Cucinelli stock slide hints at tough results season for luxury

Markets’ downbeat reaction to Brunello Cucinelli SpA’s solid second-quarter earnings is an ominous sign for Europe’s luxury goods companies, which likely face a tough slog this results season to placate investors’ concerns for the sector. 

Shares in the Italian cashmere house fell as much as 2.3% on Friday, even though its earnings met expectations and it highlighted “very promising” orders for its fall-winter collection. But the lack of a guidance upgrade was enough to disappoint investors, who are attuned to the risk of waning demand for the highest-value items. 

“The expectations’ bar is relatively higher for absolute luxury names like Hermes and relatively lower for turnaround stories like Burberry or Kering,” Stifel analyst Rogerio Fujimori said. 

“Brunello Cucinelli sales performance in the second quarter was rock solid, but full-year consensus estimates are unlikely to change materially, hence the muted share price reaction this morning,” Fujimori added.

The concerns are reflected in analysts’ forecasts, with profit estimates for the sector falling faster than for the broader European market.

Cucinelli, like France’s Hermes International SCA, has benefited from its exposure to the uber-wealthy, who tend to be less sensitive to any downturns in the economy. The stock has held up relatively well this year, with a 4.4% gain, while some peers like LVMH which have fallen. The MSCI Europe Textiles Apparel & Luxury Goods Index has dropped 13% from a peak hit earlier in the year.

“They have been reporting stronger results than peers recently, helped possibly by the “quiet luxury” trend,” Morningstar analyst Jelena Sokolova said of Cucinelli. A “slowdown for them means more subdued demand for others should continue.”

One of the main challenges for luxury firms is the pullback in Chinese demand following a post-pandemic spending boom. That’s forced some high-end labels to slash prices in China to shift unsold inventory, with brands owned by the likes of Kering SA, LVMH and Burberry Group Plc all resorting to discounting.

Next up to report are Burberry and Richemont, which are due the coming week. Analysts have already flagged the likelihood of a lackluster second-quarter reporting season. Bryan Garnier analysts, for instance, reckon first-half profits will be impacted from China’s worsening backdrop, and predict mid-range brands such as Swatch will bear the brunt.  

LVMH — owner of brands such as Louis Vuitton, Bulgari and Givenchy — has seen its price target cut by several brokers on the prospect of muted second-quarter growth. Its shares are down almost 2% this year. 

“The sector has been de-rating in the last couple of months and is now trading at more compelling levels,” JPMorgan analyst Chiara Battistini said in a note. “However, with an uninspiring first-half reporting ahead and still earnings cuts to come, we do not see a catalyst short term to turn more constructive, for now.”