Burberry, Kering slump on Barclays downgrades

9th Sep 2024 09:55

(Sharecast News) - Luxury brands Burberry and Kering slumped on Monday as Barclays downgraded its stance on the shares to 'underweight' from 'equalweight' on structural concerns related to China.

Barclays analysts said that having spent two weeks travelling across Greater China, where they met over 60 industry stakeholders, they have returned "incrementally more cautious on the sector, as China now looks weaker for longer on structural issues".

The bank said the macro environment deteriorated further in the summer and there is now a clear view that the Chinese weakness is structural and not just cyclical.

"On luxury goods, this translates into negative summer sales in Mainland China (up to circa 50% decline) and to clients being more and more selective."

Barclays said that in this "very polarised environment" brands under transition are more at risk, hence the downgrades.

Overall, it now expects the luxury goods sector to grow by around 4% in 2025, down from a forecast of 7% previously, as it turns more prudent.

The bank said that despite already being one of the worst-performing names in its space, it still sees downside for Burberry as it has concerns about the company's ability to remain a high-end luxury brand in line with its "coverage considering its lack of disciplined full-price strategy".

"Burberry looks likely to turn loss-making for the first time in H1-25 and considering that we expect the environment to remain tough next year, it could be difficult to see margin recovery in the short term," it said.

Barclays slashed its price target on Burberry to 540p from 820p.

As far as Kering is concerned, the bank said that on the back of its trip to China, it learned that Gucci continues to suffer heavy sales declines there, more so than peers, and feedback from industry experts was quite pessimistic about the potential impact of the new Gucci product offering.

"On the back of this and as China's macro environment seems set to deteriorate further, we think that Gucci's recovery story could be delayed and don't expect the other brands (Saint Laurent, Bottega Veneta, Balanciaga) to significantly offset the Gucci weakness," it said.

"We think that current expectations on Kering could be too ambitious and see risk of further earnings cuts."

Barclays cut its price target on Kering to €210 from €276.

At 0940 BST, Burberry shares were down 5.5% at 571.40p, while Kering was 4.2% lower at €226.90.