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Status change confirmed: sales growth above peers and lesser sales mix deterioration

Update Our recent rating upgrade to Buy was notably based on two sales factors: a) Sales

growth above peers. Q3 reporting is only starting, but we expect LVMH’s 7% Q3 organic

growth to stand above the sector, as in H1 (6% vs 4%). b) Less sales mix deterioration. One

of the issues on LVMH in recent years was underperforming sales growth by high-margin LV

and beverages (combined c.40% of group sales) and outperformance by low-margin retailing. In

Q3, for the second quarter in a row, LVMH’s sales mix is now more stable. Wines / spirits (14%

of Q3 sales vs 13% in Q3 2014): 16% organic growth reflects the rebound on a very low comp.

basis in China (55% volume sell-in drop in Q3 2014), which materialised even though the sellout

pattern is still falling and the XO volume sell-in drop (over 20%) is larger than initially hoped

for by the group. Overall, cognac volumes up 12% (-5% in Q3 2014) and champagne volumes

up 5% (+ 3% in H1) point to a solid pattern that is likely to continue in coming quarters (easy

cognac comp. basis, sustained US dynamics). Fashion / leather goods (34% of sales vs 36%

in Q3 2014): 3% Q3 organic growth is disappointing and reflects the lack of pricing power in

most brands ex LV (low euro), the repositioning of M Jacobs and D. Karan, and a slightly harder

comp. basis. Nevertheless, at 5% vs 6% for the group, the segment’s 9m organic growth rate is

close to the group average (compared with 3% vs the group at 5% for FY 2014). Others: the

7% beauty organic growth (H1 at 6%) is remarkable given the double-digit comp. basis and

reflects the stronger world market and related dynamics in US / Europe and in make-up /

perfumes, which play more to LVMH strengths than the previous skincare / Asia market focus.

Likewise, the 11% watches / jewellery organic sales growth (H1 at 10%) is remarkable given the

highest quarterly comp. basis of the year, the anniversarying of the Rome Bulgari flagship

reopening and the transition at TAG Heuer, and reflects a double-digit pace at Bulgari and

Hublot. Lastly, selective retailing growth is stable vs H1 at 5%, despite the further deterioration

in Hong Kong / Macau affecting DFS (SGe a third of segment sales, o/w c.40% in HK/Macau),

with double-digit growth at Sephora (SGe: 50% of segment sales).

SG view While we expect comments on LV at today’s conf call (3:00 PM CET; 33(0)1 70 77

09 40), SGe will stay broadly unchanged. Overall, we still think that a) with sector trends muted,

investor risk is lower on large/diversified groups with dominant/established brands; b) unlike in

the past, all the group’s large brands (ex DFS) have a satisfactory performance.

How we value the stock SG’s TP is the average of SOP/DCF (9.5% WACC, 4% LT growth)—