While there was no growth for the global luxury sector in 2024, HSBC Global Research says it is “time to be positive” on names like Prada, LVMH Moet Hennessy Louis Vuitton and Hermès.
In fact, HSBC has upgraded most names to “buy”, with the exception of Paris-listed Kering and Switzerland-listed Swatch, which are still on “hold”.
On Kering, HSBC’s analysts say they “no longer believe in a turnaround of the business in 2025”. “We now expect the turnaround of the main brand Gucci to occur in 2026, with 7% organic growth after almost four years of sales decline and ebit margin up 250 basis points (bp) y-o-y from a trough margin in 2024 and 2025 of 20.6%.”
As at Dec 1, HSBC has an unchanged EUR230 ($324.82) target price on the Gucci owner, some 43% above its Dec 2 close price.
Swatch, meanwhile, suffers from an “unfavourable product, channel and regional mix”, says HSBC, with the bulk of sales (nearly 90%) driven by watches and large exposure to Greater China, at 33% of group sales in FY2023 ended Dec 31, 2023.
HSBC also bemoans a lack of group communication from Swatch, as the group does not have an investor relations department. “The company communicates with the market only twice a year, with the next release due at the end of January 2025. This limits the visibility on earnings development for investors, especially in a challenging environment,” say HSBC’s analysts.
See also: Hunting for value in luxury stocks
HSBC has cut its target price on Swatch to CHF180 ($272.83) from CHF200 previously. The new target price represents a 13% upside from Swatch’s Dec 2 close price.
LVMH, Hermès earn ‘buy’ calls
See also: LVMH's empty Chinese megastore signals deeper luxury crash
In contrast, HSBC’s analysts note how luxury names have progressively earned “buy” calls over the course of 2024.
HSBC had Prada as the sole “buy” rated stock in the sector since January, before it upgraded Moncler to “buy” on Sept 9, Burberry on Oct 31 and Richemont on Nov 11.
In a 78-page thematic report released on Dec 1, HSBC analysts Anne-Laure Bismuth, Erwan Rambourg, Aurélie Husson-Dumoutier upgrade Paris-listed Hermès to “buy” while raising their target price to EUR2,500 from EUR2,250. “We believe Hermès should continue to outpace its peers in our luxury sector average in 2025; we estimate sales up 11% organically, compared to a 4% sector average.”
The HSBC analysts praise Hermès’ “defensive” profile, which is resilient in tough times. “Over the past 20 years, Hermès has had only three quarters of negative organic sales performance, two of which were during the Covid-19 pandemic (1Q2020, 2Q2020), and the other in 1Q2009.”
The strength of Hermès’ model is linked to its leather division, which has recorded 6%-7% volume growth per annum over recent years, with some modest price increases, says HSBC.
“The group has taken a more cautious approach than its sector peers to price increases, especially since 2019. This enables the group to still raise prices, in a reasonable way, consistent with its policy of ensuring that price increases cover most cost inflation, more than most sector peers, which have already implemented large price increases,” they add.
See also: Bulgari CEO eyes India for growth as China luxury demand weakens
Another strength of the company’s business model is its wide product assortment, says HSBC, from iconic high-end handbags down to more aspirational price points, such as silver jewellery and beauty products.
Aside, the HSBC analysts also upgrade LVMH to “buy”, raising their target price to EUR727 from EUR700, as it is the most US-exposed stock in the pack.
Succession planning and management change at LVMH has grabbed headlines. Many investors have been surprised at the number of changes announced by the group or reported by the press over the past year, says HSBC. “While some changes have been somewhat unexpected, our take overall is that the group is not reacting to external pressures (weak sales), rather, going through teething issues as there is an assumption that control will eventually trickle down from the current CEO, Bernard Arnault, to his five children, who are all employed by the group.”
HSBC notes that the group runs close to 85 brands. “All in, while the number of management changes is daunting, with the exception of one or two possible upcoming changes, we expect the dust to settle and disruption to abate rapidly.”
Sixth-worst year
To be sure, the sector is currently in the doldrums. The HSBC analysts note that annual adjusted organic sales growth for the companies under their coverage was “lacklustre” in the third quarter. “We do not expect it to be much better in 4Q2024, at -1% y-o-y. This year is on course to be the sixth-worst year of the past 20 years, after 2020, 2009, 2016, 2008 and 2015.”
That said, they expect a rebound next year with 4% organic growth, but much of that will only materalise in the latter half of the year.
“We think 2025 will be very much a year of two halves. In 1H2025, we expect limited growth due to still depressed consumer sentiment in China, but some support from a gradual improvement in the US following the 2024 elections, which should trigger more positive sentiment among investors,” they write in the Dec 1 report. “We expect +2% organic growth in our luxury sector average.”
In 2H2025, the combination of a gradual recovery in China and the US gaining strength will boost the sector’s organic growth rate to “slightly beyond the luxury sector’s historical growth rate” to reach 7%, with the average of the two halves leading to a 4% organic growth forecast for 2025.
HSBC believes US demand will be the first key growth driver to emerge in 2025. The analysts think the US is already showing some signs of improvement after the presidential elections, as US consumers release pent-up demand.
“Equity markets are at an all-time high, which is usually highly correlated with luxury consumption; interest rates are coming down, which should help aspirational consumers; and luxury companies are focusing on the US as it is still an underpenetrated market in terms of retail footprint,” says HSBC.
Outside the US, however, the situation is not improving, but not worsening either. According to HSBC, this could mean that the sector is on the verge of “organic sales re-acceleration”. “We believe the luxury sector is approaching the end of its earnings downward cycle, after 30% ebit cuts on average for our luxury coverage for each of 2024 and 2025.”
Charts: HSBC
