(Bloomberg) – Hennes & Mauritz AB’s dismal earnings update on Thursday is just the latest setback for shares of European clothing retailers as they end a second straight quarter of underperformance.
With a 29% decline, Zara owner Inditex SA is heading for its worst quarter on record, following the 10% drop in the fourth quarter. H&M and Next Plc fared only marginally better as soaring energy prices following Russia’s invasion of Ukraine sapped disposable income and caused shoppers to reassess discretionary spending.
The latest data showed a drop in consumer confidence in countries including the UK, France and Germany, as Europe faces the deepest energy crisis and the worst inflationary shock in decades. . Over the past month, online furniture sellers Westwing Group SE and Made.com Group Plc have warned of weaker consumer demand. And sentiment took another hit when H&M reported a sudden slowdown in sales growth, sending its shares tumbling 11% to the lowest close in two years.
“The market is most concerned about the impact on consumer confidence from the situation in Ukraine,” said Alan Custis, head of UK equities at Lazard Asset Management. Investors see a higher cost of living contributing to “a squeeze on discretionary spending.”
Those worries have piled up and sent valuations plummeting: Inditex shares are trading at 17x estimated earnings, down from around 27x a year ago. H&M’s multiple went from about 28 times to 15 times.
For some, the worst may already be predicted.
“Equities are already pricing in this bad news and, to some extent, stock prices are likely to be adversely affected by energy prices as investors examine and focus on the possible impact on disposable income,” said Alasdair McKinnon, Chief Investment Officer of Sgurr Ventures. . “In effect, this would mean that stock prices will be pulled up in the short term by the prospect of a resolution of the Ukraine crisis.”
Most analysts see the possibility of a revival. Based on average price targets compiled by Bloomberg, they expect Inditex, H&M and Next shares to jump more than 30% over the next 12 months.
It’s “not all catastrophic,” said JPMorgan Chase & Co.’s Georgina Johanan. “Low unemployment and catch-up spending on apparel should offer some support,” she wrote in a note on Wednesday, adding that the total lost revenue for the sector in 2020 and 2021 was around 30% of annual apparel spending in major European markets on average. .
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