Early premarket gappers
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What Luxury’s Worst Quarter Ever Reveals About the New Normal
Bleak financial results at LVMH, Kering and others came as little surprise. But managers offered fresh clues on how the crisis will reshape the luxury market going forward — and signalled a few unexpected bright spots.
PARIS, France — No one expected the numbers to be good. In fact, as several European luxury houses prepared to report sales and profits for the spring quarter — during which coronavirus lockdowns peaked and boutiques around the world were forced to close — investors and analysts were bracing for the modern luxury industry’s worst-ever contraction.
But when sector-leader LVMH reported Monday that first-half profits had tumbled 68 percent, missing analysts’ forecasts by more than half a billion euros, it was clear that luxury investors were in for an even rockier ride than anticipated.
Second-quarter sales for the group, whose brands include Louis Vuitton, Dior and Sephora, fell 38 percent. Gucci-owner Kering’s top line fared even worse, with revenues down 44 percent, while Italian luxury shoemaker Ferragamo saw a plunge as deep as 60 percent.
Even Hermes saw second-quarter sales fall 42 percent. That brand is considered to be luxury’s most crisis-proof player thanks to demand that has long exceeded supply for its flagship Birkin and Kelly handbags.
“I don’t think we have ever seen such a perfectly negative alignment of planets against us,” said LVMH Chief Financial Officer Jean-Jacques Guiony.
“The numbers are objectively very bad,” said Deutsche Bank analyst Francesca di Pasquantonio. “However painful we thought the deleveraging would be in the sector, it’s actually been worse.”
Trying to focus on the positive, luxury executives mostly agreed in presentations this week that demand had recovered significantly since June, especially in China, and most were optimistic that shoppers’ desire to buy luxury fashion would remain intact on the other side of the pandemic. Other bright spots included a surprising uptick in the US for some brands, and signs of resilience for labels such as Bottega Veneta and Prada.
But with little visibility on when key business drivers like international travel and foot traffic to luxury boutiques will bounce back, hopes for a “V-shaped” recovery, making the coronavirus pandemic a passing shock, have largely slipped away. More and more brand managers expect the rebound to be gradual, with some acknowledging that the crisis is likely to not only continue well into next year, but reshape the sector more deeply than missed sales.
So, what can the latest round of results presentations tell us about luxury’s new normal?
China Is More Important Than Ever
Luxury is, ostensibly, a European industry. But make no mistake. In terms of who is actually doing the buying, the sector’s fortunes are inextricably linked to China: clients from the country, a powerful centre of new wealth creation, have made up more than one-third of luxury sales and the vast majority of luxury growth in recent years.
The pandemic has only accelerated luxury’s dependence on Chinese shoppers, as demand rebounded sooner and more sharply in China than in other regions. While most luxury brands aren’t seeing anything close to a full recovery yet, the share of sales made up by Chinese consumers is surging. At Burberry, which reported results two weeks ago, sales to Chinese clients declined “in the mid-20 percent” range during the spring quarter, compared to a 45 percent drop for consumers overall. Chinese nationals were already on track to drive more than half of total luxury sales by 2025, but could reach a majority sooner in light of current trends.
In addition to the growing importance of Chinese clients, brands are seeing an explosion of sales in Mainland China itself. After long preferring to buy luxury goods at lower prices on shopping trips abroad, Chinese clients have been progressively “repatriating” their spending in recent years. That trend has accelerated as the pandemic put most international travel on pause: Kering said Mainland Chinese sales were up 40 percent year-on-year, with growth increasing throughout the second quarter. LVMH said its biggest brands, Louis Vuitton and Dior, had seen growth as high as 100 percent in certain weeks. But even these spectacular figures aren’t enough to offset the money Chinese clients aren’t spending on trips abroad.
Tourism in Question
Even if the share of China’s domestic spending was already on the rise before the pandemic, luxury brands weren’t prepared for the overall decline in tourist spending brought on by Covid-19. In addition to investments in travel retail by the likes of LVMH and Cartier-owner Richemont, extensive store networks in European shopping hubs like Paris are a reflection of the broad assumption made by managers across the industry that the record-high levels of tourism seen in recent years were only going up.
Now, a continued halt to most international travel is set to pound revenues for LVMH, which owns the tax-free shopping chain DFS as well as the Belmond and Cheval Blanc hotel chains. But the gloomy outlook for tourism was also raised as a key headwind by Kering, Moncler and Burberry.
“There are a lot of moving pieces. The only one thing we know and where we are clear is that the lack of tourism will continue in 2020 and probably most — or at least for the first half — of 2021,” Kering Chief Financial Officer Jean-Marc Duplaix said. (The UN World Tourism Organization echoed that view in a statement Tuesday, saying most members of its expert panel don’t expect international tourism to recover before the second half of 2021, though some still expect a rebound in the first part of next year.)
A prolonged downturn in travel will result in more lost sales, Deutsche Bank’s Di Pasquantonio said. “Tourist spending on average is about 40 percent of luxury sales. Part of this can be recaptured in local markets, but not entirely.”
While most brands are saying it’s too soon to think about cutting stores in tourist hubs, leases are likely to be evaluated carefully when they come up for renewal.
Digital Acceleration
E-commerce sales have surged during the coronavirus pandemic — they tripled for Kering’s Bottega Veneta, and more doubled at Prada. LVMH's Guiony said e-commerce figures were “too good to be mentioned,” perhaps not wanting to set too high a bar for future presentations.
While digital sales numbers may not remain quite as high, the rising importance of digital communications, e-commerce and integrating digital touchpoints with physical stores is certainly expected to stay with the sector on the other side of the coronavirus pandemic.
Options like click-and-collect are surging in popularity as a result of the pandemic, and brands that long resisted e-commerce are now recognising its power more clearly. After launching e-commerce in the US only as recently as last year, Dior’s Chief Executive said in a recent interview that the brand is gaining notable market share during the pandemic in part by reaching the “low-hanging fruit” of new online customers who had never had access to a physical Dior store.
Kering has said it’s putting “omnichannel capabilities at the core of our distribution strategy,” while Burberry is set to launch a “social retail store” in partnership with WeChat-operator Tencent on Friday. This week, Moncler pledged to make digital the first priority in all of its initiatives.
“Every project ranging from the definition of collections to product development and events’ concept definition should be ‘digital-first,'” said Moncler’s Chairman and CEO Remo Ruffini. Even as sales fell 29 percent during the first half, the skiwear-maker has decided to invest in bringing its e-commerce operations in-house, ending a white-label service provided by Yoox Net-a-Porter.
As brands promote themselves going forward, the need to closely monitor costs could also fuel the shift to digital. Even if digital fashion shows received mixed reviews this summer, executives will have taken note of their potential to reduce costs. Some brands are set to resume physical fashion shows this fall, but splashing out on expensive in-person events won’t be the default.
Luxury Polarisation
European luxury brands have largely surfed the same waves of economic growth in the US, Japan and China together for decades. Even if performance varied, most companies tended to move in the same direction. Recent years have seen increased polarisation, however, as demand was driven by choosier, digitally-savvy clients and big groups like LVMH and Kering leveraged their scale to dominate the market. Well-funded, fashion-forward labels like Gucci drove breakneck growth on the latest wave of Chinese demand, for example, while weaker brands that struggled to renew their offer stagnated.
During the pandemic, the gap between winners and losers in luxury is becoming more exaggerated than ever, as only the brands with the most clearly-defined and desirable offer have been able to move product in the absence of store traffic. While sales for the spring quarter fell 38 percent at LVMH, the smaller and less trendy Ferragamo saw sales plunge by as much 60 percent.
This kind of bifurcated performance is likely to continue, as polarisation has become a self-fulfilling prophecy: the strongest brands are able to drive tastes, reinvest higher profits and keep growing faster than the market. The smaller luxury companies who are posting an operating loss during the pandemic may need to make deeper cuts to investment, setting them up to fall even further behind sector leaders like LVMH and Kering once demand resumes.
US Rebound, Prada Optimistic
While the luxury industry’s recent financial results were a reflection of the unprecedented difficulties the sector is facing — as well as the rocky road ahead — the week’s news wasn’t without some positive surprises.
In the US, where the coronavirus pandemic has been compounded by political upheaval, it turns out that luxury sales actually recovered for some brands in June. Louis Vuitton’s June sales in the US were roughly in line with last year, and Dior returned to growth, said LVMH's Guiony. Kering and Prada also pointed to improvements in that market.
Other bright spots included a more modest decline for Kering’s Bottega Veneta: first-half sales fell by 9.5 percent, well ahead of the sector average, as owner Kering kept investing in the brand’s renewed aesthetic under British designer Daniel Lee.
Prada also struck an optimistic tone, despite posting an operating loss of €180 million for the first half. Chief Executive Patrizio Bertelli referred to the pandemic as a “temporary interruption.” Emboldened by rebounding demand since stores reopened, the Milanese brand is sticking to its plan to eliminate end-of-season sales.
Luxury analyst Luca Solca called the brand’s results “a miss, but for the good reasons.” “It is reassuring to see that Prada managed to produce organic retail growth in 1H20 in line with retail growth at Gucci,” Solca said.
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DAX:
- Wirecard (WDI TH) +2.2%
- VW (VOW3 TH) +1%
- HeidelbergCement (HEI TH) +0.7%
- HeidelbergCement Raised to Neutral at JPMorgan; PT 53 euros
- SAP (SAP TH) +0.6%
- SAP Is Said to Tap Morgan Stanley, JPMorgan for Qualtrics IPO
- Fresenius Medical (FME TH) +0.5%
- Fresenius SE (FRE TH) -0.7%
- Daimler (DAI TH) -0.7%
- Beiersdorf (BEI TH) -0.9%
- Deutsche Telekom (DTE TH) -1.1%
MDAX:- GEA Group (G1A TH) +2.5%
- GEA Group Forecasts Adj Ebitda
- ProSieben (PSM TH) +1.4%
- ProSieben 2Q Sales Beat Highest Est., Gives No Outlook
- K+S (SDF TH) +1.3%
- Commerzbank (CBK TH) -0.6%
- Commerzbank Board Is Said to Lean Toward Vetter as New Chairman
- Evotec SE (EVT TH) -1%
- Varta (VAR1 TH) -1.2%
- Symrise (SY1 TH) -1.5%
SDAX:- ADVA Optical (ADV TH) +3.7%
- Shop Apotheke (SAE TH) +3.1%
- DIC Asset (DIC TH) +1.5%
- Salzgitter (SZG TH) +1.5%
- Hamborner REIT (HAB TH) +1.3%
- LPKF (LPK TH) -0.9%
- Borussia Dortmund (BVB TH) -1.7%
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Nokia (NOA3 TH) +7.3%
- Nokia Takes Sales Hit But Profit Outlook Improves: TOPLive
- Dialog Semi (DLG TH) +4.1%
- Apple Smashes Revenue, IPhone Estimates on Pandemic Demand
- Telefonica (TNE5 TH) +3.2%
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NatWest (RYS1 TH) +3.2%
- *NATWEST SEES FY IMPAIRMENT CHARGE GBP3.5B TO GBP4.5B
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AMS (DQW1 TH) +2.8%
- AMS at Non-Deal Roadshow Hosted By Kepler Cheuvreux Today
- GEA Group (G1A TH) +2.5%
- GEA Group Forecasts Adj Ebitda
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BNP Paribas (BNP TH) +2.3%
- BNP Moves Past Equities Pain With 154% Debt Trading Surge
- Adyen (1N8 TH) +1.9%
- BP (BPE5 TH) +1.8%
- Beiersdorf (BEI TH) -1.3%
- Symrise (SY1 TH) -1.4%
- Carl Zeiss Meditec (AFX TH) -1.5%
After Hours Summary: Tech stocks up big on earnings -- FB +6.1%, AAPL +5.7%, AMZN +5.1%; Cos weak on earnings include TEAM -7.5%, RDFN -6%, SHAK -5.2%, EXPE -3.7%After Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: MDRX +22.5% (also will divest EPSi to Strata Decision for $365 mln), INT +13.9%, BRKS +10.3%, HURN +8.7%, TEX +7.4%, EBS +6.6%, FB +6.1%, CVA +6%, AAPL +5.7% (also announces 4-for-1 stock split), ATUS +5.7%, CACC +5.6%, VRTU +5.6%, FLEX +5.3%, BAND +5.2%, DLX +5.2%, AMZN +5.1%, SEM +4.8%, WWE +4.8%, BLDR +4.6%, LOCO +3.8%, ATR +3.5%, MX +3.4%, KNSL +3.3%, F +2.8%, CXP +2.6%, TNDM +2.6%, HIG +2.4%, SPSC +2.3%, SKYW +2.1%, CRY +1.9%, AIMT +1.6%, BVN +1.6%, X +1.5%, VRTX +1.3%, RARE +1.2%, DLR +1.1%, FLS +1.1%, QDEL +0.9%, GOOG +0.7%, CC +0.6%, FTAI +0.6%, NXGN +0.5%, BGS +0.4%, SWN +0.4%, EA +0.3%, MTX +0.3%, DRQ +0.1%, PRO +0.1%, SPXC +0.1%
Companies trading higher in after hours in reaction to news: INT +13.9% (to sell Multi Service payment solutions business), RDUS +2.5% (GH and RDUS announce strategic collaboration), BVN +1.6% (names new CEO), TTWO +1.3% (announces partnership with the NFL), LYFT +0.4% (announces partnership with SIXT), JNJ +0.1% (FDA approves expanded indication for STELARA)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: HTGC -7.7%, TEAM -7.5%, MOH -7.3%, RDFN -6%, XPO -5.5%, SHAK -5.2%, EGHT -5%, POWI -4.5%, TWOU -4.3%, CASA -3.9%, EXPE -3.7%, GILD -3.5%, FORM -3.4%, PFPT -3.4%, XLNX -3.2%, MITK -2.9%, MERC -2.7%, SYK -2.7%, SM -2.6%, ZEN -2.4%, SGEN -2.2%, EXAS -1.9%, GLPI -1.5%, NATI -1.4%, DVA -1.3%, BEAT -0.9%, MTD -0.8%, FND -0.7%, DECK -0.6%, PEB -0.6%, EXPO -0.5%, MGM -0.3%, ES -0.2%, FHI -0.2%, HTH -0.2%, ACA -0.1%, BIO -0.1%
Companies trading lower in after hours in reaction to news: WRTC -6.5% (names new CEO), GOGO -3.2% (provides update on pandemic, includes job cuts), JACK -0.4% (CFO departs)
Apple Announces 4-1 Stock Split After Shares Surge Toward $400
Apollo adds $100bn to war chest in second quarter
Prudential deal and launch of credit fund boost private equity group’s assets by almost a third
Apollo Global Management added nearly $100bn to its investment war chest in the second quarter, doubling its previous record as a rebound in financial markets unleashed large gains for Wall Street groups even as the American economy falters.
A big insurance deal with Prudential, together with the launch of a credit fund that will offer jumbo $1bn loans to corporate borrowers, contributed to an increase of nearly one-third in Apollo’s assets under management, taking the total to $414bn at the end of June.
Meanwhile, soaring markets helped wipe out about two-thirds of the $577m “clawback” bill that Apollo recorded at the end of March, it said on Thursday. This total reflects performance fees it has already received from investors, and would have to pay back if assets were liquidated at depressed valuations.
The recovery was especially pronounced at a $17.6bn buyout fund where analysts expect asset sales to be an important source of performance fees in the coming months. That vehicle, which was raised in 2013 and is about one-third of the way through selling off its investments, recorded a $2bn increase in value — enough to wipe out its entire clawback obligation.
“Despite a continued volatile market backdrop during the second quarter, Apollo once again delivered strong growth,” said Leon Black, the group’s billionaire founder.
Apollo’s $1bn profit for the three months ended June 30 marked a stunning reversal from the $2.3bn loss it recorded in the previous quarter, which ended days before Federal Reserve chair Jay Powell promised to use his powers “forcefully, proactively and aggressively” until the economy recovered from the coronavirus shock.
Since then, the US central bank has spelt out an extraordinary package of measures to support financial markets, expanding its purchases of corporate debt and adding riskier securities to the list of assets it is willing to buy.
Wall Street groups have been major beneficiaries, even as the US economy contracted the most in postwar history in the second quarter and unemployment claims surged to historic highs.
Apollo’s shares have more than doubled from their low-point in March, wiping out losses sustained in the early weeks of the pandemic, to trade 13 per cent higher than at the beginning of the year.
Carlyle Group, the Apollo rival where Mr Powell worked until 2005, also swung to profit in the second quarter. On Thursday it reported net income of $205m, compared with a loss of $709m for the previous period.
But while Apollo’s growing asset base inched closer to the $564bn tally of market leader Blackstone, Carlyle gave up ground.
The smaller firm, which has been slower than Apollo to seize new opportunities in credit and insurance, reported assets under management of $221bn, down 1 per cent since the beginning of the year.
NEXI CEO SAYS LOOKING AT POSSIBLE MERGER WITH SIA AS HAS STRATEGIC AND INDUSTRIAL RATIONALE BUT CAN ONLY BE DONE IF IT BRINGS VALUE TO ALL SHAREHOLDERS