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Investing.com -- Morgan Stanley (NYSE:MS) has cut its price target on LVMH (EPA:LVMH) shares from €560 to €510, pointing to sharper-than-expected earnings pressure stemming from operating deleverage and adverse foreign exchange (FX) movements.
While the Wall Street giant had already anticipated a slowdown in the company’s Fashion & Leather Goods (F&LG) segment, it now expects a steeper profit decline, with margin estimates dropping more significantly than previously projected.
The bank lowered its organic sales growth forecast for the first half of 2025 (1H25) for F&LG to -7.5% year-on-year, reflecting weaker demand from key consumer groups, especially Chinese tourists in Japan.
“We think expectations here remain too high (double-whammy of operating deleverage and adverse FX),” analysts led by Edouard Aubin wrote, adding that this adjustment pushes their EBIT estimate for the division below consensus.
For 1H25, Morgan Stanley projects an EBIT margin of 34.1%, versus 35.6% in consensus and 38.8% in the prior-year period. The firm expects a margin contraction of 470 basis points, driven in part by reduced capacity utilization and a worsening FX drag.
The euro’s appreciation against major currencies is now seen as shaving over 100 basis points off gross margins, up from a 25 bps hit previously assumed.
The pressure on cross-border spending—particularly a drop in spending by Americans in Europe and Chinese nationals in Japan—was cited as a major shift in second-quarter trends. According to Morgan Stanley, this remains a key component of demand in the personal luxury goods space.
Overall, the group’s full-year earnings forecast was cut by 3.5% to €16.96 billion, with EPS lowered to €20.84, nearly 4% below previous estimates. The brokerage also revised its full-year revenue forecast to €81.4 billion from €82.9 billion.
While Morgan Stanley expects most luxury peers to face downward revisions amid soft cross-border spending, it noted that LVMH’s relative underperformance is unusual.
“This has happened very rarely over the past three decades. Thus, we think it will continue to weigh on the Group’s valuation multiples,” the analysts said.
“And with earnings expectations likely to remain on a downward trajectory, we thus think share price performance may remain subdued,” they added.
The firm maintained an Equal-weight rating on LVMH shares, citing mixed drivers ahead of the company’s July earnings.
It sees near-term pressure continuing but remains positive on the luxury giant’s long-term positioning in the sector, helped by its brand strength and business diversification.