4 min read
Is the Luxury Goods Market a Good Investment?
The luxury sector is largely fairly valued at this point, with few instances of overvaluation and undervaluation.
Key Takeaways
The luxury sector is experiencing a cyclical downturn, characterized by sales and margin pressures.
- In the third quarter of 2025, sales in the Americas improved, Asia stabilized, and Europe weakened.
- Luxury brands are grappling with accelerating cost increases and inventory challenges, impacting their margins.
- Despite the challenges, opportunities exist within specific luxury companies like Kering, Swatch, Pandora, and Prada, with consumer interest shifting among top brands.
Please note that data may shift in between report updates. Please visit Morningstar.com for the most recent data as well as breaking news content.
While the luxury goods sector is complex, it also offers opportunities for those willing to navigate its nuances. In the words of Warren Buffet, "Price is what you pay. Value is what you get."
Understanding market trends, key drivers, and valuations is essential for financial advisors and asset managers who want to help their clients make sound investment decisions.
This analysis provides detailed insights into revenue and cost trends, challenges such as subdued demand and rising costs, and the unfolding opportunities within the industry. Discover the potential within renowned companies while gaining a clear understanding of the evolving influence of economic conditions and supply chain pressures.To read the full research report, download a copy.
A Closer Look at Luxury Valuations
Luxury shares converged to our fair values after the share price rally in the second half of the year, as investors grew optimistic about the imminent sales recovery. The number of undervalued stocks decreased, but we still find many attractive opportunities in the sector. We don't see the current cyclical of weakening demand to be long-lasting, based on the industry's past 30 years, where periods of subdued demand didn't last more than two years. We also believe that the moats in luxury remain intact and that fundamental growth drivers (notably, demand from American and Chinese consumers) remain intact. We believe the market now shares our view, expecting demand reacceleration in 2026. Improvement in sales trends in the third quarter supported market sentiment.
Luxury Now Looks Fairly Valued
Source: Morningstar, company data. Data as of January 2026. Note: Profitability disclosed on semiannual basis for most companies under coverage. Luxury shares now look fairly valued as the sector is muddling through the second year of a cyclical downturn.
Cyclical Downturn Expected to Be Short-Lived
While demand has softened, it's important to view this within a historical context. Based on the industry's performance over the past 30 years, periods of subdued demand typically do not last more than two years. The current cyclical downturn is not seen as a long-term trend, offering a positive outlook for a potential rebound. Sales recovered slightly in Q3 2025 after a contraction in Q2.
Source: Company reports, Morningstar. Data as of January 7, 2026. Note: Annual and half-year data for Swatch due to reporting. Data for Burberry and Richemont corresponds to calendar, not fiscal, quarters.
Investment Opportunities for Luxury Brands: What are the Top Picks?
The most recent research on luxury brands pinpoints some undervalued names in the luxury sector, including Kering, Swatch, Pandora, and Prada. But as far as what investors may be interested in specifically from each of these brands, there are three key product areas to explore:
Luxury Leather Goods
- Luxury Watches
- Luxury Jewelry
Clocking in at the second-largest luxury group based on their revenue, it might be a good time to find opportunities related to luxury leather goods with the Kering brand. Despite its popular flagship brand, Gucci, experiencing slower momentum, the brand has access to extensive marketing resources, over 90% control of its distribution, and well-established name recognition. They are in a position to maintain its pricing and desirability in the long run.
Another area to consider is luxury watches. This industry has seen steady growth, with consumers willing to invest in high-quality timepieces as a symbol of wealth and status. Brands like Swatch’s Omega, Richemont’s Cartier, and Rolex dominate this sector with their reputation for precision, craftsmanship, and exclusivity.
Consumer Interest: Google Trends Insights
Beyond sales figures, understanding brand "heat" is crucial. Report data reveals shifting consumer interest. While some brands see wavering search volumes, the data highlights strong momentum for Cartier and growing interest in Prada and Burberry. This insight can help investors gauge brand popularity and marketing effectiveness, which often act as leading indicators of future sales performance.
Luxury Sales Trends: A Mixed Bag
Taking a closer look at luxury sales trends, it's evident that there are regional nuances. Our latest report shows that trends diverged in the third quarter of 2025. Sales in the Americas showed improvement, and the market in Asia stabilized. In contrast, sales in Europe weakened during the same period.
Luxury Sales Trends Diverged in Q3 2025, With Declines Easing in Asia (Excluding Japan), Growth Accelerating in the Americas, and Europe Facing Renewed Weakness
Source: Company reports, Morningstar. Data as of January 7, 2026. Notes: Data for Burberry and Richemont corresponds to calendar, not fiscal, quarters. Median values for the companies: LVMH, Hermes, and Kering with its brands, Richemont, Burberry, Moncler, and Hugo Boss.
Economic Factors: Chinese Real Estate
The behavior of Chinese consumers remains a critical factor for the luxury sector's health. It is not just about sentiment, but broader economic conditions. Our report highlights a link between Chinese real estate prices and luxury sales. The property price downturn in 2015 preceded a stagnation in global luxury sales in 2016. We believe a similar dynamic is playing out in 2024 and 2025, suggesting that a recovery in China's property market could be a catalyst for renewed luxury spending.
The Role of Travel in Luxury Sales
Global travel flows are another key piece of the puzzle. The last few year’s data shows a recovery in luxury spending by Chinese nationals while travelling abroad, alongside a gradual stabilization of domestic purchases. However, the share of overseas luxury purchases by Chinese nationals, which reached 40% in 2024, is still well below the 70% pre-pandemic level. The continued normalization of travel is essential for driving the market forward.
Travel Flow Growth Stabilized in 2025
Source: Morningstar, CAAC, International Air Transport Association.
Chinese Consumers Leading Recovery
The behavior of Chinese consumers remains a critical factor for the luxury sector's health. The latest data shows a recovery in luxury spending by Chinese nationals while traveling abroad, alongside a gradual stabilization of domestic purchases. This trend highlights their essential role in driving the market forward as global travel flows continue to improve.
The Impact of Rising Costs in the Luxury Sector
In addition to shifting sales trends, rising costs have added to the challenges faced within the luxury goods sector. These escalating operating costs pose a challenge to maintaining margins for luxury firms. The luxury industry has a high share of fixed costs—selling costs such as rental and employee expenses are largely fixed. Due to this, luxury margins came under strong pressure as sales were marginally up or declining. Most companies could see margins continue to be under pressure in 2025.
Key Cost Drivers: Rentals and Precious Metals
Two specific cost drivers are creating significant headwinds. First, rental cost inflation has unexpectedly accelerated, with the most pronounced increases in European capitals like Sao Paolo, London, Budapest, and Buenos Aires. In 2025, the average pace of increase moderated significantly compared to 2024. Second, a rally in gold and silver prices is potentially weighing on the margins for jewelers like Richemont and Pandora, who may not be able to pass on the full cost increase to consumers in the short term.
Gold and Silver Prices Rally in 2025
Source: Morningstar, Cushman & Wakefield, Comex, company data. Note: Profitability and balance sheet items provided semiannually. Latest available data June 2025.
Operational Challenges: Inventory Management
Beyond external costs, internal operational pressures are mounting. Our report shows that inventory turns reached their lowest level since the pandemic. This indicates potential overstocking issues for some brands, which can lead to increased carrying costs, the need for markdowns, and further pressure on profit margins. Efficient inventory management is becoming a key differentiator for performance in the current climate.
Empowering Smart Decisions in the Luxury Sector
Every industry experiences global economic shifts, and the luxury goods sector is no exception. Sales and margins have been under pressure due to a combination of declining consumption, rising fixed costs, and operational hurdles. In these challenging times, the sector looks fairly valued as investors already incorporate the eventual recovery into their assumptions. However, we still see potential in certain stocks that look undervalued.
Despite the apparent obstacles, recent data shows that there are still investment opportunities, with a number of stocks now trading at an attractive discount. A key point for investors to consider is the enduring strength of the industry's top players. Brands with wide economic moats, such as LVMH and Richemont, have proven their resilience and ability to maintain pricing power.
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