Clouds Are Gathering For LVMH, Luxury: Sales Increases May Be More Modest

A profit warning by Burberry some weeks ago began to cast a shadow over the luxury industry, which has shown resilience to the economy’s impact on most consumer sectors. Against that backdrop I join many observers in trying to forecast the momentum of the luxury business for the rest of the current year as well as gaining a glimpse into 2013. LVMH is the world’s lead in luxury goods, and of course a meaningful prism through which to view the industry. They reported solid revenues for nine month of 2012 and the third quarter (the company reported 10% organic growth for the 9 month period and 6% for the third quarter of 2012.) – This indicates a smaller increase in revenues than the first half of the year. (Organic sales are sales without currency fluctuations.)
 
The current performance was achieved by the resilience of the group’s fabled brands such as Louis Vuitton, Bulgari, Celine etc., and reflects the fashion creativity and craftsmanship behind them as well as geographic diversification. There was discussion on their conference call, as the market clearly anticipated, about some slowdown in sales in Asia, evident in its Fashion and Leather business – though they indicated that sales in its core Louis Vuitton brand had not declined – and reduced tourism by Asian travelers, which impacted notably its DFS business. (Of note, DFS makes up one half of LVMH’s Selective Retailing business. Its other half is Sephora, which has seen considerable success and strong comparable sales around the world. There are now nearly 1400 Sephora locations globally, up about 110 from a year ago.)

All in all, I believe that the outlook from LVMH is strong for the rest of the year, with an organic revenue increase of about 6% likely in the fourth quarter.

However, it is more difficult to forecast beyond that. Recently, I was told that in the United States, Russian and Brazilian customers are taking up some of the slack caused by the absence of Japanese and Chinese customers. I believe that a more realistic appraisal of the current customer mix will show that even those customers that are in luxury stores like Louis Vuitton, Saks Fifth Avenue and even Bloomingdale’s show a slackening of their spending.

Moreover, while the stock market still shows strength due to good earnings, I have already heard that Wall Street firms may not pay the bonuses of past years – impacting the spending power of a key luxury consumer. Taken together, I believe there will be a slower momentum of sales in the first half of 2013 for luxury goods, but LVMH’s strategy of driving innovation across its brands and maintaining strong geographic diversification is the right way to withstand difficult economic headwinds.

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