RBC keeps cautious tone on luxury, picks Adidas, Burberry for upside

RBC Capital Markets maintains a cautious stance on the luxury sector, citing weak Q2 earnings momentum and a lack of fundamental demand, with share price movements driven more by positioning than fundamentals. Despite this, RBC highlights high-conviction Outperform picks: Burberry, for its turnaround potential and positive EPS momentum (up 22% YTD), and Adidas, deemed "most dislocated" due to its appealing valuation and momentum with expectations to meet EBIT guidance. The firm also rates Hermes, LVMH, and EssilorLuxottica Outperform, while maintaining an Underperform on Swatch Group due to operating deleverage, noting broader risks from U.S. tariffs and slowing micro indicators across the sector.

Analysis

RBC Capital Markets expresses a cautious outlook on the luxury sector, citing a mixed second-quarter earnings season characterized by weak earnings momentum and a lack of fundamental demand support. According to the firm, recent share price movements have been driven more by market positioning and sentiment rather than core fundamentals. Despite this broad caution, RBC identifies specific idiosyncratic opportunities. Adidas (ETR:ADSGN) is highlighted as its 'most dislocated stock', rated Outperform with a €260 price target, based on an attractive valuation relative to its expected revenue and earnings growth. RBC anticipates Adidas will meet its €1.7–1.8 billion EBIT guidance by Q3 and suggests a share buy-back could signal confidence. Burberry (LON:BRBY) is another top pick, rated Outperform with a £15 price target, having already risen 22% year-to-date. Its appeal lies in its turnaround potential and its unique position as the only stock in RBC's luxury coverage with positive EPS momentum, though its long-term success is contingent on the A/W 2025 collection. In contrast, Swatch Group (SIX:UHR) receives an Underperform rating due to significant operating deleverage. Broader sector risks include slowing micro-indicators like website traffic and Swiss watch exports, as well as U.S. tariff exposure, which most affects Nike (NYSE:NKE) and EssilorLuxottica (EPA:ESLX).

Key Decisions for Investors

• Investors should consider focusing on idiosyncratic opportunities within the luxury and sporting goods sectors, such as Adidas and Burberry, which are highlighted for their specific turnaround or valuation-based catalysts rather than broad sector trends.
• Monitor key catalysts for high-conviction picks, including Adidas meeting its Q3 EBIT guidance and any potential share buy-back announcement, and the successful execution of Burberry's Autumn/Winter 2025 collection.
• Exercise caution on the sector as a whole, particularly with names like Swatch Group facing significant operating deleverage, and be mindful of U.S. tariff risks which disproportionately affect Nike and EssilorLuxottica.
• For those seeking a more balanced risk-reward profile, LVMH's recent underperformance may present a relatively attractive entry point, supported by expectations of near-term improvement from easier comparatives in its key Fashion & Leather Goods division.