LVMH’s organic revenue rose 2% to €42.2bn in the first half, ignoring the impact of exchange rates. Growth in the important Fashion & Leather division only inched 1% higher, compared to 20% growth this time last year. Revenue growth in Japan jumped 44% higher due to purchases by Chinese travellers, while the rest of Asia posted a 10% decline.
Underlying operating profit fell 3% to €11.3bn, impacted by lower gross margins and higher costs.
Free cash flow after lease payments increased from €1.8bn to €3.1bn. Net debt, including lease liabilities, was €33.2bn.
LVMH referenced the “uncertain geopolitical and economic environment”, but said it remained “confident” in its strategy and the quality of its products.
An interim dividend of €5.50 will be paid on 4 December 2024.
The shares fell 3.9% in the morning after the announcement.
Our view
While still in positive territory, LVMH's organic revenue growth is continuing to slow. Tough economic conditions mean even some luxury shoppers are controlling their budgets a bit more.
The slowdown in revenue hasn’t come as a surprise, given the extent of economic and political uncertainty around the world. The important Asia region has come off the boil in terms of growth in LVMH's biggest division, Fashion & Leather Goods.
But LVMH's biggest superpower is its brands. Louis Vuitton and Christian Dior are status symbols. The group's mega-wealthy customer base is able to weather an economic downturn better than some. Spending, although not fully immune, is more reliable when things take a turn for the worse.
And LVMH’s higher item price points are supported by what we view as genuine creative and marketing superiority at LVMH. We're not alone in thinking LVMH has a best-in-class stable of labels. Being able to charge more means LVMH's operating margins are healthy too, which has also dripped down into free cash flow, ultimately underpinning the group's current ability to pay dividends. However, no dividend is ever guaranteed.
Adept management is a serious asset too. The group's CEO Bernard Arnault, is the group's largest shareholder, which probably explains the focus on long-term success.
No investment comes without risks and we think it's prudent to remember there would be knocks to the valuation as and when Arnault steps down. Succession planning has stepped up a notch, and he can’t stay in the job forever. We have faith it will be well-handled, but given his huge influence, there are likely to be jitters when the day comes. Also, if LVMH ever puts a foot wrong when it comes to its creative reputation, we view this as the other risk to monitor in terms of sentiment.
The debt level is something we’re keeping an eye on. The acquisition of jewellery giant Tiffany stretched the balance sheet, and debt reduction is likely to be a focus for now.
Shorter-term demand needs to be watched too. Chinese consumers aren't necessarily poised to prop up earnings as they have done in the past, with slower economic growth weighing on the region. European consumers have also started to normalise their spend which leaves a gap to be traversed.
We think LVMH could thrive over the long term and provide a compounding opportunity thanks to its unrivalled stable of brands. The valuation isn’t as demanding as it has been. That presents an opportunity to invest in an impressive fashion powerhouse, but also reflects a softer demand picture. That could take some time to improve, so potential investors are encouraged to take a long-term view
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, LVMH’s management of ESG risks is strong.
The group has a board-level committee that oversees the company's social and environmental issues. However, remuneration policies only loosely mention ESG-related performance targets for executives, and its overall ESG reporting falls short of best practice.
LVMH key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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