Global Luxury Goods Consumption: The Good, the Bad, and the Awkward

On June 12, Bank of America released a global luxury consumption in-depth research report called "The Good, the Bad, and the Ugly," which predicts that overall luxury demand in the second quarter of 2025 will be similar to the first quarter, presenting three situations: good, bad, and ugly. The good news is that despite increased global macroeconomic volatility, local demand in Europe, Asia, and the Americas remains strong. The bad news is that the tourism industry in Japan and Europe continues to deteriorate and may not fully recover. The ugly news is that the profit margin before taxes in the first half of the year is under pressure, with weak revenue, margin pressure (due to lack of production capacity and national portfolio effects), and large fixed cost base, leading to downward profit risks. Bank of America's forecast is 6% lower than the market consensus in the first half of 2024. Luxury goods revenue in the first quarter of 2025 decreased by 1% year-on-year compared to the fourth quarter of 2024, with growth slowing in all regions. The market has already factored in some factors. Bank of America noted that although luxury company stocks have dropped by 8% from the beginning of 2025, the market consensus earnings per share have also been lowered by 8%. Consequently, the industry's current dynamic price-earnings ratio is 22 times, which is at the midpoint of its historical valuation range. The main upward risks in the short term are related to the macroeconomy, while the downward risks are related to the expected readjustment in the second half of 2025 / 2026. Bank of America believes that the September / October fashion shows this year are more important (though most will not be catalysts), as they will help determine if there are enough new products (at lower prices) to drive sales recovery in 2026, and which brands will lead this recovery. Revenue demand in the second quarter of 2025 is weak, but perhaps not as severe as feared. As shown in the graph below, the weighted average change in second-quarter 2025 data indicates that revenue trends have slowed by 1 percentage point compared to the first quarter (a 2% year-on-year decline in the second quarter). (1) Americas: Bank of America's summary of luxury credit card and debit card data shows that the situation from the second quarter of 2025 to date (as of May) improved by 3 percentage points compared to the first quarter, dropping to -4% (May was -2%). Jewelry consumption also accelerated by 4 percentage points in the second quarter to date, reaching +3%. (2) Europe: According to data from Planet, EU tourism expenditure deteriorated by 8 percentage points from the first quarter to the second quarter, dropping to -13%. Local demand remains stable. (3) Japan: Tourism expenditure in Japan may slow by approximately 30-50 percentage points in the second quarter, which means that the region's revenue will be dragged down by 16 percentage points, resulting in a 1-2 percentage point decline in group revenue compared to the first quarter. (4) China / other regions in Asia: The data is more complex, with improvements in jewelry sales in China and Hong Kong and gambling revenue in Macau (the average increase of these three data points is 10 percentage points), while the situation in South Korea is slightly weaker (down 6 percentage points to +1% from the second quarter to date). (Bank of America's latest ratings and target prices: Five buy ratings, seven underperform ratings) Selected company highlights: LVMH: The second quarter of 2025 will be more polarized for LVMH, as it will highlight whether the fashion and leather goods department is out of step with industry trends (deteriorating 1-2 percentage points or worse), leading to pressure on the profit margin before taxes. However, since some markets are expecting the fashion and leather goods section of the second quarter to be as low as -11% (Bank of America forecasts -7%), this challenging quarter has already been pre-warned. Hermes: Predicts revenue growth of 9% for the second quarter and the entire year, with a profit margin before taxes of 40.1% in the first half. Kering: Expected performance in the first half to be consistent with the guidance from April, the next catalyst will be the performance review in the second quarter, which will help in understanding the risks of the market consensus expectations for the second half of 2025 / 2026. Richemont: Strong momentum in the jewelry business will continue, with jewelry department growth of 9%. The market consensus on the gross profit margin may still be too high, but forecasts for Italy have been postponed to October / November. Moncler: Expects the second quarter to be on par with the first quarter, with Moncler brand retail business growing by 4% at fixed exchange rates (market consensus +8%). Prada: Due to adverse factors in the Japanese market, Prada brand sales in the second quarter decreased by 1%, while Miu Miu continued to show strong growth, with an increase of 40%. Zegna: April performance was better than in March, so Zegna brand growth in the second quarter was 5% (compared to +4% in the first quarter). Swatch: Break-even for the first half of 2025. It is worth noting that in the report, Bank of America spends a significant amount of time studying the situation in Macau and Hong Kong: Macau in 2025 is expected to lower gross gambling revenue (GGR) by 5%. Gross gambling revenue in Macau improved slightly in April. Macau's gross gambling revenue from the second quarter of 2025 to date (TD) increased from 1% in the first quarter of 2025 to 3%. Due to the "Golden Week" in May, the year-on-year growth rate reached 5%. Compared to 2019, this trend has continued to improve quarterly, with a year-on-year decrease of 19% in the second quarter to date, narrowing the decrease by 5 percentage points from the 24% decrease in the first quarter. For more details, see the Macau Casino Industry Report. According to Macau Daily, the Macau government has revised down its expected gross gambling revenue for 2025 by 5% from the original estimate of 240 billion Macau patacas (about $29.7 billion).The forecasted gaming gross revenue for Macau in 2025 has been adjusted downward to 228 billion Macau dollars (approximately 28.2 billion US dollars). This means that the expected year-on-year growth in gaming gross revenue for Macau in 2025 is 1%, lower than the previously anticipated 6% growth. This downward revision in the forecast for gaming gross revenue is based on the industry's performance from January to May 2025 falling short of initial expectations.(Macau's GGR and Chinese luxury consumption show a strong correlation) The trend in Hong Kong from the second quarter to date (2QTD) of 2025 has accelerated compared to the first quarter. So far in 2025, overall retail sales and jewelry retail sales in Hong Kong have continued to show a negative trend, but recent momentum has improved. In terms of overall retail sales, there was a 2% year-on-year decrease in April, an improvement from the -6% in the first quarter of 2025; in the jewelry category, the year-on-year decrease in April also improved to 2%, an increase of 10 percentage points from the -12% in the first quarter of 2025. Looking at potential trends, the compound annual growth rate (CAGR) compared to 2021 has accelerated by 30 basis points in the second quarter of 2025 compared to the first quarter, and the trend compared to 2019 has also improved by 60 basis points. The same is true for the jewelry category, with the CAGR compared to 2021 and 2019 accelerating by about 2 percentage points in the second quarter to date compared to the first quarter. The number of visitors to Hong Kong has been showing an accelerating growth trend in the second quarter to date, but is still below the level in 2019. According to the Tourism Development Board data, in the second quarter of 2025 up to now, the number of visitors to Hong Kong reached 3.8 million. This means that total visitor numbers in April increased by 13% year-on-year, higher than the 12% in March and the 9% in the first quarter of 2025. In April, the number of visitors from mainland China was 2.8 million, an increase of 13% year-on-year, an improvement from 7% in the first quarter of 2025. Compared to the level in 2019, total visitor numbers in Hong Kong recovered to a 30% growth in the fourth quarter of 2024, but turned negative growth at -33% in the first quarter of 2025, and only slightly improved to -31% in April. In April 2025, the number of visitors from mainland China is still 34% lower than in 2019, but has increased by 2 percentage points from the -36% in the first quarter of 2025.