Luxury stocks fell to the bottom of the European Stoxx 600 index's decliners following earnings reports from Hermes International SA and Kering SA. Kering's core brand, Gucci, reported a larger-than-expected sales drop, with retail revenue in the Middle East declining 11% in the first quarter. While Hermes achieved year-over-year sales growth, it stated its business was "significantly affected by the situation in the Middle East."
Disappointing first-quarter results from Kering, the parent company of Gucci, and Hermes International SA, released amidst the impact of Middle East conflicts on luxury sales, triggered a significant sell-off in luxury stocks during Wednesday's early trading. Shares of Hermes plummeted 14%, while Kering fell 10%. The reports from both companies weighed on the entire luxury sector, with Burberry, Christian Dior, LVMH, and Moncler all ranking among the top decliners on the pan-European Stoxx 600 index, falling between 2% and 3%.
Hermes announced first-quarter sales of 4.1 billion euros (approximately $4.8 billion) on Wednesday. Total sales increased 5.6% year-over-year, missing analyst expectations of 7.1%. The company stated, "Sales in our stores grew by 7%, despite a slowdown in tourist traffic affected by the situation in the Middle East." The company added, "The wholesale business was significantly impacted by a decline in sales to authorized distributors, particularly in the Middle East and in airport channels."
Jefferies analyst James Grzinic noted that the drop in Hermes' share price reflects two major concerns: the severe challenges facing its business in the Middle East and market worries about slowing growth momentum in China.
Meanwhile, Kering reported Tuesday evening that its sales fell short of expectations. Despite efforts by new Chief Executive Officer Luca de Meo to turn the situation around, the group's largest brand, Gucci, continued to underperform. Kering's first-quarter revenue was 3.57 billion euros, down 6% on a reported basis and flat on a comparable, constant-currency basis. Gucci's organic sales declined by 8%, a steeper drop than the 6% analysts had anticipated.
Kering, which also owns brands including Yves Saint Laurent, Bottega Veneta, and Balenciaga, stated that after growth in the first two months of the year, retail revenue in the Middle East fell 11% in the first quarter. The group operates 79 stores in the Middle East, a region that contributes approximately 5% of its retail revenue.
Despite the weaker-than-expected results, investor focus remains on Kering's capital markets day scheduled for Thursday, where de Meo is expected to unveil a strategic plan named "Re-building Kering." In a statement released after markets closed on Tuesday, de Meo said, "Gucci remains our absolute priority. The full transformation is underway, and we are taking decisive actions regarding clients, distribution, and most importantly, product offering."
Bernstein analyst Luca Solca described the results as a "reality check." He stated, "The Q1 2026 results confirm what we have observed several times: the market tends to believe in a recovery being easier and faster than management can deliver." Over the past year, Kering's stock performance has outperformed most of its peers.
Like many luxury competitors, Kering has experienced a multi-year contraction following the industry's boom in 2022. A surge in demand during the pandemic led to repeated price increases, which ultimately drove some customers away. This, combined with sluggish demand in China—once a primary growth engine for the sector—has put pressure on businesses. Last year, Kering appointed de Meo to steer the company back to growth. Although his background in the automotive industry surprised many, the company's share price has risen approximately 10% since he officially took office on September 15, outperforming most peers as investor optimism about his turnaround plan grows.
**Impact of the Middle East Region** Although the Middle East constitutes a relatively small portion of revenue for major luxury firms, typically around 5%, it had been one of the few bright spots in an otherwise sluggish growth environment for the industry. Nevertheless, luxury stocks have declined significantly since the US and Israel initiated strikes against Iran on February 28, with global markets experiencing ongoing volatility as the effective closure of the Strait of Hormuz triggered an energy crisis.
UBS analyst Zuzanna Pusz said in late March, "Heightened global uncertainty is causing significant investor anxiety, particularly among those who were anticipating a long-awaited recovery in luxury demand this year." On Monday, industry bellwether LVMH stated that the Middle East conflict had a negative impact of 1% on its organic growth for the quarter. LVMH's Chief Financial Officer, Cecile Cabanis, said, "Following the outbreak of conflict, the demand gap and decline in March varied between 30% and 70% across different malls and business lines."
However, analysts also pointed to some positive improving factors for the sector, including robust consumer spending from US and Chinese customers.
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