Luxury stocks rally on Richemont sales beat - but the sector still needs China, says analyst

By Nora Redmond

Shares in Richemont rose 5% on the Swiss stock exchange.

European luxury stocks are rallying after Richemont reported better-than-expected sales in the first quarter of its fiscal year, but demand still needs to improve in China for a full recovery, according to Bank of America.

Shares in the Swiss luxury goods company (CH:CFR), which owns Cartier, Chloé and Montblanc, rose 5% on Switzerland's stock exchange, with gains since the start of the year up 13%.

The move followed the 38-year-old group announcing that it made sales of EUR6.3 billion, or $7.2 billion, in the three months ended June 30, an increase of 20% year-on-year, and beating FactSet-compiled analyst estimates by about 3%.

Rivals in the sector also saw gains on the update, with industry behemoths LVMH (FR:MC) and Hermès (FR:RMS) each up 2%. Kering (FR:KER), the parent company of Gucci and Balenciaga, climbed 3% in Paris. London's Burberry (UK:BRBY) advanced 2%, while Dior (FR:CDI) was up 1.5%.

"Overall, this was a solid print and and we view the results as a positive read-across for the broader luxury sector although it remains to be seen how much of the strength was luxury spend, jewellery driven versus Richemont specific," analysts at Deutsche Bank, led by Adam Cochrane, head of the general retail equity research team in London, wrote in a note Wednesday.

Richemont said sales in its jewelry house, which also includes Van Cleef & Arpels, Buccellati and Vhernier, grew by 24% year-on-year to EUR4.7 billion, helping sales across all areas of the business to increase since the same period of last year.

Analysts at Bank of America, led by Ashley Wallace, wrote in a note ahead of Richemont results that revenue in the luxury sector has continued to grow, with a boost in demand especially in the U.S. and South Korea.

"However, in our view the sector needs improved trends in China to make a more sustainable recovery towards historical levels (ie +9%) possible, for which visibility remains low," they wrote.

China on Wednesday reported slower-than-forecast growth in the second quarter, of 4.3% year-on-year.

Richemont reported that sales rose in all regions, with double-digit climbs in Europe, the Americas, Asia Pacific and Japan and growth of 3% in the Middle East and Africa, owing to a drop in tourism amid the war in Iran. In Asia Pacific, it said strong demand was seen in Hong Kong, Macau, South Korea and Taiwan.

Richemont kicked off the luxury reporting season, with Burberry due to issue its first-quarter results on Friday. LVMH, Kering and Hermès will report in the last week of July.

-Nora Redmond

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