Which European luxury stocks are most at risk from weaker U.S. consumer sentiment?

Investing.com -- European luxury stocks face potential headwinds due to weakening U.S. consumer sentiment.

As a result, UBS analysts recommend a selective approach to the sector, emphasizing the need for investors to be discerning in their choices.

The optimism surrounding U.S. luxury demand, which exceeded expectations in Q4, is now facing uncertainty. This change in conditions is largely driven by concerns over American consumer behavior, which could lead to a downside risk for sales estimates and, consequently, earnings and valuations.

“We have been more cautious heading into 2025 due to the sector-specific demand fatigue, which in our view provided limited upside to sales estimates needed to drive earnings and valuations higher, in spite of improving American demand,” analysts led by Zuzanna Pusz noted.

“However, even that appears less certain now due to increasing concerns about the US consumer,” they added.

In its report, UBS suggests that luxury brands with significant sales exposure to the American market could be most at risk.

For the year 2023, the brands with the highest exposure include EssilorLuxottica SA (EPA:ESLX) with approximately 46% of sales tied to American consumers, followed by Brunello Cucinelli (BIT:BCU) at 37%, and Salvatore Ferragamo SpA (BIT:SFER) at around 30%.

Other notable brands with considerable U.S. exposure are Ferrari NV (NYSE:RACE), Kering (EPA:PRTP), Ermenegildo Zegna NV (NYSE:ZGN), Richemont (SIX:CFR), Burberry Group PLC (LON:BRBY), LVMH (EPA:LVMH), Prada SpA (HK:1913), Hugo Boss (ETR:BOSSn), and Hermes International SCA (EPA:HRMS), among others.

UBS analysts have also identified which companies have recently benefited from the surge in U.S. demand.

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According to their estimates, Burberry (LON:BRBY) retail in America saw a significant increase, as did Salvatore Ferragamo, Richemont, Ferrari, Moncler SpA (BIT:MONC), Hermes, LVMH, and several others.

Looking ahead to 2025, UBS forecasts organic sales growth in the luxury sector, excluding Hermes, to be around +4%, with an expectation of a second-half-weighted recovery led by American consumers.

However, this forecast now may be at risk, analysts caution. “As such, should the American luxury demand start to slow meaningfully, this could pose downside risks to the luxury sector’s sales growth and earnings, without a meaningful improvement elsewhere,” they added.

The report also touches on the sector’s valuations, noting that they could remain range-bound.

The relative valuation of the luxury sector compared to the market has decreased by approximately 20 percentage points, now trading at an average of around 58% versus MSCI Europe.

This valuation is seen as more reasonable given that luxury demand is unlikely to benefit from planned European fiscal stimulus focused on defense spending.

Still, UBS cautions that the risk of earnings downgrades due to a potential U.S. slowdown and recent appreciation of the euro could exert further pressure on valuations relative to the wider European market.

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