Is it time to re-invest in luxury brands?

They say the luxury market has passed its peak, entering a stage of decline after its meteoric post-pandemic rise. The luxury market has stagnated with a fall of 1% in 2024 and a projected fall of 2-5% in 2025. Its biggest market, China, has been experiencing its sixth consecutive quarter of negative growth, leading to a pessimistic outlook for this industry.

However, luxury is not dead. Europe has been experiencing growth in luxury buying despite weaker tourism, where domestic consumers are increasing their palette for luxury goods. Japanese domestic consumers continue to spend, and there are a number of brands growing rapidly and taking market share.

LVMH has notably grown over four decades into the largest luxury group through acquisitions of high-quality brands such as the fashion, hospitality and jewellery industries. Its long-term success is seen in its 25-year CAGR for each business group with 13.4% for Fashion and Leather Goods, 26.4% for Watches and Jewellery and 7.4% for Wines and Spirits. 

LVMH has conducted opportunistic acquisitions, targeting brands during economic downturns where the group benefited from lower valuations and reduced risk. The group’s chairman and CEO, Arnault, constructed this luxury empire with immense success, repeatedly attaining the title of the world’s richest man in recent years. 

We recently invested in the Prada Group and Birkenstock, with the belief that these companies’ strong management teams will drive the companies’ success in the cooling luxury market and their huge potential for new product ranges. We believe that their current valuations are at an attractive discount.

  

Everyone has heard of the Prada brand, but few would realise that it is still majority owned and run by the Prada family. The first Prada store was opened by Mario Prada in 1913 and his granddaughter, Miuccia Prada alongside her husband and son still own 80% of the company. 

The family has done a tremendous job building out the Prada brand as well as founding and expanding the Miu Miu brand (which was named after Miuccia). Miuccia is the head designer of both brands, with her son, Lorenzo Bertelli, being the head of marketing. Since the 1970s, Miuccia has been running the company with her husband Patrizio Bertelli.

While luxury brands have been impacted by fewer American and Chinese tourists visiting Europe and Japan this year, the Prada brand has been gaining share. But what has driven our investment in the company is the astounding success of the Miu Miu brand, which grew revenue by 49% in 1H25, following a doubling of sales the previous year. 

Despite this astounding growth in the Miu Miu brand, Prada Group shares are flat since 2020, de-rating from a PE of 50x to only 14x next year’s earnings. While the market is concerned about Miu Miu’s growth slowing after a successful read-to-wear collection over the past year, we think the brand still has a lot of market potential in the leather category (mainly handbags) and bringing a new product line for the male audience (currently Miu Miu’s products are only for women).

Miu Miu only has 150 stores and is opening 10-15 stores per year. The other growth engine in the group is their recent acquisition of the Versace brand. While Capri failed to revive Versace after acquiring it from the Versace family, we think the Prada family will have more success in returning this brand to its original profitability and growth.

Another luxury brand we just invested in is Birkenstock. We recently attended Birkenstock’s investor day in Munich during September. Since LVMH’s Private Equity firm, L Catterton, acquired Birkenstock, the LVMH group has transformed the management team and positioned Birkenstock’s shoes as high-priced luxury items that are stylish and suitable for all markets. 

The shoe brand’s podiatric footbed design is created to fit the foot’s natural curves by offering comfort and support. The design is created under an archive of 1000 silhouettes, with 70% of the shoes being unisex. 

Birkenstock participated in numerous partnerships (such as Dior, Valentino, Rick Owens) and the Birkenstock shoes are heavily popularised with celebrities wearing them with their daily outfit. Closed-toe shoes account for a high 30% share of their sales, contributing to the rising popularity of more formal wear.

Birkenstock fits all the required elements for a traditional luxury brand: a long history (Birkenstock was founded in 1774 under Johannes Birkenstock), handcrafted production (50-60% manually handmade) and all-European manufacturing (current factories are in Germany, the Czech Republic, Portugal and Poland). Their products have always been sold out, using a “luxury scarcity model” for distribution.

The company’s revenue CAGR has been at 20% since FY14. For Q3 FY25, Birkenstock generated revenue of €635 million, achieving 17.5% revenue growth and a 60% for gross profit margin. In China, Birkenstock achieved a 36% revenue growth, retaining the top 6 in the Chinese shoes market. Despite this strong performance, the stock has been swept up in the sell-off of luxury brands, trading at all time low valuation multiples.

We believe that these companies will continue their growth despite the waning Chinese market due to the following reasons:

1. There is a rise in domestic luxury consumption
2. These brands are winning market share in a luxury market that is seeing signs of a bottom.
3. The companies have a strong management team
4. Strong potential in gaining success with new customer segments. 

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