No significant improvement in upstream activity in 2H26; luxury retail recovery may be delayed until 1H27

Overview

This report is the third in Bernstein's upstream activity monitoring series. Conducted in July in Milan in partnership with Confindustria Moda and OC&C Strategy Consultants, the survey tracks textile and apparel production orders to identify turning points in organic growth in the luxury and fashion industries ahead of time. The report concludes that no significant improvement is visible in 2H26E; supply-chain operating conditions are stabilizing but remain depressed, and a recovery reaching brand retail revenue may not occur until 1H27E.

Core views

The report finds that 1H26 performance was highly divergent relative to expectations: overall revenue was slightly better than expected, but production was weaker, while the proportions of companies at both the positive and negative ends of the growth distribution were higher than expected. Expectations for 2H26E are more concentrated, with fewer extreme positive and negative outcomes, but industry growth remains weak. The positive signal comes from improving order books. If supply-chain lead times transmit according to historical patterns, the current improvement in the second derivative of order trends may begin to be reflected in brand retail in 1H27E. From an investment perspective, against industry valuations approximately 20% below the 10-year average, the report recommends prioritizing high-quality companies and those with clear self-help pathways.

Analysis framework

The analysis is based on a July survey of Italian upstream activity. It compares actual 1H26 revenue and production with prior expectations by producer type and category, while tracking the distribution of 2H26E revenue, production, and order-book expectations. It also incorporates 2Q26 luxury-company earnings-season performance, management commentary, the industry's valuation discount, and company-specific quality and self-help signals to derive investment implications.

Methodology notes

• Leading-Indicator TrackingItalian Upstream Activity Survey

  Use textile and apparel production orders to identify turning points in luxury demand

  Upstream orders typically lead brand retail revenue. The report assesses the direction of industry conditions through changes in producer revenue, production, order books, and respondent distribution.

• Supply-Chain TransmissionOrder-Book and Lead-Time Analysis

  Improving orders transmit to retail revenue with a time lag

  The report assumes lead times of approximately 5–6 months for fabric producers and 2–3 months for apparel manufacturers; therefore, the current improvement in order books may affect brand retail revenue as early as 1H27E.

• Stock-Selection FrameworkQuality and Self-Help Framework

  Prioritize companies with high quality and greater certainty of improvement when an industry recovery remains unclear

  The report identifies Richemont, Brunello Cucinelli, and Hermès as high-quality names, while viewing LVMH, Burberry, and Ferragamo as companies with varying degrees of self-help or transformation opportunities.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global luxury-goods equities sector

  Subject of industry research

  Strengths

  The 2Q26 earnings season showed improving stability, with earnings generally better than expected, while industry valuations were approximately 20% below the 10-year average.

  Weaknesses

  2H26E revenue and production expectations remain weak, management commentary is cautious, and a broad recovery has yet to emerge.

  Comparison

  As the technology-sector rally matures, luxury goods may regain investor attention as an alternative allocation.

  Risks

  If the improvement in order books cannot be sustained or consumer demand remains divergent, valuation recovery may be delayed.

• Cie Financiere Richemont SA

  Preferred high-quality name; identified by the report as a top pick

  Strengths

  Strong jewelry momentum, with governance improvements and structural advantages in a polarized consumer environment potentially still undervalued.

  Weaknesses

  Still constrained in the short term by broad industry weakness.

  Comparison

  Relatively more favored by the report within the high-quality luxury group.

  Risks

  If jewelry demand slows or governance improvements are not recognized by the market, re-rating potential may be limited.

• Brunello Cucinelli

  Preferred high-quality name

  Strengths

  Offers quality characteristics and mean-reversion potential.

  Weaknesses

  Its quality premium may limit short-term upside elasticity.

  Comparison

  Aligned with Richemont in a quality-first allocation strategy.

  Risks

  If industry weakness persists, valuation and earnings recovery may be slower than expected.

• Hermès International

  High-quality name under consideration

  Strengths

  High brand quality; if growth recovers to the high-single-digit range, the market may tolerate one or two weak quarters.

  Weaknesses

  The report considers it more difficult to turn positive in the short term.

  Comparison

  Strong quality characteristics, but less attractive in the short term than Richemont.

  Risks

  If growth does not return to the high-single-digit range, valuation support may be challenged.

• LVMH Moet Hennessy Louis Vuitton SE

  Between high quality and self-help improvement

  Strengths

  Support comes from Dior's revival, improved cost efficiency, and its longstanding role as a core holding in luxury portfolios.

  Weaknesses

  The transformation of the wines and spirits business and the Arnault family's succession process remain concerns.

  Comparison

  Combines quality attributes with improvement catalysts, but the thesis is less clear than for pure high-quality names.

  Risks

  Business transformation or succession-related uncertainty could weigh on valuation.

• Burberry Group PLC

  Self-help improvement name

  Strengths

  Following the first anniversary of the Burberry Forward strategy, brand momentum and full-price sales have improved, indicating good progress in the transformation.

  Weaknesses

  The next phase requires improving store productivity and extending the momentum in core outerwear and scarves to other categories.

  Comparison

  Progress is clearer than for other names in the self-help improvement group.

  Risks

  If store-efficiency improvements fall short of expectations, the second phase of the transformation may slow.

• Salvatore Ferragamo SpA

  Early-stage self-help improvement name

  Strengths

  The share price is at the low end of its trading range, while management communications indicate that issues involving the brand, product mix, and store network may be being addressed.

  Weaknesses

  The improvement remains at an early stage, with lower certainty.

  Comparison

  Compared with Burberry, Ferragamo's transformation is at an earlier stage and carries higher risk.

  Risks

  If the brand repositioning and retail-network adjustments are poorly executed, the recovery may be delayed.

Key data

• 1H26 revenue growth+0.6% YoYAbove the prior expectation of -0.2%, but with significant dispersion internally.
• 1H26 production growth-0.9% YoYWeaker than the prior expectation of -0.4%.
• 2H26E revenue growth expectation-1.4% YoYWeaker than 1H26's +0.6%.
• 2H26E production growth expectation-2.7% YoYFurther weakened from 1H26's -0.9%.
• Order-book growth+2.0% YoYImproved significantly from -2.9% in 1H26 and turned positive.
• Share of respondents reporting order-book growth47%More than doubled from 22% in 1H26.
• Change in share of the 2H26E stable rangeApproximately +30 percentage pointsThe share of respondents expecting revenue between flat and +10% increased, while both positive and negative tails contracted.
• Industry valuationApproximately 20% below the 10-year averageThe report believes that if the technology-stock rally matures, investors may return to the luxury-goods sector.

Impact & implications

For investors, the improvement in order books should not be directly interpreted as a retail recovery in 2H26, as revenue and production expectations remain weak; however, the return to positive order-book growth increases the visibility of a recovery in 1H27E. In terms of positioning, the report favors buying high-quality leaders and companies with clear self-help prospects first, rather than betting on a broad industry rebound.

Risks

• 2H26E revenue and production expectations could continue to weaken, and the industry recovery may occur later than the market expects.
• Highly divergent consumer demand and widening performance gaps between leaders and laggards may mask structural pressure in the aggregate data.
• The improvement in order books must transmit through supply-chain lead times, creating lags and uncertainty before confirmation at the retail level.
• Management commentary remains cautious, and a broad industry rebound has yet to emerge.
• Self-help improvement names face execution risks in their transformations, particularly regarding store efficiency, brand repositioning, and product-mix adjustments.

What to watch

• Whether brand retail revenue in 1H27E reflects the current improvement in order books.
• Whether 2H26E revenue and production continue to come in below expectations.
• Whether the share of respondents reporting order-book growth can remain high or improve further.
• Whether divergence among womenswear, jewelry, apparel manufacturers, and fabric producers converges.
• Whether the valuation discount of the luxury-goods sector narrows as capital rotates from technology stocks.