LVMH’s third-quarter organic sales fell 3% to €19.1bn, missing market expectations of €20.1bn. The Fashion & Leather Goods division, which accounts for nearly half of total sales, saw a 5% decline as falling volumes more than offset increased prices.
Wines & Spirits continues to see the largest sales declines, with performance held back by weak local demand for Hennessy cognac in China. Perfume & Cosmetics sales were up 3%, with strong performances from its Givenchy and Christian Dior brands.
LVMH referenced the current “uncertain economic and geopolitical environment”, but said that it will remain focused on enhancing the desirability of its brands.
The shares fell 6.7% in early trading.
Our view
LVMH ended the third quarter with a big miss on sales expectations. Growth was fairly mixed across the group's divisions. But continued declines in the all-important Fashion & Leather Goods unit will weigh on profitably if things don’t pick back up soon.
The general slowdown hasn’t come as a surprise, and LVMH isn’t the only luxury name feeling the pain. But the group owns a vast stable of powerhouse luxury brands like Christian Dior, Channel, Moet and many more. We think this diversity means LVMH’s better placed than many of its peers to ride out the current ups and downs of the luxury market.
And LVMH’s high item price points are supported by what we view as genuine creative and marketing superiority. 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. We have faith it will be well-handled, but given his huge influence, there are likely to be jitters when the day comes.
The debt level is something we’re keeping an eye on. The acquisition of jewellery giant Tiffany stretched the balance sheet, so debt’s sitting higher than we’d like. Plus, weaker sales have led to a build-up of inventory, which could squeeze cash flows in the near term.
Chinese consumers haven’t been propping up earnings as they have in the past, with slower economic growth weighing on the region. It’s hoped that China’s ongoing stimulus blitz could mark the start of a turnaround here, but it’s still too early to tell. European consumers have also started to normalise their spending, which is leaving a gap to be traversed in the meantime.
We still 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 in recent years. 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 expect some volatility in the near term.
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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