By Sabrina Escobar

Luxury stocks have been caught up in the post-tariff market rout, as investors worry that the new trade order and resultant stock market selloff will dampen demand for premium goods. But the industry's reliance on wealthy consumers, and its pricing power, may help it weather the tariff storm better than other retail businesses. That could make some luxury stocks havens.

President Donald Trump unveiled a sweeping list of new tariffs last week that would affect imports coming from dozens of countries. European countries -- where most luxury brands are based -- got slapped with a 20% levy. Goods imported from the U.K. and Switzerland, other big producers of luxury products, will be tariffed at 10% and 31%, respectively.

The announcement dragged luxury shares lower in tandem with the broader market. The Tema Luxury ETF was down 2.6% Monday, and has shed 14% this year. The benchmark S&P 500 index is off 14% year to date, and the SPDR S&P Retail ETF is down about 19%.

While tariffs will make it more expensive to import premium products into the U.S., the biggest risk to luxury-goods companies is that the new levies could "precipitate a sharp global recession and stock-market correction," Bernstein analyst Luca Solca wrote in a research note last week. High-income consumers are more insulated than others from economic downturns, but are sensitive to ongoing losses in their investment portfolios, and likely will pull back on spending if stocks continue to fall.

Analysts are also closely monitoring how the tariffs will affect China's economy. Trump has threatened to tack on a 50% tariff on imports from China, atop the 34% tariffs slated to go into effect on Wednesday. Chinese consumers historically have been an important growth driver for luxury brands, but demand has cooled in recent years as China's economy has slowed.

Chinese luxury-goods sales fell around 20% in 2024, according to a Bain report. They could fall further if tariffs curb the country's growth.

In a separate note Monday, Solca cut his yearly growth forecast for the luxury-goods sector. He now sees growth contracting by 2% year over year, compared with a previous projection for 5% growth. Profit will also come under pressure. Solca expects the sector's average earnings before interest and taxes to fall between 4% and 6% from 2024 levels.

Softening the Blow

That said, premium brands may have more levers to pull than mass-market brands to offset the negative impact of global tariffs.

For one, most luxury companies produce their goods in Europe rather than Asia. While Europe's 20% reciprocal tariff rate isn't low, it isn't a death blow to European exporters. As Solca notes, luxury players have paid tariffs to export goods to the U.S. for decades, sometimes paying levies of more than 15%. If the new tariffs factor in the existing ones, then the cost increase won't be significant.

Even if the reciprocal tariffs are added to existing levies, the impact could be "negligible," he says, because tariffs are applied to the wholesale price, which is often 20% or less than the retail price. He estimates that most companies could absorb the tariff increases by raising prices by 4% or less. That's less than the typical annual price hikes of between 5% to 7% that luxury brands have implemented in recent years, Solca said.

"The tariffs' impact to sector EPS [earnings per share] might be overdone considering luxury companies' intrinsic pricing power and relatively low price elasticity of demand," Thomas Chauvet, an analyst at Citi, wrote.

Chauvet expects all luxury brands to hike prices by single-digit percentage points in the U.S. in the coming weeks.

The increases likely will vary by brand. Swiss watch manufacturers, for instance, might have to increase prices more aggressively given that Switzerland has been hit with a higher tariff rate. U.S. luxury brands, such as Ralph Lauren, Capri Holdings, and Tapestry, may also have a different pricing equation because they produce more of their products in Asia. Many Asian countries have seen tariff rates of almost 50%.

Luxury conglomerate LVMH Moët Hennessy Louis Vuitton may be going a step further to temper the tariff impact by increasing U.S. production. The company, whose shares are down 20% year to date, currently operates a handful of workshops in the U.S. But after attending Trump's inauguration in January, CEO Bernard Arnault hinted there could be more

"It looks like in the U.S., people are welcoming you in open arms," Arnault said on a call with investors in January. "Taxes are going to go down to 15%. The workshops that we can build in the U.S. are subsidized in quite a few states, and the American president encourages this practice."

It is unclear whether LVMH's competitors would follow suit.

"Most of our brands, we are producing in Italy and in France, and this is part of the promise that we bring through our product, through our heritage to the consumer," Kering Deputy CEO Jean-Marc Duplaix said on an earnings call in February. "We are selling part of our culture, being an Italian culture or a French culture. So, we have no plan of producing to counter the tariff. It makes no sense."

Where to Shop

So, should investors contemplate buying luxury-goods stocks? Analysts say yes -- but be choosy.

"The luxury sector could remain relatively resilient given exposure to a higher-income consumer and global footprint," writes Oliver Chen, an analyst at TD Cowen.

Chen's top stock in the luxury sector is Swiss conglomerate Compagnie Financière Richemont, which owns Cartier, Van Cleef & Arpels, and Montblanc. Jewelry could be a more resilient category in the near-term, Chen writes, and brands Cartier and Van Cleef haven't raised prices as much as other luxury brands in the past two years, maintaining a "strong price to value proposition." That could leave room for higher prices in the future.

Shares of Richemont, which are listed on the Swiss stock exchange, are down 6.5% this year, and have shed 16% since last Wednesday's tariff announcement.

Citi's Chauvet also favors Richemont and says the company's pure-play focus on luxury should help it maintain strong prices. He recommends Hermès stock for similar reasons, noting that Hermès benefits by having a relatively lower exposure to U.S. sales than other luxury merchants. The stock is still pricey, however, and trades for 46.7 times next 12 months' expected earnings. Richemont has a price/earnings ratio of 20.4. Both stocks sport multiples below their five-year average of 50 and 23.8, respectively, however.

For investors who want to "buy American," Tapestry trades for 11.9 times next year's earnings. While the company caters to younger, more aspirational consumers with less purchasing power than the ultrarich, Barclays analyst Adrienne Yih notes that customers are still happy to pay full price for Coach and Kate Spade products, giving Tapestry pricing power. Plus, Tapestry could benefit as consumers trade down from higher-priced handbags to more affordable goods.

Hermès stock is off 1.5% this year, while Tapestry has shed 3.6%.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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April 08, 2025 03:30 ET (07:30 GMT)

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