LVMH revenues are down again

LVMH's revenues have decreased for the second consecutive quarter amid a slowdown in luxury sales that even the leading fashion conglomerate cannot revitalize. In the past three months, revenues fell by 1% in absolute terms, remaining slightly positive on an organic basis, with a 2% increase considering currency fluctuations, including a significant drop in the Japanese yen. The results missed analysts' forecasts of 3-4% organic growth, thus falling below expectations. Net profit decreased by 14% to €7.27 billion in the first six months of 2024, also below analysts' expectations, while recurring operating profit fell by 8% to €10.65 billion. Currency fluctuations also had a negative impact, costing the group €607 million and further reducing profits. This did not prevent the group from heavily investing in marketing and fashion shows. Sponsoring the Paris 2024 Olympics and Paralympics, at a cost of €150 million, is increasingly becoming the catalyst for Arnault's group hopes, which expects a strong return on its high-profile marketing initiatives. The sense one gets from reading these results is that LVMH has two main problems: the first is the excessive reliance on a Chinese market boom that was thought to last forever but has since waned, putting the entire group strategy in crisis; the second is that, even though the group is too big to fail, it is becoming like one of those enormous houses or gigantic yachts whose maintenance costs (in this case marketing, boutiques, fashion shows, and so on) become increasingly high over time, weighing down the overall structure and depriving it of the agility that smaller players possess. In short, you can be too big to fail but also too big to move.

The situation, as mentioned, appears complex in China and across the Asian continent: the decline in sales in Asia (excluding Japan, but we'll get back to it shortly) has risen from 6% last year to 14% this year. In China, the problem is twofold: on one hand, there are various issues in the real estate market, which the Chinese central bank has attempted to address by cutting interest rates; on the other hand, there is a cultural shift where wealth and its display are meeting with disapproval from authorities who have also promised to “properly regulate excessive incomes” after having removed the profiles of several influencers from social media in recent years. Currency fluctuations in China and Hong Kong are also impacting sales in Hong Kong's duty-free stores, Hainan, and Macao, while Japan is experiencing a discount frenzy, where LVMH sales have increased by 57% even with price hikes to offset currency changes. In the United States, LVMH sales grew by a modest 2%, reflecting the market's growing skepticism, likely due to the turbulent political climate in the country.

The fashion and leather goods division reported sales of €10.28 billion in the second quarter, with a 1% increase on a comparable basis, although operating profits in this division decreased by 6%. The operating profit margin fell to 38.8% from 40.5% the previous year but remained high for flagship brands like Louis Vuitton and Dior. The latter brand achieved better results than Louis Vuitton in the USA but lagged behind in China. LVMH has also increased Vuitton product prices by 2-3% at the beginning of July, the first increase since February 2023. But other costs have also risen: marketing expenses, for example, and especially those for fashion shows, which, according to Guiony, attract huge audiences, between 300 million and 500 million. Unexpected expenses include further investments in Dior after labor exploitation accusations in Italian sweatshops, which have also caused significant problems with investors and have led to increased audits and accelerated vertical integration of the production process. As a result, the group has slowed real estate acquisitions while continuing to invest in restructuring and expanding boutiques. The wine and spirits segments, along with watches and jewelry, are the worst performers, with decreases of 26% and 19% respectively. Specifically, watches and jewelry saw lower revenues, partly due to heavy investments in repositioning Tiffany & Co., which required 30 store renovations in the first half of the year, with a quarter of its boutiques now updated to the new concept. Organic sales declined by 4% in the second quarter, while wines and spirits saw a 5% decrease. Fragrances and cosmetics increased by 4%, and selective retail, led by Sephora, grew by 5%.