The luxury sector is becoming more attractive, with high-quality stocks trading below fair value. Profit margins in 2024 were under pressure and could continue to decline this year due to weak demand. Inventory management is crucial to avoid excessive discounting and strengthen balance sheets.

Luxury stock valuations have fluctuated in recent years, impacted by inflation, lockdowns, and demand trends in China and the West. The sector is now showing signs of attractiveness again, with some overvalued and undervalued pockets. 2025 is expected to see subdued demand in the luxury market.

High fixed costs and the need for increased marketing have led to margin pressures in the luxury industry in 2024. Margins may continue to be strained this year due to weak demand and pricing challenges. Long-term, a rebound in margins is expected for competitive luxury players.

Inventory management is crucial for luxury brands to avoid excessive discounting and maintain brand integrity. Slow sales in 2024 led to slower inventory turnover, particularly affecting leather goods and apparel. Companies with strong distribution control and healthy balance sheets are better positioned to manage inventory challenges.

LVMH Moet Hennessy Louis Vuitton is the top luxury group globally, benefiting from long-term pricing power and high margins. Kering, the second-largest luxury group, has significant upside potential despite slowing momentum at Gucci. Burberry Group is working on improving performance through pricing strategies and product focus. Swatch Group offers appealing valuations and growth potential, particularly in the Chinese market.

Read more at Morningstar: Are European Luxury Stocks Finally Attractive Again?