“Luxury is not a proxy for the general economy,” Jean-Jacques Guiony, chief financial officer of LVMH Moet Hennessy Louis Vuitton SE, recently said.
He could not be more right. Browsing through the third-quarter trading update from LVMH, you would be forgiven for thinking the world wasn’t facing geopolitical turmoil, soaring inflation and sinking stock markets.
The bling behemoth reported a 19% increase in sales, excluding mergers and acquisitions and currency movements, in the three months to 30 September. Fashion and leather goods organic revenue rose 22%. Both results trounced analysts’ expectations.
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Investors should still be cautious. The third quarter was always going to be a blockbuster with travel restrictions easing and many Americans venturing back to Europe with a strong dollar to make the most of. And now LVMH has set a very high bar for the forthcoming reporting season, at a time when risks are growing for even the industry giants.
Although Europe has shone, the most important drivers of top-end demand are US and Chinese consumers. And there are considerable uncertainties around both.
US big spenders are more vulnerable to shocks than slowing economic growth, and so recent stock market gyrations area a worry. Demand from US customers was “more or less” in line with the second quarter, LVMH said. But a slowdown at Tiffany is worth watching. The company said weakness in the silver business was due to an inflationary environment, where customers prefer gold. But it is also possible that some marginal luxury buyers are being more careful with their budgets.
LVMH’s sales to mainland Chinese customers were flat amid covid-19 restrictions. That’s an improvement on the second quarter but far from a recovery. Demand in the country remains clouded by pandemic lockdowns and a darkening economic outlook. Even when life returns to normal, after two years yo-yoing between lockdowns and freedom, there is no guarantee that consumers will spend with the same gusto as they did when China reopened after the first covid wave in 2020.
One wildcard is travel. The strong dollar could be a tailwind to more US spending as trips to Europe continue into the final quarter. Any significant loosening of restrictions in China could lead to more Chinese tourism in Europe, and more lavish spending in Paris or Milan, though that still looks a way off right now.
Against this backdrop, LVMH looks best placed among the luxury companies. It is the biggest and has a muscular balance sheet that is moving toward a net cash position in early 2024, according to Bloomberg Intelligence. That gives it the clout to invest in marketing as others cut back, and possibly make acquisitions. It is well diversified through drinks and beauty, and it owns two of the industry’s most successful brands, Louis Vuitton and Christian Dior.
If the luxury shopper cuts back, say buying one handbag a year instead of two, they will likely focus on brands with the most cachet. They may even spend more on that single item. LVMH and rival Hermes International should benefit from this.
The bigger worry will be for lesser names. The exception here is Prada SpA. It is enjoying a Gen Z revival, with younger shoppers snapping up its bucket hats and logoed loafers. If the Italian company can translate this into lucrative handbag sales, then it could surprise on the upside.
The macro environment is more challenging for Kering SA, which is managing Gucci’s transition to classic from cutting edge. The luxury conglomerate should benefit from the strength of its other houses, such as Yves Saint Laurent and Balenciaga, but reorienting its biggest brand through an industry downturn will be hard work.
Burberry Group Plc is also in the midst of a turnaround and vulnerable. That said, if new designer Daniel Lee can create the sorts of winning bags and shoes he delivered at Kering’s Bottega Veneta, Burberry may be able to navigate the coming choppy waters.
Luxury goods makers’ shares rose on earlier this week, after ticking up in recent weeks. Even with LVMH’s stellar performance, that looks optimistic give the perils facing the purveyors of bling.
“Everyone is talking about the recession, but nobody had seen it yet,” said LVMH’s Guiony. If and when it does arrive, the giant should be the most resilient. But if “luxonomics” goes in the wrong direction, even it won’t be immune.
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Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry.