Not so comfortable in luxury

Not so comfortable in luxury

It seems curious to me that one of the sectors of the global market that was hit after the pandemic lockdowns were lifted, but has generally not recovered, 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 malls and shopping centers that they are more mass market than exclusive, more masstige than prestige. It makes you wonder how much longer they can keep up their high margins if consumers are no longer willing to pay higher and higher prices for items that can be purchased virtually anywhere.

That could explain the share price declines. Hermes is down 28 percent from its peak a year ago; LVMH (French luxury goods conglomerate that includes brands like Louis Vuitton, Dior, Tiffany & Co etc.) is down 40 percent from its 2023 high; and Ferrari (whose problems may be related to its new design language, fear of electric vehicles and associated high research and development costs) is down 41 percent from its all-time high a year ago, despite a return on equity of 40 percent. I have added a separate attachment about Ferrari below. Meanwhile, Cucinelli is down 38 percent, luxury watch house Richemont is down 16 percent and Kering (owner of Gucci, Balenciaga, Alexander McQueen, Bottega Veneta and YSL) is 67 percent below 2021 highs.

Only Ralph Lauren is bucking the trend, with shares just four percent away from their all-time high in December. In fact, Ralph Lauren has seen a surge in its stock price – up more than 50 percent in the past year – due to a combination of disciplined “brand lift” (the shift from a competitively priced model dependent on department stores to a premium, brand-focused strategy), strong recent results (second quarter revenue rose 17 percent year-over-year (to $2.01 billion) and second quarter earnings per share (EPS) rose 49 percent) and successful expansion in the international market. markets, especially Asia. The company successfully transformed its image from a heavily promoted retailer to a higher-end lifestyle brand, allowing it to raise its prices while expanding its direct-to-consumer (DTC) channels.

Overall, despite recent problems, many luxury brands are enjoying attractive returns on equity with capital-light models. So I decided to run a valuation exercise on them to see if they 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 profits were paid out as dividends rather than retained and compounded – admittedly a conservative attitude.

Table 1. Approximate valuation comparison (prices as of February 2, 2026)*

*Valuation estimates exclude any effect of compounded retained earnings.

With the exception of Ralph Lauren and LVMH, the large luxury houses remain too expensive according to the valuation methodology used. The much smaller B.Cuinelli may be showing some value after falling 38 percent from its all-time high this time last year.

And depending on your view on continued demand for Ferrari, and whether the (slower) shift to electric will be detrimental to maintaining the premium prices of the V12 and V8 models of the past, you might conclude that the market reactions are a demonstration of investors overestimating the short term and underestimating the long term.

Of course, time will tell.

Appendix: Ferrari notes.

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

Growth realignment: At the end of 2025, Ferrari was targeting revenue growth of around 5-6 percent through 2030. For a company with a then high-flying technology operating price/earnings (P/E) of 40-50 times, the market reacted expectedly; investors revalued 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 (launched 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 percent earnings before interest, taxes, depreciation and amortization (EBITDA) profit margins.

Chinese softness: The latest quarterly data shows a ~12 percent decline in shipments to China. While Ferrari is limiting supply to maintain exclusivity, any hint of declining demand in a key luxury market is scaring away investors.

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Roger Montgomery is the founder and chairman of Montgomery Investment Management. Roger has more than three decades of experience in fund management and related activities, including equity analysis, equity and derivatives strategy, trading and securities brokerage. Before founding Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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

Roger regularly appears 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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