LVMH Fashion and Leather Sales Fall 5% in Third Quarter, Company Cites Weaker Chinese Demand

LVMH, the world's largest luxury group, reported weaker-than-expected third-quarter sales on Monday, Oct. 12, and pointed at China.

Organic sales, which strip out currency swings, rose 1% from a year earlier to €18.5 billion ($20.7 billion). Analysts polled by Visible Alpha had expected 1.3% growth.

The damage was concentrated in the biggest unit. Fashion and leather goods, home to Louis Vuitton, Dior and Loro Piana and nearly half of group revenue, posted a 5% organic decline in the three months to Sept. 30. Analyst forecasts had called for a drop of roughly 1.6% to 1.8%.

The division had broken a two-year losing streak in the second quarter. It has now slid back into negative territory.

Asia down, US up

Sales in Asia, a region dominated by China, fell 5% from a year earlier. Sales in the US rose 5%.

"In the third quarter specifically, Asia was penalised by a sharp macro-led deterioration in Chinese consumer sentiment, with a tangible impact on discretionary expenses," Chief Financial Officer Cecile Cabanis told analysts.

Asked about China's tax crackdown on wealthy individuals, Cabanis said Chinese consumers' "feel good" factor had taken a hit. Chinese shoppers account for roughly a fifth of global luxury purchases and were long the sector's growth engine.

LVMH's own statement said organic growth reflected "a less buoyant environment in China, while the United States, Europe and Japan saw good growth."

Louis Vuitton has a second problem in China. The brand faced a nationalistic consumer backlash over a trademark dispute with tea chain Molly Tea, which used a logo resembling Vuitton's floral motif. Analysts cut their expectations in recent weeks because of the tax crackdown and that fight.

Other divisions

The rest of the group was mixed. Wines and spirits rose 6% organically. Selective retailing rose 8%. Perfumes and cosmetics were flat.

Watches and jewellery, home to Bulgari and Tiffany, grew 6%, down from 9% in the first half. That category had largely held up during the downturn, and some analysts have recently warned that the resilience may be fading.

The stock and the sector

LVMH's US-listed shares fell more than 3% after the update was published. The stock is down roughly 40% this year. Morningstar's figures aside, the scoreboard is stark: LVMH lost its title as France's most valuable company to L'Oréal, and Bernard Arnault dropped out of the top 10 of the Bloomberg Billionaires Index.

Europe's leading luxury groups have lost around €330 billion in market value since January. The $350 billion industry is in its third year of slowdown.

HSBC downgraded LVMH to Hold from Buy last month and cut its price target to 490 euros from 600 euros. It cited the weight of the fashion and leather unit and a "slower than expected pick-up at Dior."

Bank of America analysts wrote that the results "will likely still be a negative catalyst for the sector overall." RBC analyst Piral Dadhania said he expected "modest pressure" on the shares of LVMH and its peers.

The US is not a guaranteed cushion. Citi data showed US credit card spending on luxury goods fell for a third straight month in September. The sector is also dealing with the fallout from the Iran war.

The recovery argument

Not everyone reads the quarter as a deepening slump. HSBC said it remains "confident on the mid-to-long term growth potential" of the fashion and leather division and the group overall, even after moving to the sidelines.

Morningstar senior equity analyst Jelena Sokolova said "the luxury sector is showing early signs of recovery," though LVMH's flagship division has yet to return to the outperformance investors once expected from it.

Weakness beyond the luxury aisle

The soft Chinese demand LVMH described is not confined to handbags. Small-business owners in several provinces described weaker spending in interviews with The Epoch Times, published Sept. 29. All spoke anonymously, citing fear of reprisal.

A Hubei convenience-store owner surnamed Yang said sales began deteriorating around the start of last year. "Everyone is downgrading their consumption," he said. "If they can avoid buying something, they don't buy it."

A Beijing noodle-shop owner surnamed Xiao closed her restaurant and returned to Henan Province after cheaper competitors pulled customers away. A Shanxi businessman surnamed Wang said he carries about 1 million yuan ($150,000) in debt and that payments for his solar-panel installation work can be delayed for months.

These are individual accounts, not national data. They fit the pattern LVMH's CFO described, though: shoppers trading down and cutting discretionary spending.

What comes next

LVMH is the first major luxury group to report third-quarter results. The rest of the sector's reports are still ahead. Whether Chinese consumers are stabilizing or still pulling back is the question analysts will be pressing on those calls.