Naked
The naked dress was banned at Cannes. Beyond the red carpet, some luxury retailers are feeling more exposed than ever.
The Cannes Film Festival quietly updated its dress code this year, banning overly sheer gowns also known as ‘naked dresses.’ While transparency is discouraged at the world-class event, it's exactly what investors seek in the financial reports of firms behind the couture collections.
The post-pandemic boom in luxury sales has slowed down, and value creation in the sector is expected to stall for the first time since 2016. Case in point: LVMH ($LVMUY), the world’s largest luxury conglomerate, has seen their shares drop 29% in a year. LVMH has a heavy reliance on the Asian market, and Chinese consumer demand has weakened both domestically and abroad. In the December quarter, the firm reported double-digit declines in net income and profit margins.
Then there’s Balenciaga’s parent company, Kering, proving it's capable of a trend slightly worse than the US$925 towel skirt. Kering shares are down 40% in the last year, also impacted by sluggish demand from China.
On top of demand woes, European fashion houses are significantly impacted by tariffs – so a lot is riding on negotiations with the U.S. It’s a very different picture for American luxury brands.
Tapestry ($TPR), which owns labels Coach and Kate Spade, is up 95% in the last year. Its last reported EPS of US$1.03 was 17% higher than estimates. The company’s US$1.58b Q1 revenue and polished bottom line shows they still have willing customers, despite tightened consumer spending.
Ralph Lauren ($RL) is having the same kind of year. Shares are up 61% YoY and its last quarterly revenue figure was up 10.83% to US$2.14b. With a sharp-looking balance sheet, the firm comfortably returned US$500m to shareholders through dividends and buybacks.
But European luxury can still turn heads. Hermès ($HESAY) shares are up 22% YoY and net income last quarter was a sizable US$1.12b. Their Birkin bags may seem like they’re everywhere, but in fact scarcity is a core part of the brand’s strategy. Deliberately limiting supply helps Hermes offset their exposure to China and market downturns.
The mixed performance across the sector is a sure sign that, when it comes to dressing a luxury portfolio, one size really doesn't fit all. A more tailored approach to stock picking may suit better. In investing or fashion, being caught naked is rarely a good look.
