Sorry Europe, American luxury brands are in

The best investment in the luxury goods industry over the past five years wasn’t one of the usual suspects such as Hermès. Instead, Coach-owner Tapestry is the surprise leader, with Ralph Lauren a runner-up. Shares in Ralph Lauren and Tapestry have gained 29% and 55%, respectively, this year, on top of total shareholder returns of more than 60% in 2024. Not bad for brands that are sometimes considered the poor cousins to pricier and more established European luxury names. As a multiple of forward earnings, Tapestry and Ralph Lauren’s shares no longer trade at steep discounts to the European luxury houses. The recent earnings season showed a widening gap between the performance of European and U.S. brands. Coach increased sales by 13% from a year earlier in the latest quarter. Ralph Lauren grew 11%. View Full Image (WSJ) Some European brands that cater to the superrich—Hermès and Brunello Cucinelli—are keeping up with the Americans. So is Prada-owned Miu Miu, which is a hit with young shoppers. But demand has slumped at luxury mainstays including Gucci and LVMH’s fashion and leather goods division. On average, sales for European luxury brands dipped 3% last quarter compared with a year earlier, according to Bank of America. Coach and Ralph Lauren are growing in a difficult market partly by targeting young consumers. Coach said it added 1 million new customers in North America last quarter, most of whom were Gen Z or millennial. European brands might have unwittingly helped their U.S. rivals by raising prices too quickly in recent years, leaving young and middle-class shoppers with few budget-friendly choices. Gucci’s U.S. website lists three handbags that cost less than $1,000, while Ralph Lauren’s offers more than 150. American consumers are spending the lowest share of discretionary income on luxury goods than at any time since 2019, Bank of America notes, so shoppers want value when they do splurge. Coach and Ralph Lauren have spent years investing in their brand image. Their ad budgets have swelled to about 10% and 7% of sales, respectively, up from around 4% historically. Coach made it on the top five of the Lyst Index of the hottest brands in the last two quarters alongside pricier labels including Miu Miu and Prada. The index tracks the behavior of around 160 million shoppers. Ralph Lauren started showing up in the top 20 last year and now ranks higher than Balenciaga and Gucci. American brands might be taking market share from the Europeans. “In the past, there was no way someone in the market for a Louis Vuitton would be caught dead with a Coach bag," said Aneesha Sherman, analyst at Bernstein. But now they are seen as more viable alternatives, she said. The Americans are also at an earlier stage in their expansion plans, so they have room to grow. China still represents a small share of their overall sales, but U.S. fashion houses are starting to attract price-sensitive Chinese consumers who are trading down to affordable luxury brands. Ralph Lauren and Coach reported sales growth of 30% and 22%, respectively, in China last quarter. Meanwhile, European brands have slowed. Tapestry and Ralph Lauren’s high exposure to their domestic market is also helpful for now, as U.S. consumers are still spending. But both brands are cautious about how shoppers will react to tariff-related price increases in the fall. The American labels have juiced their top lines by raising prices and selling fewer items on discount. Coach, for example, has raised pricing in 20 out of the last 22 quarters. But there is room to go higher: Traditional European luxury brands used to be double the price of Coach, but are now about 10 times as expensive, the brand’s Chief Executive Todd Kahn said in an earnings call earlier this year. Kahn said in an interview that there is more “white space" to raise pricing, but noted that the sweet spot for the brand is still in the $200 to $500 price range. “We like playing in price points that attract younger customers," he said. The labels need to avoid the mistakes of European brands that shrank their customer base after pushing prices too high. The next phase for the luxury industry could be a European brand revival. More than a dozen labels including Gucci, Bottega Veneta and Chanel have hired new creative designers, who will show their collections in September. It won’t be clear for around two or three quarters—the time it takes to get new designs from the catwalk onto the shop floor—whether sales get a lift. Still, the higher-end brands aren’t likely to go head-to-head with Coach or Ralph Lauren. Louis Vuitton’s owner recently ruled out attracting young consumers back with “cheap bags," and will try to tempt entry-price shoppers with goods such as a new range of $160 lipsticks and better-quality handbags instead. European brands will be licking their self-inflicted wounds for a while. America’s luxury stocks look like a more promising bet for now. Write to Carol Ryan at carol.ryan@wsj.com and Jinjoo Lee at jinjoo.lee@wsj.com