Bernard Arnault

PARISBernard Arnault may be raking in the cash as LVMH Moët Hennessy Louis Vuitton posted another quarter of strong growth, but he is also spending lavishly to make sure that Louis Vuitton, Dior and his other luxury brands maintain their market dominance once demand loses steam.

Shrugging off ongoing trade tensions, the group’s overall revenues were up 15 percent in the three months ended June 30 to 12.54 billion euros, helped by another strong performance in its key fashion and leather goods division. Sales were up 12 percent on an organic basis.

But profitability came under pressure as LVMH ramped up spending on marketing and stores by 15 percent in the first half.

Net profit rose 9 percent to 3.27 billion euros during the period, while profit from recurring operations advanced 14 percent to 5.29 billion euros, below consensus estimates. Operating profit margin stood at 21.1 percent, down from 21.4 percent in the same period a year ago, including an adverse foreign exchange hedging impact.

The numbers continue a string of strong results for the world’s luxury players, coming on the same day Moncler posted double-digit increases in profits and sales and a day after Hermès reported stellar figures.

“We are not milking the brands in good times,” Jean-Jacques Guiony, chief financial officer of LVMH, said on a conference call. “We are definitely investing behind the brands and we are investing behind all of them.”

Dior, for instance, recently opened a temporary boutique on Avenue des Champs-Élysées while its historic flagship on Avenue Montaigne undergoes renovations. Duty-free retailer DFS is gearing up for the opening next year of its T Galleria store in Paris as part of the long-delayed renovation of department store La Samaritaine.

“Investments into the brands[…]come when the business is good, with a view not only of supporting the existing momentum, but also reinforcing the brands to make them more resilient in the global environment, if the global environment was to become more difficult,” said Guiony.

“It’s certainly the right thing to do now if we want to strengthen further the strategic value of the portfolio,” he added.

“The message is that management is willing to reinvest the dividends of scale to accelerate market share gains, especially for its most profitable fashion and leather division,” said Rogerio Fujimori, an analyst at RBC. “This should make life tougher for smaller competitors fishing in the same pond, in our view.”

In addition, LVMH remains active on the acquisition front after snapping up luxury-travel operator Belmond for $2.6 billion last year.

The group said last week it had taken a minority stake in Stella McCartney’s fashion brand, and in May, it added another prestigious wine label to its collection with the purchase of Château du Galoupet, a maker of high-end rosé.

At the same time, the conglomerate has set up a luxury maison with singer and entrepreneur Rihanna under the Fenty label, making it the first fashion brand Arnault has launched from scratch since Christian Lacroix in 1987.

“The concept is definitely to invest in different brands, not necessarily something we have experienced in the past,” said Guiony, adding that it was too early to comment on the performance of the Fenty fashion label. “There will be some learnings, there will be some value, and it’s up to us to be good enough to extract it.”

LVMH can certainly afford its largesse. Its key fashion and leather goods division, which includes Louis Vuitton, Dior and Fendi, saw revenues jump 20 percent on a like-for-like basis to 5.31 billion euros during the second quarter, zooming past consensus estimates.

The division had posted organic growth of 13 percent in the same period a year ago, and recorded a 15 percent rise in like-for-like sales in the first quarter. “The global momentum is very good for most of the brands, if not all of them, and for most of the geographies, if not all of them,” said Guiony.

Vuitton and Dior led the pack, with Vuitton seeing a “noticeable improvement” in demand from Chinese consumers versus the first quarter, and Dior growing faster than the division as a whole, the executive reported. Meanwhile, France bounced back after a first quarter marred by gilets jaunes, or yellow vests, protests.

Yet Guiony said there was no “compelling” explanation for the division’s rapid progress.

“The comparison basis is not particularly easy. The Chinese customers are there, but not the only ones,” he said. “When we look at American customers, at European customers, all of them are double-digits, so it comes really from everywhere, so it’s really a testimony to the strength in the brand, not to a specific factor.”

Even Hong Kong seems to be immune so far to protests against a controversial extradition bill. “So far, we have not experienced a very deep impact on the business,” Guiony said.

Fashion and leather goods performed better than all other segments. Wines and spirits were up 4 percent, with momentum particularly strong in the United States, Asia and emerging markets, while perfumes and cosmetics recorded organic growth of 10 percent.

Selective retailing grew 7 percent as Sephora continued to improve its performance in the U.S. against a challenging market for makeup, and growing competition from the likes of Ulta and Amazon, which is pushing into beauty with initiatives including the launch of Lady Gaga’s Haus Laboratories makeup line.

“For the time being, I don’t think there is particular evidence that Amazon will bite into Sephora or will not. It’s a bit early to say. We don’t have very precise numbers on what Amazon does on this segment,” Guiony demurred.

Online retailer 24 Sèvres, which re-branded as 24S during the quarter, remains in a “learning phase” and hopes it will capitalize on the fact that it is the only multibrand e-commerce site to stock the LVMH-owned Vuitton, Dior and Celine labels, he noted.

Watches and jewelry posted a 4 percent increase. Organic growth at Bulgari was flat compared to the first quarter, as it continues to clean up its jewelry and perfume wholesale channels, while Tag Heuer’s ongoing reengineering had a significant impact on the watchmaker’s margins.

The figures were the first to take into account IFRS 16, an accounting rule that requires companies to record all future lease rents as debt on the balance sheet. The impact on the balance sheet was an increase of 12 billion euros in non-current assets and non-current liabilities, Guiony said.

There was a positive impact of 77 million euros on profit from recurring operations, a negative effect of 68 million euros on profit before tax, and the accounting rule change gave rise to a financial charge of 145 million euros.

“All in all, I would say much ado about nothing. I would just point out the fact that the norm doesn’t allow us to restate 2018 numbers and therefore adds complexity to an already obscure and byzantine accounting modification, but that’s the way it is,” Guiony said.

Despite its heavy investments, the group sounded its customary cautious note about the economic outlook. “Obviously, the various threats to international trade should run first among our priorities. We are neither pessimistic nor optimistic, but we know our business is sensitive to tariffs and trade barriers,” said Guiony.

LVMH does not provide guidance, merely reiterating in familiar wording its plan to reinforce its global leadership position in luxury goods. “Despite buoyant demand, we will continue to manage costs and remain vigilant into the second half of the year,” Arnault said in a statement.

The luxury conglomerate’s share price is up 47 percent so far this year, propelling Arnault near the top of the Bloomberg Billionaires Index, where he briefly replaced Bill Gates as the world’s second richest person after Amazon founder and chief executive officer Jeff Bezos. Arnault is now back in third position, with a net worth of $106 billion.

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