Cars, luxury Underperform in bright Europe earnings season

European luxury labels and carmakers continued to underperform as Chinese competition and weak consumer sentiment hindered recovery, tainting an otherwise upbeat earnings season in the region. With the season almost through, earnings per share for the MSCI Europe consumer discretionary index dropped 4.3% in the second quarter, compared with expectations of 7.4% growth. The benchmark — which includes fashion behemoths like LVMH and auto giants like BMW — is also the only sector to have reported an earnings decline. The overall MSCI Europe index delivered EPS growth of 14%, the strongest in three years, driven by energy and technology. European carmakers Q2 earnings: Volkswagen and Stellantis miss Best exemplifying the struggles faced by the automotive industry is Volkswagen. Facing a prolonged slump in the Chinese market, where local manufacturers are making cheaper electric vehicles, the German carmaker fell short of earnings expectations and cut its sales outlook. The earnings miss was driven in part by negative pricing and higher product costs, Bloomberg Intelligence analyst Michael Dean said, “reinforcing the urgency” of the carmaker’s efforts to shake up its model lineup, cut jobs and close factories. Jeep and Citroen-owner Stellantis, another European automaker in the midst of a turnaround, also reported earnings below analyst expectations. Higher raw material costs, pricing pressure in Europe and uneven progress in the key North American market held back progress. For some companies, strong sales were offset by cost pressures. Adidas’ profit missed estimates after the expected World Cup boost to revenue was offset by increased marketing spending. In luxury, even some of the traditionally more resilient names struggled on earnings day. Hermès International’s shares fell to the lowest level in more than three years after softer-than-expected sales raised concerns about the health of China’s luxury goods market. While weaker consumer confidence reined in Chinese buyers and the Middle East conflict prevented a rebound in regional shopping hubs like Dubai, other markets look to be on the road to recovery. Trench-coat maker Burberry Group and Cartier-owner Richemont both benefited from solid demand from US customers. Inflection point Though the next earnings season is shaping up to feature similar themes — deteriorating consumer sentiment, intensifying Chinese competition and inflationary pressures — a brighter outlook awaits parts of the sector. For Volkswagen, the focus is on the turnaround. “Management is doing an excellent job in the face of intense headwinds outside management control in China, in Europe, and in the US,” Citigroup analyst Harald C Hendrikse said, adding that investors are now looking for a strong margin improvement in the second half. LVMH’s return to organic sales growth in its key fashion and leather goods division signals strengthening appetite for high-end goods, BI’s Deborah Aitken said, while Kering’s Gucci reset looks to be on track. “The common themes remain a strong US consumer at the high end for luxury, weaker tourist expenditure has impacted European spending, and the Chinese recovery appears slow but building steam,” Deutsche Bank analyst Adam Cochrane said. As for Adidas, the “mishap” of the recent profit miss “can quickly be forgotten if upcoming quarters confirm a healthier profit leverage to revenues progress,” Jefferies analyst James Grzinic wrote in a note. Despite a difficult start to the year, the Stoxx Europe 600 consumer discretionary index is still expected to deliver EPS growth of 15% this year, putting the spotlight on an all-important second half. By Chloé Meley

Cars, luxury Underperform in bright Europe earnings season

How Bottega Veneta weaved China’s forever it bag

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Cars, luxury Underperform in bright Europe earnings season

How Bottega Veneta weaved China’s forever it bag