"LVMH's subsidiary was put under external management. Is it worth buying its shares?

An Italian court has temporarily placed luxury cashmere clothing manufacturer Loro Piana, which together with Louis Vuitton, Dior and other brands is part of the LVMH holding, under external administration due to labor rights violations in the supply chain. Shares in LVMH, which lost its status as Europe's most expensive company this year, fell more than 2%. The luxury goods sector is still reeling from the effects of the pandemic. Should investors wait for a thaw in this sector?

An Italian court has placed Loro Piana under external administration for one year over alleged labor rights violations in the supply chain, Reuters reports. The court found that Loro Piana transferred orders for sewing clothes through fictitious companies to Chinese workshops in Italy, where they exploited workers: did not pay wages on time, forced to work up to 90 hours a week and live directly in the factories. The ruling notes that the company deliberately failed to control its contractors in order to increase profits. An external administrator has been appointed to oversee the situation. If the company eliminates the violations and establishes control over the supply chain, the external administration may be lifted early, Reuters notes.

Representatives for Loro Piana and LVMH declined to comment to Reuters.

This is not the first scandal to hit the reputation of Italian luxury brands, Reuters emphasizes. Loro Piana became the fifth fashion company to be placed under external management since 2023 due to similar violations. Earlier such measures were applied to Valentino, Dior (also owned by LVMH), Armani and handbag manufacturer Alviero Martini. According to the prosecutor's office, such schemes in the fashion industry in Italy are not isolated cases, but an established practice. Italy is home to many small manufacturers, which account for up to 55% of the global output of luxury goods, Reuters adds, citing data from consulting firm Bain.

In trading on July 14 in Paris, LVMH shares were down more than 2%. They have fallen in price by more than a third over the past year, and in April the company lost its status as the most expensive in Europe.

The luxury goods sector has yet to recover from the post-pandemic downturn, with fewer buyers, especially in China, and attempts to maintain exclusivity by raising prices have failed, notes Barron's. Now the situation is complicated by duties, the publication adds;

At the same time, analysts urge investors not to despair. Bank UBS notes that valuations of luxury companies in comparison with the rest of the market have fallen to the minimum values for the last 15 years, reports Barron's. Such situations are rare, but historically in 76% of cases luxury stocks have shown growth above the market within 1-3 months after such failures and in 100% of cases - within six months, UBS adds. The luxury sector could be supported by Donald Trump's "big and beautiful" tax law, as it effectively provides a tax break for the wealthy of about 2.3%, Barron's writes.

"It's time to become less pessimistic [about luxury brands]," said UBS strategist Andrew Garthwaite.

"Luxury isn't dead, it's just that the buyer who has supported the market since 2020 can't afford it now," added Gabriella Santaniello, CEO of consultancy A Line Partners. - But the true luxury customer who knows and loves to buy these things continues to do so."

In early July, Goldman Sachs added LVMH to its European Conviction Buy list, reports Investing.com. The investment bank noted the attractive risk/reward potential of the company's stock, adding that it is "strongly positioned to outperform the market in the new luxury sector growth cycle." LVMH's weak second-quarter results are already priced into its share price, and there is a chance of a recovery in luxury demand in China and the US in 2026, said Goldman Sachs analyst Louise Singlehurst. "We are confident in the next growth cycle for the luxury segment and that LVMH will once again lead it, as it has done before due to the scale of the business," Goldman said in a review.

Among the 25 analysts who have assigned ratings to LVMH shares, only one advises investors to get rid of them (Sell). Another 13 recommend buying (Buy and Outperform ratings), while the remaining 11 recommend holding (Hold). The analysts' consensus target price suggests the potential for the company's quotes to rise by another 17% from the July 11 close.

This article was AI-translated and verified by a human editor