LVMH Wary As Luxury Growth Hits Speed Bump
● Organic revenue growth slowed in the third quarter, but for the luxury conglomerate, it's too early to detect a cycle even as it admits the days of 20 percent growth may be over.
PARIS — Will the slowdown in luxury spending be a blip, or a protracted slump?
Market leader LVMH Moët Hennessy Louis Vuitton said it was too early to tell, after its third-quarter revenues confirmed that consumers in Europe and Asia are tightening their purse strings as the euphoria of the post-pandemic period wears off.
The luxury conglomerate, parent of brands including Louis Vuitton, Dior, Tiffany & Co. and Sephora, said revenues rose 1 percent in the third quarter, reflecting a normalization of growth rates in its key fashion and leather goods division as inflation and high interest rates weigh on discretionary spending.
Chief financial officer Jean-Jacques Guiony said it was difficult to make projections for the fourth quarter and beyond based on the quarterly performance.
“Time will tell, depending on the depth and the length of the cycle, whether it was a real cycle in consumption or merely a sort of blip after three extraordinary years,” he said on a webcast with press and analysts.
“Growth is converging toward numbers that are more in line with the historical average. Will we stay there? I don't really know. There is no reason to believe neither that we will crash, nor that we will come back to the type of 20 percent growth that we enjoyed for a certain period of time,” he added.
Group revenues in the three months to Sept. 30 totaled 19.96 billion euros, below a Bloomberg consensus estimate of 21.15 billion euros. Stripping out the impact of currency fluctuations, third-quarter revenues at LVMH were up 9 percent yearon-year, indicating a slowdown from the second quarter, when organic revenues increased 17 percent.
The fashion and leather goods division posted sales of 9.75 billion euros in the third quarter, up by 9 percent on a like-forlike basis versus the same period last year.
The segment's progression was down from the 21 percent organic revenue growth recorded in the second quarter, and below a Bloomberg consensus forecast for 11.2 percent growth.
The LVMH results come against an uncertain economic backdrop in Western economies, and a challenging macroeconomic environment in China,
with negative factors including falling property prices, high levels of youth unemployment, a drop in export demand and a weakening currency.
Describing the macroeconomic headwinds as the “worst in 50 years,” a recent report by RBC Capital Markets said that aspirational customers were especially affected. This group accounts for 165 million out of a global luxury consumer pool of roughly 400 million people, it estimated.
Although LVMH does not break out sales for individual brands, Guiony said the Dior juggernaut was settling into cruise speed after the brand tripled in size in less than seven years. The moderation comes as revenues at the house, including beauty, exceed 15 billion euros, according to a recent Bernstein report.
“The slowing down in the growth is absolutely normal after these fabulous and outstanding years that we've been through,” Guiony remarked. “You can't grow a business 30 percent per annum for forever, so the business has to consolidate. We cannot open that many stores, otherwise we would end up overdistributing the brand.”
Going forward, Dior will focus on having the optimal amount of stores and category mix.
“This should generate healthy growth going forward. We are not worried at all about the quality of the business at Dior,” he said, indicating there was no change in strategy since Delphine Arnault succeeded Pietro Beccari as chief executive officer in February.
By region, LVMH reported that demand softened in Europe and Asia, while trends were unchanged in the U.S. following a weak second quarter.
Organic revenues in Asia, excluding Japan, were up 11 percent in the third quarter versus a 34 percent jump in the prior three months, reflecting a more challenging comparison basis and a recovery in Chinese tourism outside of Asia.
“We are extremely pleased with the level of the business we do with Chinese clients,” said Guiony, adding that the main difference is that the proportion of Chinese spending on fashion and leather goods taking place offshore has doubled versus last year to around 30 percent.
In Europe, sales rose 7 percent following a 19 percent increase in the second quarter, while in the U.S., they were up 2 percent on the heels of a 1 percent decline. Revenues in Japan were broadly stable, up 30 percent in the third quarter after a rise of 29 percent in the second quarter.
While negative currency effects should impact group margins in the second half, LVMH does not plan to rein back marketing spending after a period marked by bombastic shows and mega-flagship openings, Guiony said.
“You'll see some initiatives that will be as spectacular as what we've done over the last quarters and we expect the second half or the last part of the year to be extremely full with a large number of initiatives,” he pledged.
By division, wines and spirits continued to be the weakest segment, with organic sales down 14 percent in the third quarter, while selective retailing led the pack, posting a 26 percent rise. Watches and jewelry recorded a 3 percent increase, and perfumes and cosmetics were up 9 percent.
Jewelry performed slightly better than watches in the third quarter, and Bulgari was ahead of Tiffany due to its greater exposure in Asia.
Guiony also singled out their smaller stablemate Fred, lauding the performance of CEO Charles Leung, who recently launched a high-jewelry set featuring labgrown blue diamonds, as well as an 8.88carat diamond, presented loose.
“Frankly, the amount of PR surrounding the blue diamond has been much bigger than the diamond itself so we are pretty satisfied with this. Is it a long-term trend that we could develop elsewhere? Too early to say,” he commented.
“The artificial diamonds come with some issues that are different from the natural ones. They have to be weighed and assessed carefully and we are not in a position to comment any further,” Guiony added.
Meanwhile, LVMH has big plans for Hainan. Its travel retail business DFS earlier this month revealed plans to open its first “seven-star” luxury retail and entertainment destination on the Chinese island.
Guiony said this was motivated by China's plan to transform Hainan into a free-trade port with its own customs system by 2025.
“The way the brands could operate in this environment will be entirely different from what it is. Given the number of people visiting Hainan on a yearly basis, it's worth considering as an important market and therefore all our brands are contemplating opening stores in a selected way in Hainan,” he said.
The DFS Yalong Bay project is to stretch more than 1.38 million square feet and carry 1,000-plus luxury brands. Guiony said it aims to be among the two or three biggest commercial developments in Hainan. “Hopefully we'll be as successful in Hainan as we have been in Macau,” he added.