While LVMH’s latest results spark hope for a sales recovery across the luxury sector, Flavio Cereda, Investment Manager, Luxury Equities, discusses their implications and the growth normalisation.
The Covid-19 pandemic brought unprecedented changes and disruptions to the luxury sector, forcing it to adapt and transform to survive and thrive. The luxury spending in China, the most important and influential market for luxury brands, spiked and started normalising in the third quarter of 2023. The sector then experienced a significant slowdown, evidenced by companies announcing results with revenue drops. However, LVMH’s latest impressive results spark hope and some consider them as a significant milestone in the recovery of luxury sales.
The evening of 25 January 2024 saw the release of the full year results from LVMH, by some distance the largest luxury group by size and market value. After the worst Q3 for the last six years, there was much anticipation with regard to the last quarter of the year, during which the market expected a degree of improvement albeit at some distance from the peaks of 2021-22. Prior to LVMH we have had results, full or partial, from Brunello Cucinelli (excellent yet again), Richemont (good to a point), Burberry (very poor) and Watches of Switzerland (very poor).
A key player
LVMH matters much more than the others, for a number of reasons:
- It is the first to report the full year in detail
- It is the largest and essentially a proxy for the sector
- It is a broad church and is active in so many categories: from leather to apparel, from jewellery to watches, from spirits to beauty, from department stores to duty free retail and hospitality
In other words, LVMH’s results are the ones that set the tone and direction for the sector, especially in an uncertain moment like this when the interest rates are rising.
For many years, the stock market performance of LVMH (it was Europe’s largest stock by market cap before being exceeded by the Novo Nordisk steam train) has reflected essentially the performance of the fashion and leather goods (F&LG) division, in other words, the fashion brands such as Louis Vuitton, Dior and then Fendi, Celine, Loro Piana and Loewe etc. In order to understand whether the sector big boys had navigated the challenges well, all eyes were focused on two metrics:
- Organic year-over-year (YOY) growth of the F&LG division in Q4
- Profitability level of the F&LG division in the second half
In line with market expectations
The company reported sales of EUR 86.2 billion for the full-year (FY), equating to organic growth of 13% with respect to 2022. The organic YOY growth of the F&LG division in Q4 was 9% versus the consensus range of +6% to +12%, falling nicely in the middle, so no shocker but no real positive surprise either. This is in line with market expectations. (indeed with a little help from currencies); commentaries were as positive as could be expected in the circumstances. These results should go some way to reassuring investors in the luxury sector, many of whom were still preoccupied with the underwhelming Q3 results, and sets a relatively upbeat tone for other luxury companies which are yet to report.
Given disasters seen elsewhere and unjustified sector concerns, it makes sense that reporting in line should benefit the stock price. Its share price jumped almost 13% on 26 January 2024, the day after the results announcement, as earnings point to luxury sector resilience. That is the equivalent of almost an extra EUR 40 billion in market value, more than the market cap of Moncler, Prada, Cucinelli, Ferragamo and Tods all added together. As a proxy, LVMH’s results have lifted the entire sector with stocks up 3-8% as a result.
Geographically, the US now accounts for 25% of LVMH sales, compared to 27% in the previous year. Europe accounts for 25% compared to 24% in the previous year and Asia accounts for 38% compared to 37% in the previous year. In terms of Q4 versus FY momentum, sales in the US grew +8% in Q4 vs +4% over the year, which beats estimates, while sales in Asia grew +15% in Q4 vs +18% over the year, which was a small miss. It is interesting to note that LVMH beat expectations in the US but narrowly missed them in Asia, which is a highly significant market for the luxury sector. This is in line with the broad theme of the rise of Asia and the decline of Europe in the luxury market, as denoted in a previous article, ‘The Luxury Sector in the Post Covid Era – Polarisation’. Progress has not been made as fast as expected, but it is still heading in the right direction.
Arnault normalised the sector normalisation
At the full year presentation all were listening for the views of the oracle Bernard Arnault, the most powerful man in luxury and in France, in order to catch a glimpse of what the state of luxury really is. Arnault is not always right (he was wrong in January 2020 on Covid as he had been badly informed, but so had so many others) but he often is and above all it is he who sets the trend beyond just illustrating it. Beyond joking at the challenges experienced by many competitors and praising Cartier (this is another story) he played his trump card spectacularly well – he normalised the sector normalisation.
Let me explain. In telling us all that after the crazy growth of 2020-2023 it was time to return to a ‘healthy’ 8-10% growth, in one fell swoop he reminded all that these are the ‘correct’ growth rates hereon and that luxury cannot possibly grow at 20-25% every year. We knew all this, but this was coming from the number one in the space.
Normalisation of growth (the average of the last 10 to 20 years is 6.5% yearly) implies a return to sustainable momentum with a better mix between price and volume. In fact, I think we are looking at 5-6% growth this year and 6-7% next year for the sector. These are important numbers, but a far cry from the 20% experienced post-Covid. This is normalisation, where the best and strongest will do better (possibly up to 10-12% annual growth) but we return to the ‘right’ rate of growth, ’gracious growth’ as has been long argued by Brunello Cucinelli.
In explaining that an 8-10% growth rate is the fair range for the sector, Arnault has normalised the talk of normalisation, and so reset all expectations.
We all know Dior is decelerating after years of excessive growth. In fact, we think Louis Vuitton has more sustainable momentum, in spite of doubling in size, thanks to the Midas touch of Pietro Beccari, Chairman and CEO of Louis Vuitton. Arnault set expectations lower for his group, so any double-digit print will be seen as a beat. The point is, if I tell you that sector growth slows to mid-single digit it sounds like a warning; if Arnault tells you that, it just sets the benchmark, which is one his group is likely to beat anyway. Hence, his results chat normalised the talk of growth normalisation – it sets the tone and reassured that, as we knew anyway, the luxury sector remains resilient. As an investment manager of a luxury brands strategy and an LVMH shareholder, I am grateful to hear that.
Volatility is likely to stay for a while, but the direction of travel is healthier than some thought. Arnault is optimistic, so should you be. The luxury sector normalises, but it continues to grow.
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