By Shares in Richemont, a Swiss-based luxury goods group, tumbled on Friday after the company announced that geopolitical tensions and a weakening European economy had led to lower-than-expected profits for the first half of the year.
Sales for the six months ending in September increased by 6% to €10.2 billion ($10.9 billion), slightly below the analysts’ forecast of €10.3 billion. Similarly, the profit of €1.51 billion fell short of the projected €2.17 billion.
The decline in profits was primarily driven by soft demand in Europe, where sales dropped by 1% in the second quarter. On the other hand, both the Americas and Asia-Pacific regions saw growth, with sales rising by 4% and 8%, respectively.
Johann Rupert, Chairman of Richemont, expressed his initial satisfaction with the strong start of the period under review. However, he acknowledged that growth slowed down in the second quarter due to factors such as inflationary pressure, slowing economic growth, and geopolitical tensions, which all impacted customer sentiment.
This announcement from Richemont follows a trend among luxury goods groups, as they warn of slowing demand after the initial surge following the COVID-19 pandemic. Consumers are facing challenges amid stuttering global economic growth and higher interest rates.
Just last month, LVMH, Europe’s largest luxury group known for brands like Dior and Givenchy, reported a decline in sales growth from 17% to 9% compared to the previous quarter, pointing to weakness in the U.S. market.
Luxury Stocks Experience Decline
Luxury stocks have recently faced a significant decline in value, resulting in notable losses for industry giants. On Friday, Richemont stock plummeted by over 5%, contributing to an overall 18% decrease within the last three months. Similarly, LVMH shares, which had reached a record high above €900 in May, dropped by more than 3%, now trading below €700. Kering and Hermes, other major players in the luxury sector, experienced losses of 3.4% and 1.7%, respectively.
Market Reactions
The downfall of luxury stocks has had a tangible effect on the wider market. Specifically, the Paris CAC 40 (FR:PX1) saw a decline of 0.8%. Furthermore, Wall Street’s lackluster performance from the previous day caused Frankfurt’s DAX (DX:DAX) to drop by 0.6%, while London’s FTSE 100 (UK:UKX) experienced a more significant setback of 1.3%.
UK Market Underperforms
Conversely, the United Kingdom’s market showed greater underperformance due to concerns surrounding global economic growth. This had a negative impact on both the mining industry and Diageo, a renowned global drinks company known for brands such as Guinness and Johnnie Walker. Diageo’s shares tumbled by over 15% as signs of weaker sales in South America raised concerns among investors.
Diageo’s Changing Fortunes
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, addressed Diageo’s challenges and commented that although South America represents only a relatively small portion of Diageo’s market, the extent of the decline is significant enough to alter expectations for the entire group. Previously considered a reliable investment due to its strong brand presence and consistent dividend payouts, Diageo now faces uncertainties regarding potential shifts in consumer preferences that may affect larger markets.
Euro and ECB Update
While stock markets experienced fluctuations, the euro (EURUSD) demonstrated a marginal increase of 0.1% to reach $1.0695. Furthermore, German 2-year bund yields (BX:TMBMKDE-02Y) rose by 3.8 basis points, settling at 3.050%. The upturn in bund yields followed a statement from European Central Bank President Christine Lagarde, as she confirmed that the monetary guardian of the eurozone intends to maintain current interest rates for at least the next few quarters. This strategic decision aims to support efforts in reaching the target inflation rate of 2%.
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