Naked

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.