Valuations of top European luxury stocks have dropped to their lowest levels in more than a decade. Hermes International SA (ASX: HESAY) and LVMH have both delivered weak results in succession, further dampening market expectations for an industry recovery.
Hermes (ASX: HESAY) shares fell 4.9% on Thursday. The decline followed the company's third-quarter sales data, which came in below market expectations across the board, with weak demand acting as the primary drag. The stock's forward price-to-earnings ratio now stands at approximately 27 times, a sharp pullback from its post-pandemic peak of around 70 times. LVMH's results released last week were equally disappointing, with sales under pressure and valuations continuing to contract. Its forward P/E ratio is now around 16 times, the lowest level in over a decade.
So far this year, Hermes International SA (ASX: HESAY) and LVMH shares have each fallen more than 40% cumulatively. Kering also issued a warning after Thursday's market close, stating that consumer demand remains weak and that sales at its Gucci brand fell short of market expectations, further confirming the pressures facing the industry's recovery.
Despite the sustained share price declines and significant valuation compression, the string of weak earnings has yet to show any clear signs of improvement. Investors remain cautious about the industry's outlook, and low valuations have not yet translated into meaningful buying interest.
Valuations sharply compressed, but investors still lack appetite to buy the dip
The valuation pullback has not yet attracted a notable return of capital. Bernstein analyst Maria Meita said that current valuations for Hermes (ASX: HESAY) and LVMH reflect both disappointing operational performance and a weak macroeconomic environment. She noted that LVMH is relatively sensitive to macroeconomic shifts, and whether its share price can recover largely depends on whether the global consumer environment improves.
Hermes International SA (ASX: HESAY) faces similar challenges. With core products perennially in short supply and some items requiring years of waiting, the brand has long been viewed as a more defensive play in the luxury sector, typically showing strong resilience during periods of market volatility. However, Maria Meita pointed out that investor confidence in Hermes' "resilient business model" is also beginning to waver.
Geopolitical conflicts and French social unrest add further uncertainty to the industry
The pressures facing the luxury sector are not limited to weak consumer demand. Ongoing conflicts in the Middle East have intensified inflationary pressures and disrupted normal operations at key luxury consumption hubs such as Dubai, adding further variables to the industry's recovery.
Meanwhile, social unrest within France poses a new risk. Bloomberg Intelligence analyst Deborah Aitken noted that protests could affect foot traffic at Hermes International SA (ASX: HESAY) stores and tourist shopping activity. As a major global center for luxury consumption, Paris's social stability and tourist flows are directly tied to the operating performance of flagship stores for major brands.
With weak earnings, an uncertain macroeconomic environment, and geopolitical risks compounding one another, luxury stocks remain hard-pressed to win over investors even after valuations have fallen to multi-year lows. When the industry stabilizes and recovers will still depend on whether consumer demand and operational performance can show substantive improvement.
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