LVMH Confident in Recovery as China Confirms Rebound
Chairman and ceo Bernard Arnault reported strong signs of an upturn in activity since June.
PARIS — LVMH Moët Hennessy Louis Vuitton saw a strong rebound in China in the second quarter and expects a gradual return to normal elsewhere in the second half, supported by the solid performance of its top brands, Louis Vuitton and Dior, and a jump in online sales.
The French luxury conglomerate said net profit plummeted 84 percent in the first six months of the year, after the COVID-19 pandemic forced the closure of many of its stores and factories worldwide and grounded travelers, who account for 40 percent of luxury goods purchases in value terms, according to analysts.
“I do not think we have ever seen such a perfectly negative alignment of planets against us,” LVMH chief financial officer Jean-Jacques Guiony said on a conference call on Monday. But the outlook is brightening for the group, which has seen continuous improvements since the lifting of lockdown measures in many countries.
“The month of June was significantly better, and July will certainly see some improvement compared to June,” Guiony said. “We see, month after month, the situation coming back to a more normalized state and we expect this to continue.”
Bernard Arnault, chairman and chief executive officer of LVMH, noted the group had shown “exceptional resilience” during the health crisis. “While we have observed strong signs of an upturn in activity since June, we remain very vigilant for the rest of the year,” he said in a statement.
“Thanks to the strength of our brands and the responsiveness of our organization, we are confident that LVMH is in an excellent position to take advantage of the recovery, which we hope will be confirmed in the second half of the year, and to strengthen our lead in the global luxury market in 2020,” he added.
LVMH, which owns 75 brands ranging from Dom Pérignon Champagne to Bulgari jewelry, reported that sales fell 38 percent in the three months to June 30, following a 15 percent drop in the first quarter. In organic terms, sales were also down 38 percent, beating the Bloomberg consensus forecast for a 42 percent fall.
Organic sales in the second quarter were down 54 percent in Europe and Japan, while the U.S. saw a 39 percent drop. Asia, excluding Japan, performed comparatively better, with a 13 percent decline.
LVMH’s net profit totaled 522 million euros in the first half, with Louis Vuitton, Dior and Moët Hennessy remaining highly profitable. But the group’s gross margin took a hit, due to the depreciation of unsold products and its inability to absorb all the fixed costs of its manufacturing activities.
Most segments recorded losses during the period, with the exception of the key fashion and leather goods division, as well as wines and spirits. Selective retailing — which includes Sephora and DFS, LVMH’s travel-retail business — was hardest-hit, with a loss from recurring operations of 308 million euros in the first half.
Fashion and leather goods posted sales of 3.35 billion euros in the second quarter, down 37 percent in like-for-like terms, broadly in line with expectations. The division posted growth of more than 65 percent in China, while sales in Europe and the U.S. saw a progressive recovery from May.
In the U.S. and Japan, Dior sales rose in June while Vuitton was broadly flat. “I think this is very encouraging for the future,” Guiony said.
Dior has staged a series of high-profile events, including a physical fashion show in Italy for its cruise collection — albeit without the usual guests — and the opening of its traveling exhibition, “Christian Dior: Designer of Dreams,” in Shanghai on Tuesday.
Vuitton, meanwhile, is gearing up to present its spring 2021 men’s collection with fashion shows, open to the public, in Shanghai and Tokyo.
Sales of perfume and cosmetics were down 40 percent against a backdrop of significant destocking by retailers, with LVMH refraining from selling through parallel distribution channels. In the second half, Fresh will open concept stores in China with new services, and Loewe will launch a line of home fragrances.
Guiony said it was too early to extrapolate any forecasts from the global spike in online sales during the lockdown, although he indicated a shift in LVMH’s attitude to e-commerce, which it has traditionally been reluctant to engage in.
”We are very pleased with the business we’ve done on the digital front, particularly in Sephora and in fashion and leather goods, and to a lesser extent in perfumes and cosmetics. It has enabled us to offset part of the lost business in regular distribution channels, so it is encouraging for the future,” he said.
“When I see the amount of business that we’ve been able to generate in the last six months on our e-commerce platform, I think there is a future for these platforms to generate a significant amount of the global sales and to be a real and genuine distribution channel, alongside the brick-and-mortar,” Guiony added.
The watches and jewelry division recorded a 52 percent drop in organic revenue, even though Bulgari saw a strong recovery in China in the second quarter. Meanwhile, organic sales of wines and spirits were down 33 percent, with cognac benefiting from a rebound in sales in China and resilient U.S. demand.
In the selective retailing division, revenues fell 38 percent even as Sephora gained market share and saw strong increases in online sales. DFS was focused on cutting costs and gradually reopening its downtown stores in Venice, Macau and Hong Kong.
“Our top brands have not disappointed — all profitable; less revenue drops than peers; outstanding margins; market share gains; well positioned to become stronger in the crisis, which is exactly what leaders should do,” Guiony said.
“We are optimistic and confident, although there are two things we should not forget in order to be able to react quickly to any change in the environment. First, the resolution of the sanitary crisis lacks visibility and we cannot rule out further difficulties here and there. And two, the travel retail business is and will be suffering for a number of months and quarters before it comes back to normal,” he added.
While LVMH plans to slash its capital expenditures budget by 40 percent this year, it expects to keep its workforce largely intact. “There is no such thing as massive reduction in headcount. There could be some adjustments here and there, but nothing particularly significant,” said Guiony.
“It would be stupid on our side to adjust too much — be it the capital base, the human base, or even to streamline too much some brands — because when things recover, we want to be in good shape to benefit from that,” he explained.
The executive gave a brief update on LVMH’s $16.2 billion acquisition of U.S. jeweler Tiffany & Co., saying half-a-dozen antitrust filings were still pending, though he did not specify in which countries. “Things are moving forward,” Guiony said. “But I don’t really know when all the go-aheads will be given.”
He also declined to estimate the potential impact of U.S. tariffs on French fashion goods, including handbags. “Some are pending, some are threatened. It’s very difficult to make any assessment,” he noted. “It’s a likelihood, that’s right, but it’s not the first time that something like this doesn’t happen at the end of the day.”
Analysts expect the group to outperform the rest of the luxury sector, despite an unfavorable geographic mix.
“LVMH is more exposed to the U.S. market, which will be particularly hit by the delayed lifting of lockdown,” Morgan Stanley noted in a recent research report. The U.S. accounted for 24 percent of the luxury group’s revenues in the first half.
But LVMH was likely to benefit from a “flight to quality” as consumers seek the reassurance of mighty brands like Vuitton, Dior, Fendi and Celine, and gravitate toward classic and bourgeois brands over edgy labels.
“Consumers tend to want to buy products, which are less likely to depreciate in value over time, but also generally want a less ostentatious look,” said Morgan Stanley analysts Edouard Aubin and Elena Mariani.
The LVMH results come on the heels of figures from Compagnie Financière Richemont showing sales fell 47 percent in the three months to June 30 due to store and workshop closures, anemic tourism and a lack of appetite for hard and soft luxury worldwide during the pandemic.
Meanwhile, Burberry reported retail sales fell 48.4 percent in the first quarter ended June 27, despite a powerful rebound in the key markets of mainland China and South Korea. Kering is scheduled to publish its second-quarter results on Tuesday, with Hermès International to follow on Thursday.