Luxury on sale: opportunity or value trap?

The luxury sector’s sharp sell-off is largely cyclical and creates an opportunity in the largest, highest-quality houses rather than evidence of a permanent structural decline.

• Between May and August, Gucci cut prices on some core handbags in France by 20% to 30%, while LVMH, Hermès and Kering shares fell 41%, 40% and 32% year to date, respectively.
• Post-pandemic price increases, inflation and higher interest rates have priced out aspirational buyers; revenue from clients spending less than €20,000 annually on luxury has declined since 2022.
• China has become a more mature market: mainland China’s share of global luxury sales rose from 6% in 2010 to 21% in 2021, while property weakness, tighter taxation, lower confidence and a shrinking 25-to-39 age cohort limit the prospect of a return to double-digit growth.
• Management can still improve performance through pricing, innovation and creative renewal: more than a dozen brands changed creative directors over the past year, Chanel responded positively to Matthieu Blazy, and LVMH said Dior returned to growth in the second quarter after Jonathan Anderson’s first year.
• Luxury’s economics remain strong, with high gross margins, high returns on invested capital and robust free cash flow; scale supports greater spending on marketing, flagship stores, VIP events and experiences such as the Dior Spa and Louis Vuitton’s ship in Shanghai.

Takeaway: Magellan favours the largest houses because pricing power, scale, global reach and long-term demand drivers—including concentrated wealth, US consumer strength and intergenerational wealth transfer—should outweigh the risks of a prolonged Chinese downturn, weaker aspirational demand and failed creative resets.