Deutsche Bank slashes Burberry estimates on weaker demand outlook

European luxury stocks started 2023 strongly with gains of around 25% in the first quarter, but are set to finish the year in the red, as double-digit growth over the pandemic has slowed considerably on the back of "normalising Western demand and macro headwinds limited China demand", Deustche Bank said.

"In 2024 we expect the outlook to remain challenging. Deutsche Bank's macro house view is cautious, with a mild US recession expected in 1H, continued stagnant growth in Europe and China GDP growth below long term trends," the bank said.

It expects average growth of just 6% in 2024, though the first half is likely to face tough comparatives before the outlook improves in the second half. Valuations already reflect some of these headwinds, Deutsche Bank said, with price-to-earnings valuations having fallen to an average multiple of 19, compared with the 10-year average of 22. However, the bank sees downside risk to earnings.

For Burberry, the only UK-listed stock in the bank's luxury coverage, the target price has been reduced to just 1,600p from 1,950p previously, after the bank cut its earnings and sales forecasts for 2025 and 2026. A 'hold' rating has been maintained on the stock, which was down 1.8% at 1,487p by 1050 GMT.

Deutsche Bank highlighted Paris-listed Kering and Zurich-listed Richemont as its top picks in the sector, saying both companies have the "scale to invest, strong brand heritage to drive customer engagement and have near-term earnings risk encapsulated".