By  on July 24, 2014

PARIS — A chill in Asian markets and a slowdown in fashion and leather goods headlined what analysts described as a disappointing first half for LVMH Moët Hennessy Louis Vuitton.

The French luxury giant reported a 4.3 percent dip in net profits in the six months to June 30 to 1.51 billion euros, or $2.07 billion.

Second-quarter revenues rose 1.3 percent to 6.8 billion euros, or $9.33 billion, a 3 percent gain in organic terms. This compares with a reported gain of 4.2 percent in the first three months of the year, reflecting a more modest pace for the luxury sector, beset with strong currency headwinds and facing sluggish demand in most geographies, except for the U.S. and the Middle East.

A sharp drop in fortunes at LVMH’s watch and jewelry division surprised analysts, with revenues slipping 1 percent and operating profits plunging 31 percent in the half. The company blamed currency swings, heavy investments in communications and one-off restructuring costs at Tag Heuer for hitting the bottom line. It also highlighted cautious purchasing by multibrand watch retailers, compelling the group to continue expanding its own store network.

Heavy destocking of cognac in China, reflecting the government’s anticorruption efforts, also dented profits in the wines and spirits division, falling 15 percent in the half. LVMH said it expects the situation to normalize later this year.

But currency took the biggest bite: Weakness in the American dollar and Japanese yen wiped 235 million euros, or $322.2 million, from first-half profit tallies.

Dollar figures are converted from euros at average exchange rates for the periods in question.

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A gain of 47 million euros, or $64.4 million, came from Loro Piana, consolidated for the first time in the first-half numbers. Its sales in the period came to 330 million euros, or $452.4 million.

LVMH acquired an 80 percent stake in the Italian firm last year for 2 billion euros, or $2.73 billion at current exchange.

LVMH chairman and chief executive officer Bernard Arnault said he approaches the second half “with confidence” and that the firm plans to “pursue further market gains in our traditional markets, as well as in high potential emerging territories.”

During a conference call, chief financial officer Jean-Jacques Guiony highlighted a slowdown in China in the second quarter, weakness in the Hong Kong business due to “political unrest” and softness in Singapore following the disappearance of Malaysian Airlines flight 370 in March.

An exception was South Korea, which was still “quite strong,” he noted.

Pressed for details on China, Guiony said it was “difficult to explain” the lower level of business, while noting that LVMH did not open very many stores in the first half. He also noted that Vuitton recorded lower purchases among traveling and domestic Chinese consumers in the second quarter.

In the three months, organic revenues improved 3 percent in Asia, versus 4 percent in the first quarter; 6 percent in the U.S., excluding Hawaii, a pickup of 1 percent versus the first three months of the year, and remained flat in Europe, against a 1 percent improvement in the first quarter.

The swing in Japan was more dramatic, down 11 percent in the second quarter versus a 32 percent gain in the first, reflecting a frenzy of buying ahead of an April 1 increase in value-added tax.

Meanwhile, the company blamed a “strategic reshuffle” at Marc Jacobs International for flat operating profits in fashion and leather goods. Guiony cited higher costs and revisions to its retail and wholesale mix that will have a “short-term impact on profits.”

LVMH recently assigned one of its high-potential executives, Givenchy ceo Sebastian Suhl, to the helm of Jacobs, effective in September.

“We have a lot of hopes for the company, well positioned in the contemporary segment,” Guiony said. “We plan to develop it much further.”

LVMH highlighted rapid progress in leather goods at Fendi, in particular its Du Jour and Peekaboo bags, and continued growth at Céline, driven by leather lines and shoes.

And it held out hope that business at Vuitton will speed up in the second half when new product lines by Nicolas Ghesquière, its new artistic director of women’s collections, start hitting stores.

The brand continues to introduce more high-end, soft leather lines to improve its product mix. Guiony cited a strong reception and that the upgrade is going according to plan, while acknowledging that “end demand is not helping much.”

Monogram canvas products also did well in the first half, thanks to new models such as the Pallas and Montaigne, he added, noting that Vuitton’s famously fat gross margin remained unchanged in the half, despite currency pressures.

Selective retailing outpaced all other divisions, registering a 9 percent organic revenue gain in the half, with Sephora showing “excellent momentum” in North America, Asia and the Middle East.

Organic growth in the half came to 3 percent in watches and jewelry, 4 percent for fashion and leather goods and 6 percent for perfumes and cosmetics. Wines and spirits sank 1 percent.

Disclosing its results after the close of trading on the French Bourse, LVMH trumpeted its “resilience despite a still challenging economic environment.”

The LVMH results trailed a 5.8 percent revenue gain at Hermès International and a 9 percent jump at Burberry Group in the three months ended June 30.

Rival French luxury group Kering is to report its second-quarter sales on Wednesday. Bernstein Research is forecasting 3 percent underlying growth for the group, and 5 percent for the luxury division, with double-digit momentum at Bottega Veneta and Saint Laurent compensating for flat sales at Gucci.

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