Key Takeaways
- LVMH, Prada and Kering are all 4-star stocks, so are screening as undervalued.
- Ongoing turnaround strategies at some of Europe’s biggest high-end brands appear to be paying off.
- US and Chinese consumers continue to drive the luxury sector’s rebound.
Karen Gilchrist: After years of weakness in luxury stocks following a pandemic-era boom, green shoots are emerging at some of Europe’s most recognizable high-end brands. What does this mean for the sector’s outlook? To discuss her top picks and the prospects of a luxury rebound, I’m joined by Morningstar senior equity analyst Jelena Sokolova.
LVMH Improves in Key Fashion and Leather Goods Division
Karen Gilchrist: Now, Jelena, let’s start off with your top pick, LVMH MC. This has been one of the worst-performing luxury stocks so far this year, but we did see in second quarter results, 3% organic growth and the return to growth of the prestigious fashion and leather goods segment for the first time in two years. So what do you attribute this improvement to and why do you think the stock is attractive?
Jelena Sokolova: It is one of the wide moat names under our coverage in the luxury universe. We just have three wide moat names in luxury, LVMH being one of them. We still see the brands being very strong, but of course there has been a period of weakness, specifically in the fashion and leather division. But now there are some green shoots, as you mentioned. So I think the weakness, we have to put it in context. LVMH grew tremendously strongly after the pandemic. So for the fashion and leather division and for its major brand, Louis Vuitton, actually the sales doubled in a matter of four years, which is super impressive given the brand’s size was already EUR 10 billion. It’s extremely difficult to grow from these levels, and actually slowdown and moderation was something that we cautioned investors about back in 2023.
Now, however, our stance is that longer-term the company’s brands should be well positioned to outperform thanks to the brand strength. If you take Louis Vuitton, the brand strength is supported by pricing power, by the super high standing of the brands, by full control over distribution, which prevents discounting, but also the really massive communication budgets that nobody in the industry can match. So over the long term, the company in fashion and leather has delivered above 10% growth, which compares to 5% for the industry, and we expect the company to get back to this outperformance over time, but it’s not happening yet.
Prada’s Long-Term Appeal Looks Set to Endure
Karen Gilchrist: Prada 01913 is one of your other preferred names, which is currently equally discounted. Its Miu Miu label has been a bright spot for the industry at large, but you have suggested that this momentum could begin to cool. Why then is this still one of your preferred stocks and where do you see the growth there?
Jelena Sokolova: I think it’s all a matter of expectations. We think that with multiples for Prada being in the low-teens, a lot of upcoming weakness in the Prada brand and Miu Miu’s slowdown is already discounted. We also expect a slowdown. However, compared with the market, we are more bullish on the long-term recovery of the brand appeal, given the strength of the brand and the moatiness of the brand. And we also think that Prada could be a better owner of Versace going forward, and that is something the market is also concerned about.
Gucci-Owner Kering Shows Green Shoots
Karen Gilchrist: Now, another 4-star name is Kering KER. We saw in its latest results a narrowing of losses at its key Gucci brand. How are you thinking about the turnaround of this key label and the overall strategy of the auto veteran Luca de Meo?
Jelena Sokolova: Our stance on the name was that, again, thanks to the strength of the brand, Gucci is unlikely to permanently lag the industry, and that is something that the shares have been pricing in for some time. So currently we are seeing some improvement. The losses, the declines of revenue for Gucci, are narrowing. There are some green shoots, for instance, in the US market, where first of all the US is leading the gains in the luxury market overall, but also the brand is stronger positioned there. So already there we see, 9-10% growth for Gucci and for the group. So that’s encouraging. But also in the second quarter what was encouraging was that the losses were actually narrowing also in Europe and also in Asia. So you already have [fashion designer] Demna’s collections going into the stores. It seemed like they managed to get more people in the stores. So hopefully, as this rollout progresses, we will see more improvement.
There is also something being done on the operational side. For instance, Kering has fixed the balance sheet. Markets had concerns about the balance sheet and the net debt being too high, so now the leverage is in order. They are also closing down underperforming stores, working with cost efficiency, which also protects the margin and gives the group a little bit more runway for this recovery to work.
Burberry’s Brand Refocus Pays Off
Karen Gilchrist: One more brand in the midst of turnaround is Burberry BRBY. What do you make of the progress with this brand? And particularly we’ve seen some strength in the US consumer, but increasingly the Chinese youth as well.
Jelena Sokolova: For Burberry, I think the turnaround is in place. It is growing. It’s not massively growing, but it is growing relatively well. I did like initially its refocusing on where the brand is the strongest, which is outerwear and scarves. So they have done it well. They have also worked with their pricing to make it a bit more affordable in the context of pricing having been pushed too far by the industry over time. So I think the turnaround is in place. It seems to be working, and we do see shares as undervalued as well after the current weakness. China is also doing a little bit better for them. But, of course, the US is really the market which pushes the industry forward at the moment.
US and China Continue to Lead Luxury Rebound
Karen Gilchrist: That really has been a thread throughout, that the US consumer has been leading that growth. How are you feeling about the overall prospects, having looked at these latest results for the sector at large, and the prospects for us returning to those levels of growth that we did see those years ago?
Jelena Sokolova: I’m not forecasting the sector to return to this double-digit that we have seen after covid. I actually flagged those as unsustainable, driven by a lot of tailwinds. But I do see recovery. Last year, we published a report that flagged recovery in the US and in China. These two nationalities account for about half of the demand overall, so super important. The US now, I think, is growing from a much healthier base. So what happened in the US, luxury demand spiked after covid, then it went down, which I also kind of warned investors against. Now we are at a much more easy comparison base with the US. So the US economy is still doing well. Markets are strong. Markets are a precursor of luxury demand in the US. So here the recovery is sustained, I think, from Q3 2025.
With China, the results are still quite mixed across companies. But we do see at least that the situation is not deteriorating. It does show some signs of stabilization, maybe a little bit of improvement, but it’s still too early to say. I think the key really depends on the real estate market, and that pushes down the sentiment. In terms of real estate, the decline in prices is still happening, but it is narrowing in the tier-one cities, and our team in Asia expects the stabilization to happen toward the end of the year, so hopefully that will boost the demand for luxury as well.
Karen Gilchrist: Jelena Sokolova, thank you for your time. For Morningstar, I’m Karen Gilchrist.
