60 industry stakeholders, reported growing caution regarding the sector. They identified that China’s current economic challenges are structural rather than cyclical. The analysts observed a worsening macro environment over the summer and noted a substantial drop in luxury goods sales in Mainland China, with declines reaching up to approximately 50%. They also noted that consumers are becoming increasingly selective.
The bank indicated that in this "highly polarised environment," brands undergoing significant transitions are particularly vulnerable, leading to the downgrade of Burberry and Kering. Barclays has revised its growth forecast for the luxury goods sector, now projecting a growth rate of around 4% in 2025, down from a previous estimate of 7%.
Barclays expressed concerns about Burberry’s ability to maintain its status as a high-end luxury brand due to its current pricing strategies. The bank warned that Burberry might face loss-making conditions in the first half of 2025 and that short-term margin recovery could be challenging given the tough market environment. Consequently, Barclays has reduced its price target for Burberry to 540p from 820p.
Regarding Kering, Barclays highlighted ongoing issues with Gucci, which continues to experience substantial sales declines in China, more so than its competitors. Feedback from industry experts has been pessimistic about the potential recovery of Gucci’s sales and the impact of its new product offerings. Given the deteriorating macro environment in China, Barclays believes that Gucci’s recovery might be postponed, and the performance of other Kering brands like Saint Laurent, Bottega Veneta, and Balenciaga may not be sufficient to counterbalance Gucci’s weakness. As a result, Barclays has lowered its price target for Kering to €210 from €276.
By 0940 BST, shares of Burberry had fallen by 5.5% to 571.40p, while Kering’s shares were down 4.2% to €226.90.
