- Luxury has been the worst-performing sector YtD, driven by overblown China fears.
- Industry data points to a strong improvement in leather handbag imports to China.
- Stock is reclaiming range lows, providing a more favourable entry point for earnings
Despite one of the worst weekly selloffs for the luxury sector, underlying demand trends are quietly improving, positioning LVMH for a potential positive earnings surprise at its 4Q results on 27 January as early results from peers signal a sector inflection. Early results from Richemont and Brunello have shown 10%+ growth in sales for the final quarter of 2025. Albeit from a low base, industry data point to an improvement in the Chinese luxury market (Asia accounted for 27% of LVMH’s FY24 Revenue), with the strength in local equities providing a supportive wealth effect for higher income consumers in the region. December leather handbag imports have increased 10%+, further indicating an underlying improvement. Consensus also likely underestimates lagged US wealth effects, which should drive strong H1 26 local spending on easy comps. We expect management will likely be upbeat given the 2025 exit rate in China and point to a continuation of the improvement in quarterly growth across all its divisions.
The recent weakness in the sector has provided an attractive entry point to play another earnings surprise by LVMH, with the price rebounding off range lows. Furthermore, the latest signs of hedge fund buying in the sector will likely accelerate should earnings surprise positively and broader market uncertainty over the fresh tariff headlines abate. We propose Long Mar26 680 calls costing 0.9% of underlying (Spot ref: 591.8).