On the surface, LVMH just reported very reassuring numbers in its third-quarter earnings update. Organic growth totaled 14% through the first nine months of 2023. However, the company took a 4% hit due to exchange rate fluctuations, so adjusting for that, sales advanced 10%, from $60 billion last year to $66 billion this year (€56.5 in 2022 and €62.2 in 2023).
However, third quarter performance was hardly up to its recent highs. Organic growth slowed to 9% after racking up 17% advances in both the first and second quarters.
Organic growth aside, when we get down to just the reported numbers for the third quarter, revenues advanced only 1%, from $20.9 billion in 2022 to $21.2 billion this (€19.8 billion to €20 billion).
It might be too soon to say that LVMH has hit a wall, but its momentum is surely flagging. And if the luxury industry’s market leader is having trouble – LVMH’s revenues topped $84 billion last year, making it nearly four times larger than the industry’s number two Kering at $22 billion – what does it say about prospects for the rest of the luxury market?
Luxury Consumers On Hold
Perhaps it’s more accurate to say that luxury consumers have hit the wall. They’ve put the brakes on spending, given their fully justified worries about the mounting geopolitical upheaval in the world.
“The aspiration of the luxury consumer is ebbing – unprecedented economic challenges, current political disputes, and global instability are shaking consumers’ future predictability,” said Chandler Mount, CEO of the Affluent Consumer Research Company (ACRC), a firm with which I am affiliated.
ACRC’s most recent luxury tracking study showed a significant decline in both affluent consumers’ financial confidence and luxury spending indices, signaling that growth in the luxury industry will pause, if not fall, in the short term.
All But Japan
Globally, all markets slowed in the third quarter, with the exception of Japan, which continued to advance at a buoyant 30% organic rate. However, Japan accounts for only about 7% of the Group’s revenues, so it can’t make up for the slowdown in other markets.
Asia disappointed with only 11% organic growth in the third quarter after advancing 23% year-over-year through the first half of 2023. LVMH depends on Asia for nearly one-third of its revenues.
Europe, which generates 24% of revenues, put on the brakes, dropping from 22% organic growth in the first half to 7% most recently. The company blamed the slowdown on normalizing local and tourist demand. Europe benefited from an influx of visitors last year, with revenues up 43% through the first nine-months of 2022.
On a side note, the company revealed that Ireland is ripe for further expansion, given the high number of tourists it attracts, and said many of its brands are contemplating opening stores there.
The U.S. managed to squeak out 2% organic growth this quarter after dropping 1 % in the second. However, the U.S. was the only global market that experienced a decline to its contribution to the Group’s topline results in the first nine months of the year, down from generating 26% of revenues last year to 24% this.
Of course, it’s unreasonable to expect double-digit growth in all markets to continue indefinitely. Still, since the pandemic, luxury consumers have had a heady appetite for almost everything LVMH threw at them. Something’s changed, and consumers may have reached their fill.
Product Perspective
When reporting the results of its five reporting segments, LVMH wants to keep all eyes focused on organic growth and that on the last nine months’ performance. During the first six months of the year, all but Wines & Spirits generated double-digit organic growth each quarter, so the strong early half-year performance bolstered the nine-month results.
On an organic growth basis, results looked pretty solid in the third quarter, except for wine and spirits:
- Wine & Spirits -14%
- Fashion & Leather Goods +9%
- Perfumes & Cosmetics +9%
- Watches & Jewelry +3%
- Selective Retailing (Sephora, DFS, Le Bon Marché) +26%
But unlike its geographical reporting, where only organic percentage changes were provided, LVMH reported the actual revenue numbers for each reporting segment. That changes the perspective altogether, using the current 1.06 Euro to Dollars conversion rate.
Fashion & Leather Goods Flat
Bringing in nearly half of LVMH’s revenues last year, Fashion & Leather Goods was basically flat in the third quarter, up only 1% from $10,268 million in the same period last year to $10,335 million most recently. It attributed the change to normalization of local and tourist demand in Europe and tough comps in China.
CFO Jean-Jacques Guiony wouldn’t get into specifics about results for each fashion group brand, but the company’s presentation reported that Christian Dior had “remarkable growth.” Loro Piana showed “strong momentum in all product categories,” and Louis Vuitton had “excellent performance, driven by strong creativity.”
On the other hand, it used more restrained terms to describe the performance of Celine, Loewe, Fendi and Marc Jacobs.
Selective Retailers On A Roll
Its next largest reporting category is Selective Retailers, which advanced 18% on a reported basis, reaching $4,321 million from $3,673 million last year.
Sephora continued to pull in customers in North America, Europe and the Middle East while London got its second Sephora store. DFS benefited from the recovery in international travel, and Le Bon Marché had a “good” though not great performance.
Watches & Jewelry Down
Next on the list is Watches & Jewelry, which declined 5% on a reported revenue basis, dropping from $2,826 million last year to $2,675 million in the third quarter. This surely was a letdown after the much-anticipated reopening of the Tiffany flagship store in New York City earlier this year.
The company presentation noted “solid growth” in jewelry and implied watches were off, as it only stressed “continued innovation” in the category. All the company said about Tiffany was it continued to elevate the brand, whereas it bragged Bulgari had “excellent growth.”
Perfume & Cosmetics Advanced Modestly
Perfume & Cosmetics inched up 2% to $2,113 million from $2,007 million last year. Here again, Christian Dior was called out for its “outstanding performance” against tough comps.
Perfumes and makeup were strong overall and prestige skincare demand in Asia pulled the category along.
Wine & Spirits Tanked
Wine & Spirits was the most troubled category but accounted for less than 10% of total Group revenues last year. It was off 21% on a reported basis, down to $1,600 million from $2,013 million previous third-quarter. Cognac & Spirits was the big loser, off 27%, but Wine didn’t do all that much better, down 13%.
Guiony noted that “demand is pretty soft in the U.S.” and that what is happening here is hard to measure given the many different points of sale.
Back To Normal
In closing the call, Guiony said, “Growth is converging after three roaring years toward numbers that are more in line with historical averages.”
He reassured investors that “There is no reason to believe that we will crash,” then added, “Nor will we come back to the type of 20% rise that we have enjoyed for a certain period of time.”
The main takeaway from the call is that LVMH is not really slowing down, just getting back to “normal after these fabulous and outstanding years.”
And he signaled no changes in strategy, which he described in three words – “Desirability, Desirability, Desirability!” That fuels aspiration for the company’s many brands, and he promised some spectacular marketing initiatives coming in the latter part of the year.
“We have to reinvent ourselves from time to time, but the framework of what we do is at all times to increase desirability,” he said. It may be a tough sell given all the factors outside the company’s control weighing down luxury consumers’ propensity to spend.
Looking at what the future holds, Guiony’s answer to a question regarding prospects for Chinese consumers in 2024 applies across the board. “Forecasting what is going to go on with the Chinese customers in 2024 is really, really easy: I have no idea.”
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