Cartier's Wake-Up Call for Luxury Dreamers -- Heard on the Street

By Carol Ryan

European luxury brands may be later than investors think to benefit from China's rapid economic recovery.

Shares in Compagnie Financière Richemont, owner of the Cartier and Van Cleef & Arpels jewelry brands, fell 5% in early European trading Thursday after the Swiss company reported weak sales for the three months through June. Sales at constant currencies fell 47% compared with the same quarter of 2019.

Amid a pandemic that has richly rewarded some online players, the big miss was at Richemont's e-commerce websites Net-a-Porter and Watchfinder. Sales there fell 42% -- nearly double the drop that analysts expected -- due to the temporary closure of distribution centers. Service levels aren't back to normal in many markets and aggressive price cuts are now needed to entice buyers to spend online.

On Wednesday, British trench coat maker Burberry gave bearish guidance about current trading. Its shares are down 8% so far this week. Both companies sell a slightly larger chunk of their goods to Chinese customers than the 35% industry norm.

The Chinese economy grew 3.2% in the second quarter compared with the same period of 2019, according to official data released Thursday. Investors have been hoping that the country's V-shaped rebound, combined with its insatiable appetite for European luxury goods, will offer brands some protection during the crisis.

Sales within China did increase by 49% for Richemont and a "midteens" percentage at Burberry. But the numbers are deceptive: Chinese shoppers typically buy overseas, where luxury goods are cheaper than at home. Without the boost from travel, their spending globally was down 35% in June compared with the same month last year, according to UBS estimates.

Luxury consumption is likely to be depressed for several years in other big luxury markets such as the U.S. and Europe, leaving brands more dependent than ever on well-heeled Chinese shoppers. Much of the industry's future demand is expected to come from China's growing upper-middle class, currently around 65 million individuals, who earn between $30,000 and $45,000 a year, based on estimates by Morningstar analyst Jelena Sokolova. The question is whether that group of consumers will continue to spend such a big chunk of their disposable income on designer goods -- products they, by definition, don't need -- in a grimmer economic environment.

European luxury stocks head into this earnings season trading at an 80% premium to the MSCI Europe index as a multiple of projected earnings, according to UBS -- well above the sector's 47% long-term average. Investors are beginning to wake up to the risks of pricing brands for perfection when the outlook has never been less certain.

Write to Carol Ryan at carol.ryan@wsj.com

(END) Dow Jones Newswires

July 16, 2020 09:03 ET (13:03 GMT)

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