Luxury Stocks Are Slumping: Should You Buy M&S or Next?

London Fashion Week arrives this weekend, bringing its familiar rush of runway sparkle, celebrity sightings and designer spectacle to the capital.

Yet beyond the polished smiles, front-row air kisses and glossy show invitations, a more anxious mood is hanging over both the catwalks and Bond Street’s luxury boutiques.

Investor enthusiasm for high-end fashion has cooled sharply, with shares in names such as British heritage label Burberry and luxury powerhouse LVMH sliding further in recent sessions.

The latest sell-off came after HSBC analyst Anne-Laure Bismuth issued a downbeat assessment of the outlook for the global luxury sector.

With sales momentum weakening and profits failing to impress at LVMH and other major luxury groups, the STOXX Europe Luxury index has dropped 20 per cent since the start of January.

LVMH, whose stable of brands includes Dior, Louis Vuitton, Tiffany and Sephora, has seen its share price fall 35 per cent this year to €414.

That leaves the stock close to levels last seen during the Covid-era shutdown of retail. It is a sharp reversal from the post-lockdown “revenge spending” boom, when LVMH shares surged as high as €841.

Even Hermes, long viewed as one of luxury’s most resilient names and famed for its Birkin handbag, has not escaped the pressure, with its shares down by a third to €1,409.

Burberry has fallen 17 per cent over the same stretch and is now 50 per cent lower than it was three years ago, despite recent signs of a revival built around a renewed focus on its British identity.

Companies seen as recovery stories have suffered the steepest blows, as investors appear to worry that their hoped-for turnarounds may lose momentum.

Meanwhile, the mood is far brighter on the high street, where fashion retailers including Marks & Spencer, Next and Zara owner Inditex are seeing their shares thrive.

Indeed, so successfully has M&S ‘dumped the frump’ that it will be staging its first-ever show at London Fashion Week, alongside Burberry, Erdem and other elite participants.

Next week, the focus moves to the shows in Milan and then Paris. But the questions British investors will be asking are: should I quit Bond Street for the High Street? Or is Bond Street now a bargain alley?

Why luxe lost its allure  

The factors behind the sector’s malaise include the impact of conflict in Iran on Middle East tourism, and the continuing consumer downturn in China, where the passion for baubles and handbags was previously voracious.

Americans may fast be becoming almost as keen, thanks to fortunes made from soaring artificial intelligence (AI) tech stocks. But apprehension over a bubble in these shares persists.

Bank of America analysts say that third-quarter data indicates a dip in demand in the US and other key markets, such as South Korea, where the AI boom has also enriched luxury goods fans.

Yet although an AI stock rout imperils the taste for luxury, the deft deployment of AI could reset luxury goods companies’ relationship with customers, reigniting their urge to spend. Or so argues Claudia D’Arpizio, of management consultancy Bain.

Meanwhile, as Bain also highlights, cost-of-living pressures have curtailed the spending of more than 60 million ‘aspirational’ shoppers worldwide who used to make up about 15 per cent of luxury companies’ clientele.

Some of this pain is self-inflicted. From 2019 onwards, LVMH and the rest raised the prices of bags and other items by 50 to 70 per cent.

Now, as Mamta Valecha, analyst at Quilter Cheviot, points out, LVMH is trying to win back these shoppers.

Initiatives include lipsticks that sell for £120, a more affordable proposition than a Louis Vuitton Neverfull bag, which costs around £1,400 (against £990 in 2020).

New Louis Vuitton stores are being designed as ‘immersive brand experiences’ in which a younger crowd can buy lipsticks and dream of one day acquiring a Neverfull.

But Valecha adds that change takes time in a conglomerate the size of LVMH, suggesting that the benefits may not be visible in results for a few quarters.

All this suggests that luxury would not suit risk-averse investors.

But if you want to inject an adventurous twist into your portfolio, it could be worth taking a bet on a bounceback. After all, these businesses have built their reputation on successive reinventions.

Note that Bain still expects growth in the sector of 3 per cent this year and 4 per cent in each of the next three years, while broker Bernstein forecasts 5 per cent.

The Bond Street options  

Broker analysts are taking a cautious view, rating the following as a ‘hold’: Burberry, Kering, the Gucci group and LVMH. But Berenberg, Bernstein, Deutsche and others are more optimistic about Hermes, considering it a ‘buy’ at its current level.

The view of Richemont is also more upbeat, because of this Swiss company’s concentration on jewellery through its Cartier and Van Cleef & Arpels divisions.

So expensive have handbags become that bracelets and necklaces seem, relatively, affordable, and also a way to hold gold at a nervous geopolitical time.

Rolexes and other timepieces also appear to be seen as a desirable asset – good news for Watches of Switzerland, a British company. Despite a recent retreat, its shares are 38 per cent up this year.

Investors seem to agree with the company’s chief executive David Hurley that ‘your iPhone is going to tell you the time more accurately, but a watch is a symbol of success.’

The high street choices

Shares in Next, the £17.4billion group regarded as the high street bellwether, have bounced by 9 per cent this year to 15,000p. Ahead of half-year results next Thursday, most analysts see the shares as a ‘hold’.

But, on the basis that Next almost always contrives to deliver a pleasant surprise, Citigroup and Deutsche view the shares as a ‘buy’ Citigroup has set a target of 18,400p.

M&S shares have advanced by 76 per cent over the past three years, and by 17 per cent this year to 386p.

But analysts hope for more, with the majority believing M&S to be a ‘buy’ with an average target price of 442p. 

The company will be ensuring that the creations that it sends down the runway at its fashion week show support this favourable assessment.

Inditex, the Spanish behemoth and the world’s largest fashion retailer, this week unveiled a 7.6 per cent increase in first-half sales to €19.8billion.

This may have been below forecast but the group has made a strong start in the third quarter, taking catwalk copy specialist Zara upmarket, while expanding its discount chain Lefties. The first store opened this month in Liverpool.

Analysts love Inditex’s strategy, it seems. The shares stand at €54 but are tipped as a ‘buy’ with an average price of €60.

I have stakes in both Bond Street through Burberry and LVMH, and in the high street through Next and M&S. Trends come and go. But diversification is seldom out of style.