LVMH: choppy economy is hell for leather

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Since the Great Financial Crisis, shares in LVMH have risen by more than 18 times. That is down to buoyant Asian demand and shrewd management by Bernard Arnault, boss of the French behemoth.

But weakening third-quarter sales disproved the luxury industry’s boast that “our customers are too rich to notice downturns”. How bad is the problem for this supermarket of brands for the super minted?

Park Avenue and Beverly Hills boulevardiers are beset by bank runs and gyrating Treasury yields. Beijing equivalents are coping with a property crash. Prices for dwellings in China declined 8.3 per cent year on year, according to data group CEIC.

The tensions were clear in the numbers with which LVMH kicked off the luxury sector’s earning season. Growth was sequentially lower in the third quarter. Revenues, which had expanded at 17 per cent year on year in the last two periods, decelerated to 9 per cent.

LVMH shares have been retreating for weeks in anticipation. On Wednesday, they fell another 5 per cent, leading the sector lower.

Ominously, sales growth pace at LVMH’s fashion and leather goods unit dipped to 9 per cent year on year. Double-digit jumps were previously the norm. More than three-quarters of LVMH’s operating profit derives from this division. The real engine here is Louis Vuitton with more than half of group earnings alone.

Yet not all is gloomy. For all the concern about Chinese customers, this group increased the value of purchases made while travelling by 40 per cent in the third quarter compared with the same period of 2021. US travellers also continue to buy LVMH goods on overseas trips.

A more worrying sign is that European revenues fell single digits, as Zuzanna Pusz at UBS pointed out. That is well behind the positive, high single-digit pace one period before.

LVMH therefore promised to defend its operating profit margins, as it did so successfully a decade ago. They have crested at 26 per cent since 2021.

A period of extraordinary growth for the luxury sector may be ending. The central case for owning these stocks has not changed. Industrialisation continues in developing economies. Automation via new technology will intensify in the developed world.

That will swell the ranks of a dollar millionaire class that has quadrupled since 2020. Demand for the trappings of wealth will remain brisk.

The Lex team is interested in hearing more from readers. Please tell us what you think of the luxury goods sector in the comments section below.