Luxury stocks have fallen out of fashion with investors over the past couple of years but Deutsche Bank (DBK.DE) suggests the outlook for the sector could improve next year, highlighting its top picks in this space and more broadly in retail.
Companies in the luxury sector have struggled in recent years, with rising cost pressures on consumers forcing them to rein spending and brands have been particularly impacted by the economic slowdown in China.
However, the situation could be on the verge of turning around, according to a Deutsche Bank Research on Monday.
"After two years of luxury underperforming retail and sporting goods we see this changing as the year progresses," the investment bank's analysts said in the note.
At the same time, they added: "Timing will be important. We see the shift in 2H (second half) as earnings momentum and sentiment is paramount. There are even more uncertainties than usual at this time and we see 'volatility' being the watchword."
The analysts said that they viewed the weakness in the sector with consumers in China as cyclical rather than structural. They believed that the "luxury shaming" currently seen in China would fade over the next one to two years, with a shift away from the "quiet luxury" trend back to more overt displays of wealth over time, and a return of consumer confidence buoyed by economic stimulus.
In addition, the analysts viewed potential US tariff hikes as "less relevant" for luxury compared to sporting goods and retailers.
US president-elect Donald Trump has pledged to impose tariffs on countries, including China, after he returns to the White House in January. Over the weekend, he threatened to threatened to wage a possible "100% tariff" against BRICS countries, which includes China, if they attempt to undermine the US dollar with a new currency.
Nevertheless, Deutsche Bank's analysts noted that 2025 was the year of the snake, which is "often associated with renewal and transformation by nature of shedding its skin and suggests both challenges and opportunities in the year ahead."
Keeping that theme in mind, they said that their preferred stocks in European luxury, sporting goods and apparel, which "reflect a preference for a number of companies undergoing a transformation".
The analysts said that French luxury group Kering, whose brands include Gucci and Yves Saint Laurent, has had a "poor year" in 2024 in terms of its share price, sales, profits and balance sheet.
"At Gucci the collections under Sabato de Sarno have had very mixed reviews, albeit we believe improving as the year progressed," they said.
However, they added: "All of the survey and external data we see points to an ongoing high consumer regard for the Gucci brand."
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Shares in Kering are down 44% year-to-date, with the company having warned that profits would be lower for the year, after reporting that revenues had fallen 15% in the third quarter to €3.8bn (£3.15bn).
However, Deutsche Bank's analysts said that Kering's management had provided "relatively explicit guidance for 2024 EBIT (earnings before interest and tax) so we see the short term as derisked."
"With the rising tide in 2H expected to lift all luxury boats our view is that the most outperformance will be delivered from the highest beta names where self help will magnify the outperformance," they said.
Deutsche Bank had a "buy" rating on Kering shares, with a target price of €320.
Deutsche Bank's team upgraded their rating on iconic British luxury brand Burberry to "buy" from "hold", in Monday's note, with a target price of £11.60 ($14.67) on the stock.
Burberry is one company that has been particularly impacted by the slowdown in demand for luxury goods, with its struggles seeing the stock booted off the FTSE 100 (^FTSE) in September's quarterly reshuffle, after 15 years on the blue-chip index.
However, Burberry unveiled a turnaround plan last month, with recently appointed CEO Joshua Shulman saying that said the company was "acting with urgency to course correct" following underperformance.
Burberry reported a 22% fall in revenue to £1.09bn in the first half of its fiscal year, as well as a loss of £53m.
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The company unveiled a new strategy to help improve performance and outlined immediate actions it had taken in the last 90 days. This included initiating a cost savings programme of around £40m in annualised savings, and starting a global roll out of "scarf bars" to accentuate this area of products in its stores.
Investors cheered the news, with the stock now up 13% over the past month, though it is still 35% in the red year-to-date.
Deutsche Bank's analysts said: "The new Burberry strategic plan appears to be very sensible in our view and focusses the brand on the areas of historic strength whilst rectifying some of the pricing mistakes of the past."
"With sector leading earnings growth (albeit from a very low base) we see the Burberry strategy as being more aligned with the luxury consumer over the next 12-24 months," they added.
In the broader retail space, Deutsche Bank's team highlighted UK high street stalwart M&S as another preferred stock, with a "buy" rating and a target price of £4.50 per share.
"M&S has been another top performer in 2024 that we see continuing in 2025," the analysts said.
"Whilst it is fair to argue that investors now appreciate the fundamental changes in the business model that have been delivered we believe that it is better placed than most clothing retailers to deliver further market share gains and has scope to offset inflationary pressures with efficiencies," they added.
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M&S shares are up nearly 43% year-to-date, seeing a recent boost from its half-year results.
The retailer posted 5.8% growth in revenues to £6.5bn in the first half, logging 4.7% sales growth in its clothing and home business.
M&S said: "Deeper buying into campaign lines drove a further increase in style perceptions."
The retailer said that its collaborations with actor Sienna Miller and fashion designer Bella Freud sold rapidly.
Next up on the list is German online fashion retailer Zalando, which operates across Europe, selling both premium and high-street brands.
"Zalando is the leading online clothing retailer in Europe and as online sales growth recovers we see it as a significant beneficiary," said Deutsche Bank's analysts, putting a target price of €36 per share on the "buy" rated stock.
They noted that sales growth had recovered in the third quarter, as Zalando logged a 5% in group revenue to €2.39bn.
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The online retailer confirmed its guidance for the 2024 financial year, which had been upgraded in October. Zalando said it expected revenue to grow by between 2% and 5%, while adjusted EBIT was anticipated to increase to between €440m and €480m.
The analysts said that the "most exciting pieces of the Zalando investment case are the growth in adjacent categories such as beauty, sporting goods and premium fashion", combined with the further rollout of the Zalando E-commerce Operating System (ZEOS) fulfilment offering to third-party brands.
Zalando shares are up 40% year-to-date, though are still well below their peak in 2021.
Another German company on Deutsche Bank's list was Puma, as analyst's pick in the sporting apparel space, giving a €60 target price on the "buy" rated stock.
"In a somewhat anti-consensual call we take a preference for Puma over adidas (ADS.DE) in 2025 given lower investor expectations and growing brand heat in the Speedcat franchise," the analysts said.
The racetrack-inspired Speedcat sneaker has made a comeback, with Puma relaunching the shoe in classic colourways and teaming up with the likes of popstar Dua Lipa to market the trainer.
Deutsche Bank's analysts said that the newfound popularity in the sneaker is "similar to the halo effect adidas has felt with its Terrace franchises which has allowed it to successfully re-engage with consumers and retailers."
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In Puma's recently released results, the sports apparel retailer said its sales growth had accelerated in the third quarter, growing by 5% to €2.3bn. While the company's EBIT was in line with expectations, coming in flat at €237m.
"The potential US tariffs and USD (US dollar) strength will offer some headwinds on a margin front unless there is a significant increase in pricing for the industry (both into the US and in Europe given EUR weakness)," Deutsche Bank's analysts said.
"Accordingly we see some risk of forecast volatility on these macro factors but the improving brand heat and sales growth combined with a more reasonable valuation suggests this is in the price in our view."
That revival story in a classic Puma product, as well as the turnaround stories the analysts highlight, reflect that theme of renewal that they expect to be central to these stock stories over the coming year in these fashion sectors.
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