Luxury stocks have been struggling since the beginning of the year, and the unexpected profit warning from Burberry Group Plc has made matters worse. The company’s lowered profit forecast due to a slowdown in sales during the crucial Christmas quarter caused Burberry shares to plummet by as much as 15% on Friday, which was the largest one-day drop in over a decade. Although the stock did recover some of its losses, the decline triggered a sell-off in other luxury brands, resulting in a sector-wide loss of up to $7 billion.

This recent drop adds to the already significant decline of over $200 billion in major luxury stocks since April of last year. The initial surge in luxury sales in China, which was driven by the reopening following pandemic restrictions, was short-lived and has since lost momentum. As a result, analysts have been revising their growth forecasts for the luxury sector. Just this week, Goldman Sachs Inc. analysts joined in on the downward trend by slashing their industry growth estimates.

Bernstein analyst Luca Solca pointed out the challenges of implementing self-help strategies in a difficult market, referring to Burberry’s disappointing update in the fourth quarter of last year. This recent event further reinforces the sentiment that the luxury sector is facing significant challenges. Prior to Burberry’s warning, Bank of America analysts led by Ashley Wallace advised against buying into the luxury stock pullback at this point. They believe that it is still too early, as they anticipate the sector’s earnings momentum to remain soft for at least six months. They do not expect a re-rating of the sector until there is clear visibility of a turnaround.

Overall, the luxury sector is grappling with the aftermath of the pandemic and shifting consumer preferences, which presents significant challenges. Despite the considerable decline in luxury stocks, investors and analysts remain cautious and recognize the need for a clear path towards recovery before confidence in the sector can be restored.

Useful links:
Burberry profit drop article
Chinese demand for luxury brands article