Top luxury brands rarely go on sale, but their stock prices are no exception.
Valuations across the real estate sector have plummeted due to the slowing Chinese economy and sluggish demand in the U.S. But long-term investors may stand to profit from this bursting bubble.
A recovery for luxury goods was expected this year but hasn’t materialized yet, and the coming months and into 2025 look grim. China is the main culprit: Chinese consumers accounted for 23% of the global personal luxury goods market last year, according to Bain & Company, but demand for Louis Vuitton handbags and Burberry scarves has stagnated.
Indeed, the prolonged economic downturn and weak housing market are fueling fears that the market could fall further.Adding to the gloom are weaker Swiss watch exports to China and Hong Kong, LVMH Moet Hennessy Louis Vuitton SE’s Sephora laying off 10% of its 4,000 employees in China, and sluggish tourism to Europe.
In the United States, there has been some improvement as stock indexes have recovered from a brief sell-off in August and as European luxury groups have opened stores in the United States in recent years, but the looming presidential election casts uncertainty over the holiday season.
The situation has been exacerbated by chaos in Paris due to the Olympic and Paralympic Games and limited travel to other cities such as Milan. Add to that signs of a backlash against luxury goods after big price hikes and the outlook is bleak.
Analysts at HSBC Holdings Plc said luxury goods sales excluding currency fluctuations would grow just 2.8% in 2024, which could be the sixth-worst year in the past two decades based on last year’s sales estimates.
It’s no wonder stocks have fallen. The MSCI Europe Textile, Apparel and Luxury Goods Index is down more than 25% from its March high. The typical premium for the MSCI Europe index has narrowed.
LVMH, the world’s largest luxury group and a leader in the luxury industry, has seen its market capitalization fall by more than 30%, to its lowest in two and a half years. As a result, it is trading at about 19 times earnings, below its average of 26.5 over the past five years, according to data compiled by Bloomberg, and below its average of 21 over the past 30 years, according to Stifel analysts.
There is, of course, the risk that profits will come under increasing pressure – the post-Covid economic boom has inevitably raised costs for companies – but even so, bags and other accessories should remain attractive in the long term.
In China, consumers are wearing luxury goods differently, for example by combining them with cheaper branded items and spending more on experiences. But Chinese consumers’ demand isn’t going away; Bain & Company expects them to account for a larger share of the personal luxury goods market by 2030. There won’t be a second China to fuel growth, but new consumers will emerge elsewhere. Brands are increasingly interested in India, for example.
At the same time, America’s relationship with luxury has fundamentally changed. Until a few years ago, the U.S. was an underpenetrated market. But Louis Vuitton’s appointments of first the late Virgil Abloh and then musician Pharrell Williams as creative directors of menswear have opened up European brands to a wider range of American consumers. Overspending may be holding back consumers for now, but the relationship is unlikely to completely break down, despite the current indigestion.
Against this backdrop, LVMH seems in an advantageous position. The company is struggling in the wine and spirits sector, but it owns two of the world’s biggest luxury brands, Louis Vuitton and Dior. Its power means that sales have risen about 60% since 2019, and it can promote itself more loudly than its rivals and keep its brands top of mind for consumers.
Its 150 million euros ($167 million) investment to become creative partner of the Olympic and Paralympic Games and expected 150 million euro deal to sponsor Formula 1 suggest it has the financial muscle to outdo its rivals. Its strong balance sheet could also help it make acquisitions. Despite its size, it still has room to grow in the areas of watches, skincare and hospitality.
While Hermes International SCA shares have not fallen as much as its peers, they have given up most of this year’s gains. The company is more resilient because it can effectively dictate demand levels. There are many more consumers wanting to buy its popular Birkin and Kelly bags than there is inventory, and supplies are continuing to flow to customers. As a result, the company’s shares still trade at about 41 times forward earnings, but that’s below the five-company average of 49 times.
Financière Richemont SA is in a similar situation, down almost a quarter since June. The company is invested in the struggling Swiss watch sector, but 52% of its sales last year came from jewelry, which may hold up better given that price increases have lagged those of many handbags. It owns two top brands, Cartier and Van Cleef & Arpels, which remain popular with Chinese shoppers. Prada SpA is also down about 25% since late May, but is still seeing strong growth, driven by the popularity of sister brand Miu Miu, which saw retail sales rise 95% in the second quarter.
But turnaround stories such as Kering SA, whose shares fell to a seven-year low after Gucci’s modest comeback, and Burberry Group Inc.’s latest restructuring attempt, seem vulnerable to a downturn.
The risk for everyone is that China’s economic downturn will drag on for a longer period and the luxury goods slump will become even deeper.
But the pain from the jewellery destruction will not be felt evenly, and just like with watches and handbags, investors should choose stocks that will stand the test of time.
Andrea Felstead