Not so comfortable in luxury

Not so comfortable in luxury

It has struck me as curious that one of the sectors of the global market that was hit after the pandemic lockdowns were lifted but has generally failed to recover, is luxury retail. 

I have long believed that many prestige brands, such as Louis Vuitton, Gucci, Prada, and Ralph Lauren, are now so common on street corners and in shopping centres and malls that they verge on being more mass-market than exclusive, more masstige than prestige. One questions how much longer they can sustain their high margins if consumers become unwilling to pay ever-increasing prices for items that can be bought just about anywhere.

That could explain the share price declines. Hermes is down 28 per cent since its highs a year ago; LVMH (French luxury goods conglomerate which includes brands such as Louis Vuitton, Dior, Tiffany & Co etc.) is 40 per cent lower than its 2023 highs; and Ferrari (whose issues may relate to the new design language, electric vehicle anxiety and related high research and development costs) is 41 per cent lower than its all-time highs a year ago despite 40 per cent returns on equity. I have included a separate appendix on Ferrari below. Meanwhile, Cucinelli is down 38 per cent, the luxury watch house of brands, Richemont, is 16 per cent lower, and Kering (owner of Gucci, Balenciaga, Alexander McQueen, Bottega Veneta and YSL) is 67 per cent below its 2021 highs.

Only Ralph Lauren is bucking the trend with its shares just four per cent from their all-time highs in December. In fact, Ralph Lauren has seen a strong surge in its share price – up over 50 per cent in the past year – due to a combination of disciplined “brand elevation” (shifting from a discounted, department-store-reliant model to a premium, brand-direct strategy), strong recent results (Q2 revenue was up 17 per cent year-over-year (to US$2.01 billion) and Q2 Earnings Per Share (EPS) rose 49 per cent), and successful expansion in international markets, particularly Asia. Indeed, the company has successfully transformed its image from a promotion-heavy retailer to a higher-end lifestyle brand, allowing it to increase prices while growing its direct-to-consumer (DTC) channels. 

Generally, despite recent travails, many luxury brands enjoy attractive returns on equity with capital-light models, so I decided to run a valuation exercise on them to see whether any were trading below a range of intrinsic value estimates based on a variety of required returns. I also decided to treat each company as if all earnings were paid out as a dividend rather than retained and compounded – admittedly a conservative posture.

Table 1.  Estimated valuation comparison (prices as at 2 February 2026)*

*Valuation estimates exclude any effect of compounding retained earnings.

With the exception of Ralph Lauren and LVMH, the major luxury houses remain overpriced under the adopted valuation methodology. The much smaller B.Cuinelli is perhaps displaying some value, having declined 38 per cent from its all-time high price this time last year.

And depending on your view about the enduring demand for Ferrari, and whether the (slower) shift to electric will be detrimental to sustaining the premium prices of the V12 and V8 models of the past, you might conclude the market reactions is a demonstration of investors over estimating the near term and underestimating the long-term. 

Time, of course, will tell.

Appendix:  Ferrari notes.

Amid a “perfect storm”, Ferrari (RACE) is trading near its 52-week low (~€280–€289):

Growth Realignment: In late 2025, Ferrari guided for circa 5-6 per cent revenue growth through 2030. For a company with a then high-flying tech company price to earnings (P/E) of 40-50 times, the market reacted expectedly; investors re-rated the company’s shares from “Growth” to “Value/Quality”.

Electric Vehicle (EV) “Margin Jitters”: Ferrari is investing €200 million in its new “e-building,” where it will develop its first fully electric model (launching later this year). Analysts fear that even if they sell every car, the substantial research and development (R&D) and depreciation will temporarily reduce their world-class 38 per cent Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) margins. 

China Softness: The most recent quarterly data showed a ~12 per cent drop in shipments to China. While Ferrari limits supply to maintain exclusivity, any hint of cooling demand in a key luxury market spooks investors.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.

Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances. 

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