Big Is Beautiful in Luxury Fashion and Leather, but the Big Players' Valuations Remain Unattractive

Following a deep dive into recent and historic performance drivers of the main fashion and leather groups’ top brands, we are lifting our fair value estimates for these names: wide-moat LVMH to EUR 510 per share from EUR 394, wide-moat Hermes to EUR 620 per share from EUR 540 per share, and narrow-moat Kering to EUR 590 per share from EUR 455. Fair value increases largely stem from our more optimistic forecasts for the groups’ top brands (Kering’s Gucci, LVMH’s Louis Vuitton, and Hermes) which we expect to grow at 7%, 8%-9% and 8.3% respectively, over the next decade, versus 5.5% expected luxury industry growth. We think the big brands are well positioned to outperform in the longer term as they can afford superior marketing budgets and differentiated real estate, their brand recognition is backed by secondary market success, and they retain control over distribution channels offline and online. Risks to this performance include success-induced complacency, consumer preference shifts, normalization of luxury demand in the United States that was buoyed by a few nonrecurring tailwinds, and China's "common prosperity" push. LVMH and Hermes shares still look expensive, while Kering’s shares are trading in line with our fair value estimate.