Are Luxury Brands Good Investments?

Luxury stocks have largely rebounded toward our fair value estimates after beginning 2026 in undervalued territory. However, the recovery has been anything but uniform. 

Strong earnings from Brunello Cucinelli and better-than-feared results from Ferragamo boosted investor optimism, pushing both stocks above our fair value estimate. Meanwhile, traditional luxury leaders such as LVMH and Hermès have been considerably derated. 

Today, the luxury goods market is effectively split in two. Roughly half of our coverage universe trades at or above fair value, while the other half continues to offer potential upside. Regional dynamics remain an important driver of performance. In the US, affluent consumers continue spending amid strong equity market gains fueled by AI-related optimism. In China, however, consumer demand remains subdued as ongoing weakness in the property sector weighs on confidence. 

Although valuations have improved across the sector, we continue to see select opportunities for long-term investors willing to navigate the current luxury market challenges.  

One of the defining characteristics of luxury companies is their high fixed-cost base. Retail leases, flagship stores, and employee expenses remain relatively fixed regardless of sales volumes. As a result, even small fluctuations in revenue can have an outside impact on profitability.  

Many luxury brands also increased marketing investments to strengthen brand desirability and maintain consumer engagement. As sales growth slowed or declined throughout 2024, margins came under significant pressure. 

Cost controls implemented during 2025 helped stabilize profitability, but margins remain below long-term averages. Looking ahead, we expect a cyclical recovery in demand combined with the scale advantages enjoyed by leading luxury brands should create meaningful operating leverage and improve profitability.  

Inventory discipline is emerging as one of the key differentiators among luxury companies. 

Unlike many consumer industries, luxury brands cannot rely on widespread discounting to clear excess inventory without risking damage to brand equity. At the same time, destroying unsold luxury products has become increasingly controversial and, in some jurisdictions, restricted due to sustainability concerns. 

The sales slowdown in 2024 led to slower inventory turnover throughout the industry, especially among leather goods and apparel companies. Inventory turnover rates fell to their lowest levels since the pandemic, raising concerns about potential markdown risk. 

In our view, companies best equipped to protect pricing power are those that maintain direct control over distribution channels and possess strong balance sheets. These firms can reduce production and patiently manage slower-moving inventory without resorting to discounting. 

Weaker competitors may not have that flexibility, making inventory management a key factor for investors evaluating luxury market challenges in the years ahead. 

During the first quarter of 2026, the Americas maintained positive momentum and emerged as the strongest growth region. Asia (excluding Japan) delivered its second consecutive quarter of sales growth since the beginning of 2024. 

Europe, however, faced pressure from lower tourist activity, particularly from the Middle East. Because many luxury brands report Middle Eastern sales as part of their broader EMEA region, ongoing regional weakness weighed on overall results. Overall, Middle East weakness shaved 1%–1.5% off growth for luxury names in the quarter. 

Historically, equity market performance has been strongly correlated with luxury spending. Prior to the covid-19 pandemic, industry growth showed a meaningful relationship with S&P 500 returns. Continued strength in US financial markets could therefore provide ongoing support for luxury consumption among affluent households in the US. 

Geopolitical tensions in the Middle East have had only a small dampening impact on luxury buying globally, and no impact on the markets, but spillover inflation remains a risk, specifically for aspirational consumer demand. 

Total Revenue Passenger Kilometers (RPK) year-over-year declined in April (approximately 3%), driven by weaker international travel demand. The Middle East was the largest drag on performance, with traffic down approximately 47%. All other regions posted modest gains, with the exception of North America, which was broadly flat. The conflict continues to place pressure on both travel demand and airline capacity, while simultaneously increasing operating costs through higher fuel prices. We expect travel to return to normal once the conflict is resolved. There are no current airspace restrictions; hence, we expect outbound travel from the Middle East to Europe in the summer months to be solid, whereas summer is an off-peak travel destination for inbound travel. 

Chinese outbound travel remains a key driver for the luxury sector. Although self-gifting behavior while traveling and favorable price gaps between China and Europe should support luxury purchases, we think that the normalization of travel flows is likely to be delayed due to constrained consumer budgets. In recent months, Chinese domestic and international passenger volumes have been volatile. 

Chinese luxury consumption remains predominantly domestic, with overseas purchases accounting for only 35% of Chinese luxury spending in 2025, according to Bain & Company, compared with around 70% before the pandemic. 

Global prime rental growth moderated annually overall, with increases recorded on 58% of streets and declines on 16%. The Americas region dominated at 7.9% growth, while Europe gained traction at 4%, in contrast to Asia Pacific's deceleration to 2.1% mostly due to subdued increases in Greater China. The weakening of rental costs could alleviate some pressure on the bottom line from soft sales. 

Recent rallies in gold and silver prices are squeezing margins for jewelers like Pandora (silver), Richemont, and LVMH’s Tiffany. While we believe that jewelers have the pricing power to offset raw material price increases in the long term, brands are not as responsive to short-term shifts, which can temporarily affect the margin. We see Pandora as the most at risk, given its midprice positioning that limits pricing power. However, Pandora recently announced it would introduce platinum plating as an alternative to silver to reduce its reliance on silver. 

At the same time, selling, general and administrative costs increased due to fixed-store costs and uneven demand. Gross margins came under slight pressure as most companies turned cautious on pricing on the back of subdued demand. We expect pricing to remain modest before we see a meaningfully strong recovery in demand. Return to sales growth should result in better leverage of operating costs, supporting margins over the long-run.