Results: A Mixed Bag – Beat in 3Q15 Group Sales (+7%) but Weak Fashion & Leather Trends to Temper Enthusiasm Near-Term
Citi's Take — Shares performed well on the publication of strong 1H15 results but
came under pressure in August on renewed China-related concerns (poor macro
data, RMB devaluation and Shanghai stock market correction). Solid 3Q15 sales
(+7% in constant FX vs. consensus +6%) suggest these concerns were possibly
overdone, however 3% constant currency sales growth in Fashion & Leather
compares unfavourably with consensus of ~+6% and +10% in 2Q15, while the
strong beat in Cognac in China might have been artificially driven by
undershipments in 3Q14 (depletions for XO and VSOP in China remain negative, in
our estimates). Following strong recent share price performance (+11% over the
past week), the miss on this high-margin division could drive share price pressure
near-term in a quarter where the market traditionally focuses on sales momentum.
While regional growth disclosure will not be available until tomorrow’s conference
call, we would expect the following regional trends: i) continued double-digit sales
momentum in Europe still driven by tourism and parallel markets, albeit possibly
moderating from +14% in 2Q15 given price increases in 2Q15 and RMB weakness
(-5% vs. EUR since the RMB devaluation announcement in August); ii) double-digit
growth in Japan normalising from +34% in 2Q15, albeit against a ~15pp tougher
comparative (+5% in 3Q14 vs. -11% in 2Q14); management indicated 3Q15 sales
growth accelerated relative to 1H15 (+8%); iii) solid growth in the US (~+8-10%
estimated), a modest slowdown relative to 1H15 and a respectable outcome
considering the US stock market correction over the summer and US dollar strength
affecting inbound tourism and supporting outbound travel; and iv) continued
weakness in Greater China given negative wealth effects from stock market
correction and RMB devaluation, although recent data points of the Golden Week
holiday in Mainland China and Hong Kong have been on balance better than
expected.
Implications — Given i) a ~1% beat on reported 3Q15 revenues and better-than
expected constant currency sales growth (+7%); ii) adverse divisional mix (highmargin
Fashion & Leather underperforming, Watches & Jewelry outperforming and
artificial Cognac recovery in China); and iii) limited outlook comments, in particular
greater uncertainty from Louis Vuitton’s renewed quarterly sales volatility, we expect
consensus FY15 EBIT of €6.59bn (+15% YoY) and FY16 EBIT of €7.24bn (+10%
YoY) to be trimmed down by a low single-digit percentage.