Luxury company stocks were expected to be continuously rising: the global economy is growing and the stock market is hitting historical records — making the rich even richer.
But the sector is moving in the opposite direction.
The Roundhill S&P Global Luxury ETF — which includes the top luxury companies in the world, such as LVMH, Kering, and Moncler — has fallen 8.1% since January, compared to a more than 20% increase in the S&P 500.
The decline reflects a slowdown in sales and increasing concerns from analysts that the situation will not reverse anytime soon, according to Barron’s.
The magazine — one of the leading American publications focused on the stock market — notes that part of the problem is related to China, which used to account for nearly a third of luxury goods consumption in recent years but is now facing an economic crisis that has made its consumers more cautious.
Another part of the problem stems from a misguided strategy of the companies themselves, dating back to the pandemic.
“When government stimuli made many people feel wealthy, a legion of new luxury buyers flooded the market. The sales boom that ensued was not only unsustainable but also raised fears that the carefully cultivated aura of exclusivity by brands could be damaged,” the magazine said.
“As a result, one company after another started raising prices. The outcome: a range of luxury products now cost 50% to 100% more than in 2019.”
According to Barron’s, this “hyperinflation” drove away many aspirational consumers — probably more than desired. And, to make matters worse, it deterred many core buyers, the truly rich.
“Some people decided to step back and say, ‘I’m not going to buy anymore because this is becoming ridiculous’,” a sector consultant told the magazine. “You can’t justify the high price through product differentials when it almost doubles in a few years.”
For example, a Cartier Trinity ring now costs €1,540, 64% higher than the price in 2019, according to HSBC data. And a Chanel side bag now costs €11,000, 91% more than in 2019;
“As prices rise, brands need to generate more and more excitement for people to spend. Even if it’s a brand you love, people begin to be put off by the prices,” said an analyst.
This is a bigger problem for luxury brands that cater to many aspirational consumers, who have money only for occasional purchases.
Barron’s mentions the examples of Versace and Dior, which sell products like keychains and sunglasses at lower prices but create long-term connections with customers. “But with high prices and cheap fake products available, many luxury brands have failed to attract new buyers who would be valuable in the future when they were earning more.”
Another example is Burberry, which has always been a step below ultra-rich luxury brands due to its lower prices and outlets. Post-pandemic, Burberry tried to move up the value chain by increasing prices by more than 50%.
This ended up driving away its core consumers, without attracting the wealthiest ones. The company’s sales fell by over 4% last year and are expected to drop by 15% this year, according to market estimates.
The poor results are not only affecting Burberry, with other companies in the sector reporting weak numbers in recent quarters. Nevertheless, Barron’s believes that the recent sell-off has created some bargains.
Analysts cited by the magazine mention LVMH and Richemont as examples of companies trading at attractive multiples and being more immune to the sector crisis.
LVMH is currently trading at 19x its estimated earnings for this year, the lowest multiple since 2023.
“LVMH has used its huge capital to stimulate the operational and fashion side of its brands, and the excitement around its launches has proven to set it apart from the competition. These advantages make recent weak results less concerning than for its peers,” the magazine said.
As for Richemont, trading at 18x earnings, it is more immune to fashion fluctuations and cheap fake products. “Jewelry is timeless, with the main Cartier line offerings spanning multiple decades, even over 100 years,” a manager told Barron’s. “Being timeless is a powerful product marketing.”
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
