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Investors greeted LVMH’s disappointing sales with surprising aplomb

The business of luxury is seduction. The aesthetics, the textures, the aura of exclusivity all conspire to turn savvy customers into true believers. That logic is not supposed to apply to hard-nosed investors. Yet their approach to the sector also veers into blind faith.

See, for instance, the market’s reaction to LVMH’s — horrible — sales. The luxury juggernaut’s key fashion and leather goods business, which includes brands such as LV and Dior, was down 5 per cent in the third quarter as the Chinese consumer finally capitulated. That points to a much sharper slowdown than feared.

Yet investors greeted this with surprising aplomb. Indeed, the main shock over Wednesday’s mini luxury sell-off was just how mini it was. Competitors were down a couple of percentage points. And LVMH itself fell less than the magnitude of cuts to forecast earnings. Indeed, at 21 times next year’s earnings, the group’s valuation is not far off from mid-cycle multiples of 23 to 24 times, according to Thomas Chauvet at Citigroup. The market, it seems, sees this as a classic macro downturn — and one that will soon reverse.

That is rich. It assumes that China’s as-yet-hazy stimulus programme will rapidly feed through into higher consumption. Analysts, for instance, are pencilling in mid-single-digit sales growth for LVMH next year.

More worryingly, it is by no means clear that, when the macro drag eventually clears, the luxury sector will seamlessly return to rapid growth. Successive price rises may have turned some customers off. In an era of fantastically chic but not terribly exciting “quiet luxury”, there are also murmurs about product desirability.

That leaves the luxury sector as a whole exposed to further disappointments. True super-premium companies such as Hermès and Ferrari — impervious both to macro and fashion cycles — should be relatively sheltered. Brands such as Prada/Miu Miu, which have recently found favour with consumers, might be cushioned from the worst of the impact.

LVMH is not in this camp. The group’s heft has traditionally been an advantage, enabling it to invest in talent, marketing and real estate. But momentum at LV and Dior has been relatively weak, suggests a Bernstein analysis of brand desirability. It may not help that the group is in the midst of a creative and managerial transition, which will take time to gain traction.

LVMH’s premium to the sector has compressed from about 40 per cent in March to about 6 per cent today, on Bloomberg numbers. The luxury sector is a long way from regaining its swagger. And LVMH, unusually, has work to do itself to recover its shine.

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Was it nature or nurture? In the unhappy case of a DNA testing company and its sliding share price, the answer is both

Even before its birth as a public company, 23andMe never really had a chance. The DNA-testing firm’s shares have slid, revenue has disappointed and profit has not materialised. Co-founder Anne Wojcicki now wants to take 23andMe private, at a meagre price. This misfortune is the result of both nature and nurture.

As business models go, 23andMe was stunted from the start. Customers pay to spit into a tube, mail it back and learn what is written in their genes. Results can range from discovery of genes associated with serious medical conditions to more frivolous revelations, such as the genetic propensity to hate other people’s eating noises.

The problem is that after that big reveal, there is not much scope for recurring business. Back when 23andMe’s backers exploited frothy market conditions to merge with a special purpose acquisition company, the company forecast $400mn of revenue by 2024, boosted by activities such as drug development. It made just $220mn.

Wojcicki is to blame, though a wider slide in valuations of experimental drugmakers didn’t help. The godparents share some responsibility: Citigroup and the late Credit Suisse brought 23andMe to market in 2021. Citi’s analyst declared the $10 stock to be worth $14, only for the share price to halve in just over six months.

Even an injection of Richard Branson’s DNA didn’t help. The Virgin mogul set up the Spac that acquired 23andMe and handed it a public listing. His involvement in other blank-cheque firms has flopped too. An investment in eco-disinfectant maker Grove Collaborative has shrunk by 97 per cent. Of the two space companies Branson sold to Spacs, Virgin Galactic’s operations are on hold and Virgin Orbit went bankrupt.

The best hope for 23andMe is a takeover by Wojcicki, who proposed buying the portion of the company she doesn’t own for 40 cents a share in July. That was rejected by independent directors, who subsequently resigned. With the stock trading at 27 cents, it no longer looks so mean.

Still, it’s not clear what Wojcicki would get. No fewer than 13 US states — covering one-third of the population — have passed laws forcing companies to get consent from genetic data providers before a transfer to a new owner, say privacy advocates at the Electronic Frontier Foundation. If many say no, the value of 23andMe’s main asset may melt away before the ink is dry on a deal.

That’s more reason for investors to take what they can get and learn from their mistakes — namely, piling into a fragile, unproven business model in a hyped-up market. Genetic testing makes it possible to anticipate future challenges from the get-go. Backers of 23andMe did nothing of the sort.

The group saw a “marked deterioration” in sales of fashion and leather goods to Chinese consumers.

PARIS — The Chinese dam has broken for LVMH Moët Hennessy Louis Vuitton.

The world’s biggest luxury group missed market expectations with a 4.4 percent drop in revenues in the third quarter, blaming lower growth in Japan and a “marked deterioration” in sales of clothing and accessories to Chinese nationals.

Overall sales in its key fashion and leather goods division were down 5 percent on a like-for-like basis versus the same period last year, sharply below a Visible Alpha consensus forecast for a 1 percent increase.

The sector leader’s struggles illustrated the depth of the crisis in confidence among Chinese consumers.

Their spending on fashion and leather goods was down in the midsingle digits in the third quarter, after rising in the mid- to high-single digits during the first half of the year, chief financial officer Jean-Jacques Guiony told analysts and journalists on a webcast on Tuesday.

Golden Week Not That Golden

Business in watches and jewelry remained under strain, but did not worsen. The country’s National Day Golden Week holiday, which ran from Oct. 1 to 7, did not move the needle either way, Guiony noted.

The French conglomerate, which owns more than 75 brands including Louis Vuitton, Dior, Tiffany & Co. and Sephora, is on a general cost-cutting drive, but it plans to continue investing in stores, communications and events in China next year in the belief that demand will eventually bounce back. “We don’t give up,” Guiony said.

“We are still very hopeful that the luxury industry will continue to develop and will continue to surf on the wave of the emergence of the upper middle class,” he added. “We see absolutely no reason why, after a cyclical downturn as we are experiencing today, we shall not be in a position to recover.”

The fortunes of luxury stocks have been closely tied to China’s announcements regarding economic stimulus measures designed to counter flagging growth linked to factors including a slumping property market and high youth unemployment.

The world’s second-largest economy is at risk of missing its target of around 5 percent growth in 2024, analysts say.

Guiony said recent announcements showed that Chinese authorities understand the need to spur household spending, though he would not speculate on the timing of a potential turnaround.

“Whether these measures will be sufficient or not, [or] will be completed in the future by further measures, I don’t have a clue, but clearly it shows that they are taking the issue very seriously,” he remarked.

Slowdown Since Second Quarter

Reporting results after the market close, LVMH said revenues totaled 19.07 billion euros in the three months to Sept. 30, below the Visible Alpha forecast of 20.01 billion euros.

Stripping out the impact of currency fluctuations, sales were down 3 percent year-on-year, indicating a slowdown from the second quarter, when organic revenues increased 1 percent.

Like-for-like sales in Japan were up 20 percent in the third quarter after a 57 percent jump in the prior three-month period as the yen recovered from its recent weakness.

In the rest of Asia, the trend worsened with a 16 percent decline in the third quarter.

Sales were flat in the U.S. and up 2 percent in Europe, representing a slight quarterly deceleration in both cases.

LVMH does not break down results by brand and Guiony offered little insight on the underperformance of fashion and leather goods, beyond saying that Vuitton was slightly above the division average and Dior slightly below.

Creative Churn

The segment is facing a period of creative churn, with the departure of Hedi Slimane at Celine, to be succeeded by Michael Rider; Kim Jones exiting Fendi, with no successor yet revealed, and Sarah Burton taking over at Givenchy.

Guiony said LVMH was counting on product innovation to emerge from the market slump, and the onus will be on the new artistic directors to stoke excitement around their offerings, although these won’t come on stream for several quarters.

Some analysts have suggested that its cash cow brands are also in need of a refresh.

“The impression is that both LV and Dior are in transition and need a breather before they regroup and restart. Both brands have seen the same womenswear creative directors in place for a long while, which seems less than ideal,” Bernstein analyst Luca Solca and his team said in a report in August.

Uncharacteristically, Tuesday’s initial press release from LVMH did not include a quote from chairman and chief executive officer Bernard Arnault, with the group merely reiterating its guidance for the year.

But at an event last week celebrating the 10th anniversary of the luxury group’s vocational training program for craftspeople, the luxury mogul emphasized the importance of quality products over marketing.

“Our future customers should feel drawn to our products because of their perception of the excellence of our craftspeople, and not because we’re trying to reel them in with some classic marketing tactic based on a study of what they want,” Arnault said.

LVMH’s share price has fallen by 27 percent from its intra-year peak of 872.80 euros on March 14 as inflation has curbed discretionary spending.

But Guiony made clear that LVMH would not be changing strategy or lowering prices in an attempt to win back aspirational customers.

“I think it would be a mistake. We have to stay true to what we are. The offer in luxury has been the key strength over the years,” he said. “The current situation is more demand-driven than offer-driven.”

Organic sales of watches and jewelry were down 4 percent in the third quarter, while wines and spirits posted a 7 percent drop. On the bright side, perfumes and cosmetics were up 3 percent, and selective retailing rose 2 percent.

Revenues at travel retail operator DFS are still below 2019 levels, and LVMH said last week that it was bringing back Ed Brennan as interim CEO to help steer the business back to growth.

More Management Changes?

There is speculation that other senior management changes are in the works, after a series of big shifts in LVMH’s C-suite and the appointments of Arnault’s sons Alexandre and Frédéric to its board of directors.

During this year alone, executive changes have included the nomination of a new deputy CFO and head of LVMH Fashion Group, as well as the stepping down of Antonio Belloni, LVMH’s long-standing group managing director.

In late September, LVMH revealed internally the upcoming departure of Christopher de Lapuente, CEO of the selective retailing division, who is retiring at the end of October.

Even as it tries to rein in spending, the luxury group must deal with a number of unexpected bills in the coming months.

If confirmed, French Prime Minister Michel Barnier’s plan to raise the corporation tax would cost LVMH between 700 million and 800 million euros, Guiony said.

Meanwhile, a disappointing Champagne harvest is set to wipe 40 million to 50 million euros from the profits of the division, he added.

Cécile Cabanis, participating in her first call as deputy CFO, said the wines and spirits division would also be hit by China’s imposition of temporary anti-dumping measures on brandy from the European Union, a measure that disproportionately affects cognac producers.

Cabanis said China accounts for just under 20 percent of Hennessy’s revenues, but tariffs should have limited near-term impact as inventories in China are high due to recent weak demand.

LVMH was the first major player to report third-quarter sales. French group Kering is due to unveil its figures on Oct. 23, followed by Hermès International on Oct. 24.

“For the time being, the material revenue miss of the luxury bellwether LVMH is a clear negative for the industry ahead of the [third-quarter] reporting season and in the run-up to key Christmas and Chinese New Year trading periods,” Thomas Chauvet, analyst at Citi, said in a research note after the results.

Transportation Department says it’s the largest penalty against an airline for civil-rights discrimination

Lufthansa LHA 3.24%increase; green up pointing triangle was fined $4 million by U.S. regulators, who accused the German airline of discriminating against 128 Jewish passengers by stopping them from making a connecting flight due to the alleged misbehavior of a few fliers.

The passengers, who were going from New York City to Budapest in May 2022 for an annual memorial event in honor of an Orthodox rabbi, weren’t allowed to board a connecting flight in Frankfurt, Germany, the U.S. Transportation Department said.

On the first leg of the flight, some passengers said they were told by the crew to wear face masks and not to stand in the aisles. The passengers said they didn’t see anyone that didn’t comply. Lufthansa at the time required passengers to wear a face mask, while U.S. and German law prohibit passengers from assembling in aisles or galley areas during a flight.

The captain of the flight informed a Lufthansa security manager of misbehavior by passengers traveling on to Budapest. No specific passengers were identified, according to the Transportation Department. Still, the airline put a hold on more than 100 passengers’ tickets.

In Frankfurt, the gate staff called the names of passengers allowed to board, and left the 128 travelers waiting at the gate “confused and upset” as the plane left, the Transportation Department said.

Most of the 128 passengers were wearing clothing worn by Orthodox Jews, such as black hats, pants and jackets. They told the Transportation Department that they were treated like they were a group of one, even though many didn’t know each other, “because they were openly and visibly Jewish.”

In a video posted to social media a few days after the flight, a Lufthansa employee talking to an upset man at the Frankfurt airport says, “It was Jewish people who were the mess.” The man replies, “Jewish people on the plane made a problem, so all Jews are banned from Lufthansa for today?” She answers, “Just for this flight.” The video was verified by Storyful, which is owned by News Corp, the parent company of The Wall Street Journal.

Lufthansa tweeted an apology several days after the flight, saying it regretted that “the large group was denied boarding rather than limiting it to the non-compliant guests.”

The Transportation Department said the $4 million fine is the largest it has issued against an airline for civil-rights violations. Half of the fine must be paid within 30 days. The other $2 million was credited to Lufthansa for paying back the affected passengers.

Penalties for civil-rights violations by airlines are somewhat uncommon, as proving discrimination can be difficult. Airlines are more commonly fined for customer-service violations such as not providing required refunds.

“No one should face discrimination when they travel, and today’s action sends a clear message to the airline industry that we are prepared to investigate and take action whenever passengers’ civil rights are violated,” said Transportation Secretary Pete Buttigieg.

According to the Transportation Department, Lufthansa said the passengers were denied boarding due to an “unfortunate series of inaccurate communications, misinterpretations, and misjudgments,” and its employees didn’t discriminate against customers. Lufthansa rebooked most of the passengers on flights the same day.

Lufthansa said Tuesday it has cooperated with the Transportation Department and will continue to have a dialogue with Jewish organizations and advocacy groups. It said it has created antisemitism and discrimination training for its employees.

Jewish organizations have called out rising antisemitism in the U.S. and other countries in recent years, a problem worsened since the Oct. 7 attack on Israel by Hamas last year and the ensuing war in Gaza.

Jonathan Greenblatt, the CEO of the Anti-Defamation League, a Jewish advocacy group, said in a post on X that the incident “was clear antisemitism” and that the airline blamed “Jews as a group for the alleged actions of a few.”

The Transportation Department said it had a right to investigate the Lufthansa incident because the flight originated from the U.S. and Lufthansa’s foreign air carrier permit requires it to obey U.S. laws.

Alibaba, Baidu, and state-owned Beijing Financial Holdings among investors who have agreed to take over 30% of Horizon Robotics’ shares ahead of IPO

Alibaba 9988 -0.65%decrease; red down pointing triangle and search-engine giant Baidu BIDU -5.19%decrease; red down pointing triangle are investing in a nearly $700 million equity offering by a Chinese smart-driving firm, indicating rising demand for assets in the rapidly growing market for autonomous driving.

Horizon Robotics, which is planning to raise as much as 5.41 billion Hong Kong dollars through an initial public offering, equivalent to $696.6 million, will begin taking orders from institutional investors starting Wednesday, it said in a filing.

Alibaba, Baidu and state-owned Beijing Financial Holdings are among the cornerstone investors who have agreed to take over 30% of the company’s shares ahead of the IPO. Horizon Robotics is expected to start trading on the Hong Kong exchange on Oct. 24.

Having cornerstone investors helps companies better market their shares to institutional and retail investors.

Chinese companies have been exploring the use of advanced driver-assistance systems in consumer cars and robotaxis as a progression toward full self-driving vehicles. Chinese policymakers are promoting the development of cars, roads, and cloud services to support autonomous driving.

Horizon Robotics provides advanced driver-assistance systems and autonomous-driving solutions that combine algorithms, purpose-built software, and processing hardware for assisted and autonomous driving for passenger vehicles.

The company has set a price range of 3.73 Hong Kong dollars to 3.99 Hong Kong dollars per share. The final IPO price will be determined on Oct. 22.

The offering comes at a time when Chinese equities markets are showing some signs of revival following Beijing’s multibillion-dollar monetary and fiscal push to rejuvenate its ailing economy, which has been battered by weak consumer demand and a real estate slump.

Horizon Robotics said that nearly 70% of the IPO proceeds will be used over five years for research-and-development purposes, while the rest will be used for sales and marketing expenses and meeting working capital needs.

Goldman Sachs, Morgan Stanley and China Securities International are among the banks advising Horizon Robotics on the IPO.