Arnault may now have more opportunities, for example in hospitality and skincare, two areas where the group still has scope to expand. — Bloomberg
IF LVMH Moet Hennessy Louis Vuitton SE is suffering, then the effects of the luxury downturn are set to be much worse elsewhere.
The group controlled by Bernard Arnault confirmed a slowdown from the spectacular performance of the past three years to something more pedestrian. But as the reporting season gets under way, LVMH is likely to be one of bling’s brightest spots.
First the bad news. LVMH on Tuesday said that group-wide organic sales, excluding exchange-rate movement and mergers and acquisitions, rose by 9% in the three months to Sept 30.
That’s a slowdown from the 17% in the three months to June 30 and, unusually for LVMH, below the Bloomberg consensus of analysts’ expectations.
Organic sales in the crucial fashion and leather goods division also rose 9%, less than half the second quarter’s rate of growth. Sales of wines and spirits tumbled 14%, much worse than expected.
The shock didn’t come from China. True, against a sputtering economy, it hasn’t delivered the C-shaped recovery that many investors were banking on earlier this year. But Chinese demand for LVMH’s fashion and leather goods doesn’t seem to have worsened either.
It’s a similar picture in the United States, where there was a slight improvement in the third quarter, although shoppers there remain under pressure.
The key element of surprise was the weakness in Europe. Here, there has been a sudden deterioration in demand from local customers, while tourist spending is also moderating.
That paints a dispiriting picture for the purveyors of bling, who have enjoyed three years of stellar growth.
Shares in LVMH fell as much as 8% in early trading on Wednesday, dragging the rest of the luxury sector lower.
For LVMH, the stock decline looks harsh. For a start, in fashion and leather goods, it owns two of the industry’s megabrands, Louis Vuitton and Dior.
Its scale and deep pockets mean it can invest heavily in these names, which it has been doing, with the most spectacular stores and eye-catching fashion shows, as well as its smaller houses. This means that when consumers do spend, they are more likely to choose one of its brands, which are at the forefront of their minds.
LVMH also has the benefit of diversification, although right now its presence in wines and spirits is actually working against it. Demand for cognac and spirits remained weak in the United States, and China is recovering more slowly than expected.
Still, it has a sizeable perfumes and cosmetics business, and also owns the US’ Sephora chain, which is benefiting from the “lipstick effect” as consumers trade down to affordable treats. The duty-free arm is also being helped by the Chinese beginning to travel more.
Indeed, the division that contains both retailers was the star performer in the third quarter.
Like LVMH, Hermes International should be able to navigate the more difficult backdrop. It can in effect control its own demand, with waiting lists for its most iconic bags and a well-heeled customer base, meaning that it should be able to outperform in tougher times. Prada SpA’s recovery is entrenched, which should continue its momentum.
But others look more vulnerable. While Richemont owns the jeweller Cartier, it also has significant exposure to the watch sector, which may be less resilient than fashion and leather goods. LVMH said jewellery performed slightly better than watches in the quarter.
But the most challenged look to be those brands trying to turn their fortunes around, such as Kering SA’s Gucci, Britain’s Burberry Group Plc, and Italy’s Salvatore Ferragamo SpA. While consumers demand newness, they also tend to stick to the biggest names when they are feeling the most stretched.
And there is another silver lining for LVMH: Its muscular balance sheet means it may be able to pick up brands that come under pressure by what look to be the worst conditions for the luxury industry since the start of the pandemic.
Five years ago, Arnault lamented that valuations were too high. That didn’t stop him buying Tiffany of course. He may now have more opportunities, for example in hospitality and skincare, two areas where the group still has scope to expand.
Even stepping up investment, the group is highly cash generative. Bloomberg Intelligence estimates that LVMH could have a net cash position by the end of next year.
With Wednesday’s slump, shares in LVMH had lost about 24% from their peak on April 24. They are now trading on about 20 times forward earnings, 24% below their five year historic average.
Longer term, luxury’s prospects are still bright, but the next year is set to remain volatile, given China’s weakness, a US election and now consumers struggling in Europe. But like one of its hard-wearing monogrammed bags, LVMH should withstand the elements relatively well. — Bloomberg
Andrea Felsted is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
