European luxury groups are reeling as wealthy Chinese consumers pull back on spending. Shares of Kering, LVMH and Hermes have fallen about 40% this year, and Kering plunged 16% in a single session.
Kering, the owner of Gucci, dropped 16% on the Paris exchange on the 23rd, according to Reuters and Bloomberg reports on the 24th. The slide followed third-quarter results released the previous day showing Gucci revenue fell 6% to 1.291 billion euros, with sales at directly operated stores down 9%.
Kering attributed the decline to fewer store visits in mainland China and Japan. Retail sales at its other brands excluding Gucci rose 2%, but that was not enough to cushion the blow. The company has closed a net 105 stores this year and plans to shut 20 more by year-end.
LVMH fell 1.5%, and its forward price-to-earnings ratio stands at about 16 times, lower than it was more than a decade ago. Hermes slid 4% to its lowest level in four years. The company's third-quarter revenue growth of 4.3% at constant exchange rates was its weakest since 2020.
Retail Sales Up Just 1%, Gold and Jewelry Down 9.6% as China's Wealthy Hold Back
China's weak consumption also shows up in the data. Retail sales rose just 1.1% in September from a year earlier, according to the National Bureau of Statistics of China. That was an improvement from August's 0.4% but far below third-quarter gross domestic product growth of 4.5% and industrial output growth of 5.5%.
Sales of mobile phones, liquor and tobacco increased, but gold and jewelry fell 9.6% and automobiles dropped 21.2%, extending the slump in discretionary spending. Real estate development investment fell 20.6% in the first nine months, while new home sales declined 13.2% by floor area and 13.9% by value.
Luxury earnings have followed the same path. LVMH reported a 5% organic revenue decline in its fashion and leather goods division in the third quarter, far worse than market expectations for a 1.8% drop. Revenue in Asia excluding Japan swung to a 5% decline in the third quarter from gains of 7% in the first quarter and 4% in the second, the only region to post negative growth.
LVMH Chief Financial Officer Cecile Cabanis said tougher taxation of overseas trust assets held by wealthy Chinese had hurt sentiment. Hermes pointed to China's property downturn, weak consumer confidence and a high propensity to save as drags on demand. A backlash among Chinese consumers after Louis Vuitton filed a trademark suit against the popular Chinese tea brand Mollity also weighed on LVMH.
The headwinds extend beyond China. Rising oil prices and inflation worries tied to the prolonged Middle East war have compounded the pressure, while protests disrupted store operations along major luxury shopping districts including Place Vendome in Paris and in Milan. Concerns are also mounting that tourist demand could weaken.
German investment bank Berenberg cut its rating on Hermes to hold from buy. Bloomberg said the share declines have eased valuation concerns but that investors remain hesitant to buy because of new risks such as the spread of protests in France. Deutsche Bank said the latest results could lead to further downgrades to earnings forecasts for the second half and next year.
European luxury companies have been tripped up by their weakest link — sluggish Chinese consumption — even as U.S. demand holds up. Emerging from a slowdown now in its third year will hinge on when spending by wealthy Chinese returns and on how protests in Europe and the pullback in tourist demand play out.