Even the mighty LVMH Moet Hennessy Louis Vuitton SE can’t escape the distress in China.
However, the fall in its share price—up to 2%—in early trading today looks to be an overreaction. It subsequently reversed the losses. The owner of Dior and other luxury brands is still the behemoth on the bling block, and should be able to benefit from Chinese revenge spending when it comes. It is muscular enough to resist a recession too.
LVMH—controlled by the world’s richest man, Bernard Arnault—said on Thursday that sales excluding currency movements and mergers and acquisitions rose 9% in the three months to 31 December. What disturbed investors was fashion and leather goods. Those account for about half of sales and three quarters of profit. They lifted organic sales by 10%, a dramatic slowdown from the 22% expansion in the third quarter. LVMH’s second-half operating margin also came in below expectations as the company increased marketing spend by 30% in that period while also suffering from the downturn in post-Covid Zero China.
Yet organic sales growth is still ahead of analysts’ expectations, as well as the performance of its rivals, Cartier owner Cie Financiere Richemont SA and Britain’s Burberry Group Plc. That underlines LVMH’s resilience, and should bode well for sales when conditions in the luxury market stabilize.
Chief Financial Officer Jean-Jacques Guiony said results in China were “heavily down,” with traffic to stores slumping 85% from 2019 levels in December. But he told Bloomberg TV that activity in the country had “recovered very significantly” in January. Arnault said that in Macau, where the Chinese can now travel, the change was “quite spectacular”.
If Chinese spending does pick up, LVMH stands to benefit — even if it is less exposed to the country than some rivals. It owns some of the most in-demand names, not just Louis Vuitton and Dior, but Fendi, Celine and Loewe. Its scale means it has the resources to invest making its brands even more desirable.
Of course, there are risks.
With 27% of sales in the US, the group is more exposed to the region than its competitors. So far though, LVMH’s presence there has served it well: American consumers are leading the world in luxury spending. Tiffany & Co, acquired two years ago, has become a 1 billion euro ($1.09 billion) operating profit brand. Arnault reckons that if the jeweler were listed today, it would probably be worth twice the $16 billion he paid for it. But this also means it is more vulnerable if the US economy weakens.
There is also a danger that as the houses become bigger they lose their appeal to top end shoppers who value exclusivity. Louis Vuitton, for example, is now a 20 billion-euro revenue brand. The company will also have to contend with serving many more Chinese customers in its stores when they begin traveling to Europe again. It will have to work hard to maintain that luxury experience in Paris.
But pushing the houses upmarket, as well as Arnault’s decision to shake up management, should help to prevent his brands from becoming quotidian. Furthermore, economic downturns are likely to affect LVMH’s smaller rivals more adversely. Kering SA, for example, would be hard hit by recessions right now when it is trying to get Gucci back on track.
The rally in luxury shares since the beginning of this year has been too far and too fast. The initial pullback in stocks on Friday is unsurprising given the rupture in Chinese spend in December. It is still not clear whether shoppers there will splurge with the same abandon as they did in the period before the virus hobbled the world. Meanwhile, recessionary risks remain in the US and Europe.
Even against this backdrop, LVMH is increasingly in a league of its own, likely capturing sales from its rivals, all of whom only seem to grow smaller in comparison. Despite a market capitalization of 400 billion euros, all that is hardly reflected in its valuation. Arnault’s empire has the breadth and resources to hire the best designers and fund the marketing necessary to keep its houses at the forefront of the imagination of consumers. Like one of Louis Vuitton’s classic monogram handbags, LVMH has the best chance to remain an integral part of the world’s wardrobe.
Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.