PARIS — LVMH Moët Hennessy Louis Vuitton posted another strong performance in the second quarter, suggesting the luxury sector is well positioned to weather turbulence in the Chinese market, which accounts for roughly one-third of its sales.
Although the world’s largest luxury group saw an increase in Chinese demand in the three months to June 30, it stuck to its customary cautious outlook, noting that currency fluctuations and the threat of trade tariffs could yet weigh on its performance in the second half.
“The excellent results of the first half of the year attest to the strong desirability of our brands and the effectiveness of our strategy. The performance of the first half is even more remarkable given the unfavorable currency environment,” Bernard Arnault, chairman and chief executive officer of LVMH, said. “Despite buoyant global demand, monetary and geopolitical uncertainties remain. In this context, we will stay vigilant and rely on the talent of our teams and the shared entrepreneurial passion to further increase our leadership in the world of high-quality products in 2018.”
Related Galleries
The parent of brands including Louis Vuitton, Dior, Guerlain and Bulgari said revenues rose 11 percent to 10.89 billion euros in the second quarter, slightly above the market consensus of 10.86 billion euros, according to analysts polled by FactSet. This represented organic growth of 11 percent, versus the 13 percent progression recorded in the first quarter.
But profitability registered a strong beat, with net earnings in the first half jumping 41 percent to 3 billion euros, while recurring operating profit rose 28 percent to 4.65 billion euros. The margin for the perfumes and cosmetics division, in particular, reached an all-time high during the period.
Jean-Jacques Guiony, chief financial officer of LVMH, said sales and profits for the first half of 2018 were equivalent to LVMH’s full-year numbers in 2010, with the U.S., Asia and Japan posting double-digit growth.
“The engine is firing on all cylinders and only capacity constraints and willingness to preserve brand exclusivity prevent us from growing faster,” he said on a conference call.
However, he highlighted a number of risk factors ahead, including possible declines in the U.S. dollar and Chinese renminbi; a tougher comparison base, as Christian Dior Couture was not yet included in LVMH’s scope of consolidation in the first half of 2017, and uncertainty connected to higher tariffs throughout the world.
“Although the luxury industry is not in the front line of this, such a risk would certainly bear some negative consequences for us. For these various reasons, I think that despite the strength of the business, the current trends cannot realistically be extrapolated to the second half of the year,” Guiony said.
Sales in the key fashion and leather goods division advanced 13 percent in organic terms in the second quarter, broadly in line with analysts’ estimates. This compared with 16 percent organic revenue growth in the first quarter of this year and with a 13 percent increase in the second quarter of 2017. Excluding German luggage maker Rimowa, which is purging its wholesale channel following its acquisition by LVMH last year, the division would have posted organic growth of 17 percent in the second quarter of 2018, Guiony noted. The rise was again driven by a strong performance from the group’s cash-cow brand Louis Vuitton, which saw its margins improve over the period.
Though LVMH does not break out figures for its fashion houses, Arnault has pointedly said he wants to restrict the size of Vuitton to keep the brand desirable, even as rival group Kering’s star label Gucci has recorded five consecutive quarters of growth exceeding 35 percent.
Vuitton, whose revenues analysts peg at more than 8.5 million euros per year, played a prominent role at the 2018 FIFA World Cup by making a custom trunk to house the gold trophy, in tandem with a limited-edition line of leather goods, including the bags touted by France’s winning team on their return from Russia.
The label also benefited from favorable media coverage of Virgil Abloh’s first collection as men’s wear designer, though it will be a while before his first creations hit stores. “The image impact is very positive and the buzz around his arrival at Vuitton has been tremendous. We are very pleased with that. As far as real business is concerned, it’s obviously too early to say,” said Guiony.
Dior, likewise, made a splash with the debut last month of Kim Jones as men’s creative director, though its margins are lagging those of other brands, the executive noted.
“The margins of Dior […] are much lower than the average, so it had a negative impact on the division,” he said. “We intend to improve the margins at Dior, but for the time being we don’t intend to mention any objectives.”
Givenchy received a strong visibility boost when Meghan Markle wore a gown by its creative director, Clare Waight Keller, for her wedding to Britain’s Prince Harry in May. Meanwhile, Céline saw continued momentum in leather goods ahead of Hedi Slimane’s debut coed show for the brand in September.
The performance of Marc Jacobs is improving, Guiony said, noting that losses were “much lower than they were last year.” In the second half, Fendi is set to open its first Spanish store in Barcelona, while Kenzo will unveil boutiques in Las Vegas and Florence, in addition to taking back its distribution in China.
Watches and jewelry recorded organic growth of 12 percent in the second quarter, boosted by “excellent momentum” at Bulgari, while perfumes and cosmetics were up 14 percent. Key launches in the second half will include a Dior fragrance fronted by Jennifer Lawrence, and a Givenchy perfume with Rooney Mara as its face.
Selective retailing was up 9 percent, fueled by continued good growth at Sephora and a rebound in the profitability of travel retailer DFS, following the termination of its loss-making Hong Kong International Airport concessions.
LVMH provided little information about the performance of its online retailer 24 Sèvres, but Guiony suggested it did not expect e-commerce overall to generate significant revenues.
“We mostly view the digital strategy as a complement to the brick-and-mortar strategy. Basically, what people want is to get information online and do the shopping off-line,” he said. “I’m not saying that digital will not end up taking a share of the global business, but we don’t expect this share to be a major one.” Revenues for wines and spirits grew by just 3 percent, capped by ongoing supply constraints.
The positive figures come against a backdrop of rising trade tensions and continued currency turmoil. The renminbi hit a one-year low last week amid concerns about a slowdown in the Chinese economy and an escalating trade standoff with the United States. The U.S. government has imposed tariffs on $34 billion of Chinese goods, and President Trump has threatened to extend the levies to all U.S. imports from China.
Rogerio Fujimori, analyst at RBC Capital Markets, said in a research note on July 10 that the recent Chinese stock market correction and currency weakness were negative for luxury stocks, though he maintained his “outperform” rating on LVMH. “LVMH’s well-balanced portfolio and more diversified sources of growth make it well-placed to continue outperforming its peers: we expect the pace of share gains for LVMH to accelerate further if the luxury market become less buoyant from here,” he said.
Guiony said for now, the market losses were in no way comparable to China’s stock market slump in 2015. Prompted by cuts in Chinese import tariffs earlier this month, part of a government drive to promote consumption on the Mainland, Louis Vuitton has slashed prices in China by 4 percent, though the move appears to have had little impact so far. “There was no obvious or noticeable reaction from the customer base,” Guiony said.
He noted that while prices in China were once 50 percent higher than in other regions, the recent weakness of the U.S. dollar and renminbi meant the differential is down to less than 30 percent. Vuitton is monitoring foreign exchange fluctuations worldwide, but sees no need for further price adjustments at present, he added.
Hermès International said last week it’s still seeing double-digit growth in mainland China after better-than-expected second-quarter sales, while Burberry reported a 3 percent uptick in retail revenues in the three months to June 30, as it fine-tunes its commercial model ahead of Riccardo Tisci’s runway debut in September.
Kering is scheduled to publish second-quarter results after the market closes on Thursday. Shares in LVMH closed up 2.7 percent at 301.10 euros on the Paris Bourse on Tuesday before the results were released.