US investors are refocusing on European brands, but there is still clear divergence over the luxury recovery

Overview

This report is a feedback note from Morgan Stanley's European brands team following investor meetings held in New York, covering European consumer discretionary equities across luxury goods, sporting goods, apparel retail, and eyewear. Investor discussions focused on themes such as the wealth effect, China demand, brand momentum, Chanel competition, the Middle East reopening, and World Cup marketing. The overall conclusion is that interest in non-tech sectors and high-quality consumer assets has increased, but there remains clear disagreement over the quality of the sector recovery, regional mix, and valuation upside.

Core views

In luxury, LVMH is viewed by many investors looking to add sector exposure as the default long among the four major luxury groups, due to the first upward revision to second-quarter F&LG expectations and the possibility that Dior may turn positive; bears argue that low-single-digit growth is not strong given the low base, and that the third-quarter base becomes more difficult. Hermes is seen by bulls as a high-quality buy-and-hold name, with valuation compression creating an entry point; bears worry about weakness in non-leather categories, Chanel taking share, and structural issues emerging in brand mechanisms related to quota bags. Bullish consensus on Richemont is relatively strong, supported by management improvement, Cartier and Van Cleef taking share in jewelry, South Korean demand, and a favorable nationality mix; the main concerns are valuation, room for earnings upgrades, and the sustainability of core lines such as Alhambra. For Kering, the focus is Gucci's US recovery and management changes, but weak China performance, lower-end demand drivers, and a 33x forward P/E keep bears cautious. In other consumer discretionary areas, Burberry is in the early stages of a turnaround, adidas is supported by World Cup marketing and US momentum, and Inditex is seen as a high-quality compounding asset; EssilorLuxottica, meanwhile, is weighed down by concerns over smart-glasses competition.

Analysis framework

The report uses a meeting-notes approach, summarizing bullish and bearish views, disputed issues, buy-side expectations, valuation discussions, and catalysts from investor meetings in New York. It is not a deep financial model on a single company, but rather uses investor feedback, shifts in consensus, channel checks, regional demand, brand momentum, and valuation frameworks to assess market sentiment and potential trading direction for the European brands sector.

Methodology notes

• Investor FeedbackBull-Bear View Synthesis

  Organize bullish arguments, bearish arguments, and marginal points of dispute by stock

  The report breaks discussions from the meetings into assets such as LVMH, Hermes, Richemont, Kering, Burberry, EssilorLuxottica, adidas, and Inditex, and records supporting factors, opposing views, catalysts, and risks for each.

• Valuation methodsDCF and P/E Multiples

  Explanation of valuation methods used for adidas and Inditex

  The adidas target price comes from a base-case DCF, assuming a WACC of 8.1% and a long-term growth rate of 1.5%; the Inditex target price is based on the average of DCF and P/E multiples, with DCF assuming a WACC of 8.5%, a terminal growth rate of 1%, and using a 26x P/E.

• Sentiment and ExpectationsBuy-side Consensus and Catalyst Check

  Observe whether sales expectations, earnings revisions, and upcoming data releases can drive share prices

  The report focuses on events such as LVMH's second-quarter F&LG OSG, Richemont's July 15 sales release, Burberry's Q1 LFL, adidas' second-quarter constant-currency growth, and Inditex's second-half base effects to judge whether market expectations are too high or whether there is still room for upward revisions.

Asset mapping & comparison

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

• LVMH

  Luxury leader and default long candidate for the sector

  Strengths

  Second-quarter F&LG expectations have been revised upward, Dior may turn positive for the first time in three years, and excluding Middle East pressure could show a higher underlying growth rate.

  Weaknesses

  Growth expectations remain modest, Vuitton innovation and the strength of Dior's recovery are questioned, and non-F&LG businesses are unlikely to materially lift the earnings trajectory in the near term.

  Comparison

  Viewed as cheaper and less crowded than CFR, with fewer structural controversies than RMS, and lower turnaround risk than KER.

  Risks

  Weak China channel checks, a tougher third-quarter base, Chanel taking share, and growth off a low base being viewed by the market as insufficient.

• Hermes

  High-quality buy-and-hold luxury name, but divergence is increasing

  Strengths

  Forward P/E is meaningfully below its historical average, long-term brand quality is high, and expansion into non-leather categories helps widen TAM.

  Weaknesses

  Growth in non-leather categories is relatively weak, middle-class consumers are under pressure, and some investors believe the appeal of the quota-bag mechanism is declining.

  Comparison

  Historically often used as a valuation reference for high-quality brands such as Richemont, but its own derating has weakened its role as a relative valuation anchor.

  Risks

  Chanel taking share, a lower pre-spend ratio, a dilemma in handbag output growth strategy, and further derating if brand scarcity is impaired.

• Richemont

  Jewelry leader with strong US investor positioning and consensus

  Strengths

  Nicolas Bos becoming CEO and organizational adjustments have improved governance, Cartier and Van Cleef continue taking share in jewelry, and South Korean demand is strong while US exposure is high and China exposure is low.

  Weaknesses

  The stock has performed strongly over the past two years while consensus EPS has been cut; if 1Q27 sales do not drive upgrades, medium-term upside may be limited.

  Comparison

  The earnings quality of Cartier and Van Cleef is compared with Hermes, but after Hermes derated, the rerating power of that comparison has weakened.

  Risks

  Sustainability of high growth in jewelry, momentum in Cartier Watches, over-penetration of Van Cleef Alhambra, and the path of gold prices and gross margin.

• Kering

  Turnaround name driven by Gucci recovery and management changes

  Strengths

  The group owns brands with relatively strong fundamentals, management changes over the past 12 months are viewed positively, and Gucci's US recovery in the second quarter has been faster than expected.

  Weaknesses

  Marginal buying interest remains limited, and Gucci's recovery is mainly concentrated in the US, while Greater China performance remains only average.

  Comparison

  Relative to LVMH and Richemont, Kering looks more like a high-risk turnaround trade.

  Risks

  The US accounts for about 25% of Gucci sales and Greater China about 24%; if the regional recovery is uneven and driven by more cyclical entry-level consumers, the valuation multiple may remain constrained.

• Burberry

  Early-stage turnaround and margin recovery name

  Strengths

  The new management strategy is pragmatic, and off a low base the company may drive medium-term revenue and margin recovery through market share gains and cost control.

  Weaknesses

  Margin recovery increasingly depends on revenue growth and operating leverage rather than gross margin expansion.

  Comparison

  Compared with other luxury names, Burberry is more dependent on turnaround execution and store-efficiency improvements.

  Risks

  Sales momentum may prove unsustainable, Q1 LFL may lack sequential improvement, second-half comps become harder, and there is a lack of near-term catalysts and earnings upgrades.

• EssilorLuxottica

  Eyewear and optometry leader, pressured by the smart-glasses competition narrative

  Strengths

  Bulls believe the derating has gone too far, the core business is unchanged, and investments in surgery, diagnostics, and oculonomics can strengthen the full-patient optometry journey.

  Weaknesses

  Near-term catalysts are lacking, and market sentiment is pressured by competitive risk from tech players.

  Comparison

  Compared with traditional consumer brands, its controversy is more concentrated around technological disruption and competition in the smart-glasses ecosystem.

  Risks

  Smart glasses disrupting the core traditional business, a high base in Q4 2026, continued earnings downgrades, and negative news flow related to Delfin.

• adidas

  A sporting goods name on which Morgan Stanley is explicitly bullish

  Strengths

  World Cup marketing and product mix are driving US momentum, execution is strong in running, training, apparel, and Greater China, and industry fragmentation may actually help it gain share.

  Weaknesses

  The market worries that after the World Cup there will be insufficient revenue drivers in 2027, terrace momentum may fade, and apparel momentum is more fashion-driven and cyclical.

  Comparison

  Against a generally cautious backdrop in sporting goods, adidas is viewed as a winner with greater market-share gain potential.

  Risks

  The hurdle for second-quarter constant-currency growth expectations is too high, higher marketing expenses may limit EBIT conversion, China competitive pressure, and insufficient product innovation.

• Inditex

  High-quality compounding apparel retail asset

  Strengths

  Strong P&L visibility, scarce medium-term growth, and investors are willing to pay for consistency and resilience; it can serve as a high-quality consumer holding to reduce AI concentration.

  Weaknesses

  Current trading is supported by favorable calendar effects, and revenue growth and gross-margin strength may slow in the second half.

  Comparison

  Investors compare it to some high-quality US consumer leaders and expect continued rerating if it keeps proving consistency.

  Risks

  Macro and fashion tailwinds weakening, AI causing higher unemployment among middle-income groups, freight and input-cost pressure, and limited share-price upside without earnings upgrades.

Key data

• Number of meetings>20 meetingsInvestor meetings in New York covering European consumer discretionary equities.
• Investor mix40% long-only funds, 60% hedge fundsReflects participation from both allocation-driven investors and trading-oriented / long-short capital.
• Most discussed stocksLVMH, CFR, RMS, RACE, KER, ITX, ADSMainly concentrated in leading European luxury, retail, and sporting goods names.
• Main discussion topicsWealth effect, China, brand momentum and Chanel, Middle East, World CupThese themes determine sector sentiment and single-stock divergence.
• LVMH second-quarter F&LG expectationRevised up from about 0% OSG to about 2%, VA consensus about +1.5% OSGThe upward revision is symbolically important, but bears argue it is still not strong enough given the low base.
• Hermes valuationCurrently about 33.8x forward P/E vs. about 44.5x 10-year averageBulls believe valuation compression creates an entry point, while bears worry about structural brand issues.
• Richemont valuation comparisonAbout 27.8x 12-month forward P/E vs. Hermes at about 33.8xAfter Hermes derated, the relative valuation argument for continued Richemont rerating has weakened.
• adidas second-quarter constant-currency growth expectation+14%Morgan Stanley raised its estimate and believes upside risk remains, but investors worry the hurdle is too high and that marketing spending will weigh on EBIT conversion.
• Inditex growth algorithm6%-8%Bulls believe the company may continue to outperform its own medium-term revenue growth algorithm.

Impact & implications

For portfolios, the European brands sector could become a diversification direction after excessive concentration in tech positions, especially for assets with brand quality, regional mix advantages, and earnings visibility. But the report also warns that the luxury recovery is not linear: if China and middle-class consumption remain weak, or competitors such as Chanel continue taking share, the market may only be willing to grant limited valuation expansion. Near-term trading depends more on whether second-quarter sales, first-half margins, Q1/Q2 same-store growth, and management guidance can trigger earnings upgrades.

Risks

• China demand and channel checks continue to weaken, potentially undermining confidence in the luxury sector recovery.
• Pressure on middle-class consumers puts the quality of growth under scrutiny for categories such as Gucci, Hermes non-leather goods, adidas apparel, and Inditex.
• Chanel's strong growth may be coming from taking market share rather than expanding industry demand.
• Several stocks already carry high consensus positioning or valuations; if sales data do not lead to earnings upgrades, upside in share prices may be limited.
• The World Cup, favorable calendar effects, and short-term marketing activities may produce one-off growth that is hard to prove sustainable into 2027.
• Tech players entering smart glasses may weigh on the valuation of EssilorLuxottica's traditional business.

What to watch

• Whether LVMH 2Q26 F&LG OSG reaches +2% to +3%, and whether Dior truly turns positive.
• After Richemont's July 15 sales release, whether it can drive consensus upgrades.
• Whether Hermes' non-leather categories, pre-spend ratio, and handbag output policy continue to trigger structural concerns.
• Whether Gucci's US recovery can spread to other regions such as Greater China.
• Burberry's Q1 LFL growth and details of improvements in stores, CRM, and clienteling.
• adidas' second-quarter constant-currency growth, post-World Cup orders, and EBIT conversion.
• Inditex's second-half comparison base, gross margin, and whether it can still outperform its 6%-8% growth algorithm.
• The marginal impact of the Middle East reopening, South Korean luxury demand, and FX changes on European brand revenues.