Luxury goods shares have slumped in the run-up to London Fashion Week, with British brand Burberry and French conglomerate LVMH among the hardest hit as the industry's four-day showcase opens this weekend.
The declines followed a gloomy report on the sector's prospects from HSBC analyst Anne-Laure Bismuth. Weak sales and disappointing profits at LVMH and other constituents have driven the STOXX Europe Luxury index down 20 per cent since January.
LVMH, which owns houses including Dior, Louis Vuitton, Tiffany and Sephora, has seen its shares fall 35 per cent this year to €414, close to the lows recorded during the Covid-19 retail shutdown. The stock had soared as high as €841 during the revenge-spending boom that followed the end of lockdowns.
Hermes, maker of the Birkin bag, has fallen by a third to €1,409, while Burberry is down 17 per cent this year and 50 per cent over the past three years. Burberry's fortunes had been reviving thanks to a renewed emphasis on "Britishness".
So-called turnaround stocks have been hit hardest, apparently on fears that any recovery could now stall. By contrast, shares in high street names such as Marks & Spencer, Next and Zara owner Inditex, the Spanish retail giant, have been rising.
M&S has turned its fortunes around so successfully that it will stage its first-ever show at London Fashion Week, appearing alongside Burberry, Erdem and other established names. The fashion calendar moves on next week to Milan, then Paris.
Why luxury lost its shine
Analysts point to several causes of the sector's malaise, including the impact of conflict in Iran on Middle East tourism and a continuing consumer downturn in China, where demand for luxury goods was previously strong.
Bank of America analysts said third-quarter data pointed to a dip in demand in the United States and other key markets such as South Korea, where wealth generated by the artificial intelligence boom had also been fuelling luxury spending. Fears of a bubble in AI stocks persist.
Claudia D'Arpizio of management consultancy Bain argued that the deft use of AI could instead reset luxury companies' relationship with customers and reignite their appetite to spend. Bain also said cost-of-living pressures had curtailed spending among more than 60 million "aspirational" shoppers worldwide, who once made up about 15 per cent of luxury companies' clientele.
Some of the damage has been self-inflicted. From 2019 onwards, LVMH and its rivals raised the prices of bags and other items by 50 to 70 per cent. Mamta Valecha, an analyst at Quilter Cheviot, said LVMH was now trying to win those shoppers back, including through lipsticks priced at £120, a cheaper entry point than a Louis Vuitton Neverfull bag, now around £1,400 compared with £990 in 2020.
New Louis Vuitton stores are being designed as "immersive brand experiences" aimed at a younger clientele who might buy a lipstick while dreaming of one day owning a Neverfull. Valecha cautioned that change takes time in a conglomerate the size of LVMH, and that benefits may not show up in results for a few quarters.
Bain still forecasts sector growth of 3 per cent this year and 4 per cent in each of the following three years, while broker Bernstein forecasts 5 per cent growth.
The Bond Street options
Broker analysts remain cautious on several names, rating Burberry, Kering, the Gucci group and LVMH as a "hold". Berenberg, Bernstein, Deutsche and others are more positive on Hermes, rating it a "buy" at current levels.
Richemont, the Swiss group behind Cartier and Van Cleef & Arpels, is also viewed more favourably because of its focus on jewellery. With handbags now so expensive, bracelets and necklaces look relatively affordable and offer a way to hold gold at a nervous geopolitical moment.
Watches are also seen as a desirable asset, benefiting British retailer Watches of Switzerland, whose shares are up 38 per cent this year despite a recent retreat. Chief executive David Hurley said an iPhone would tell the time more accurately than a watch, but that a watch remains a symbol of success.
The high street choices
Shares in Next, the £17.4 billion group regarded as the high street bellwether, have risen 9 per cent this year to 15,000p, with half-year results due next Thursday. Most analysts rate the shares a "hold", though Citigroup and Deutsche rate them a "buy", with Citigroup setting a target of 18,400p.
M&S shares have climbed 76 per cent over three years and 17 per cent this year to 386p. Most analysts rate the stock a "buy", with an average target price of 442p.
Inditex, the Spanish retailer and the world's largest fashion group, this week reported a 7.6 per cent rise in first-half sales to €19.8 billion, a figure that came in below forecasts. The group has nonetheless made a strong start to the third quarter, taking Zara upmarket while expanding its discount chain Lefties, which opened its first store in Liverpool this month. Inditex shares stand at €54 and are tipped as a "buy" with an average target of €60.
