Morgan Stanley has adjusted its price target for LVMH (EPA:LVMH) shares, reducing it from 560 euros to 510 euros. The revision follows unexpected earnings challenges stemming from operational leverage and adverse currency fluctuations.
The investment bank had initially forecasted a deceleration in LVMH’s Fashion & Leather Goods (F&LG) segment. However, it now anticipates a more pronounced decline in profits. Additionally, margin expectations are declining more sharply than previously projected.
F&LG Sales Growth and Margins
Morgan Stanley has updated its organic sales growth prediction for the F&LG segment in the first half of 2025 (1H25), now expecting a 7.5% year-on-year decrease. This adjustment reflects diminished demand, particularly from key consumer groups like Chinese tourists in Japan.
Analysts, led by Edouard Aubin, commented, “We believe current expectations remain overly optimistic, given the dual impact of operational leverage and unfavorable exchange rates.” This revised perspective has led to EBIT estimates for the division falling below consensus expectations.
The bank forecasts an EBIT margin of 34.1% for 1H25, which is lower than the consensus of 35.6% and the 38.8% recorded in the same period the previous year. A margin contraction of 470 basis points is anticipated, attributed to reduced capacity utilization and intensifying exchange rate pressures.
Currency Impact and Cross-Border Spending
Appreciation of the euro against major currencies is predicted to decrease gross margins by over 100 basis points, a significant increase from the previously estimated 25 basis points.
An evolving trend in the second quarter is the pressure on cross-border spending, particularly the decline in spending by American tourists in Europe and Chinese tourists in Japan. Morgan Stanley emphasizes that cross-border spending is a vital component of demand in the personal luxury goods sector.
Overall Financial Forecast and Market Positioning
Morgan Stanley has reduced its full-year earnings forecast by 3.5% to €16.96 billion, and earnings per share have been revised to 20.84 euros, approximately 4% below earlier estimates. The brokerage also adjusted its full-year revenue forecast, decreasing it from €82.9 billion to €81.4 billion.
Despite anticipating that most luxury competitors may face downward revisions due to weak cross-border spending, LVMH’s relative underperformance is considered unusual by the bank.
Analysts observed, “Such underperformance is rare, occurring infrequently over the past three decades, suggesting continued pressure on the Group’s valuation multiples.”
They added, “Earnings expectations are likely to persist on a downward trajectory, which could result in weak stock performance.”
While maintaining an Equal Weight rating on LVMH shares, citing mixed factors ahead of its July earnings report, Morgan Stanley remains optimistic about LVMH’s long-term position in the luxury sector, thanks to its brand strength and business diversification.
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