Analysts expect weak H2 results from luxury so forecasts for the Q3 earnings season, which kicked off this week, were low. So far, those expectations are not proving low enough. The industry’s giant, LVMH, which has a market capitalization greater than its six largest competitors combined, was in the spotlight yesterday.
LVMH reported Q3 revenue of €19.1 billion, which fell short of analyst expectations. The company posted a 3% organic decline in sales, whereas analysts had predicted 2% growth. This disappointing performance was primarily driven by a 16% revenue drop in Asia (excluding Japan), particularly in China, where consumer demand softened and which comprises about a third of LVMH’s sales. Growth in Japan was the only bright spot (up 20%) yet Japan contributes to less than 10% of group revenue. Sales growth in the U.S. was flat, but the U.S. continues to become a more important market for LVMH given the protracted slump in Asian sales.
Revenues were negative across all LVMH business groups apart from Perfumes and Cosmetics (3%) and Selective Retailing, principally SEPHORA (2%). One of the most impacted sectors was fashion and leather goods, which fell by 5% when a slight 0.5% growth had been anticipated. This is especially bad news as this segmented comprises almost half of LVMH’s revenues.
LVMH’s share price closed down almost 7% yesterday, which drove down the FSW Markets All Luxury Index by over 5% on a day when the benchmark S&P 500 was flat. Over the second half of the year, the FSW Index and the S&P 500 have moved in almost complete opposite directions as per the below figure. Our index is now down about 13 percent year YTD while the S&P is up about 23%.
Earnings season continues this Friday with Kering and Brunello Cucinelli due to report on Q3. General expectations are that Gucci will continue to pull down Kering while Cucinelli may continue to show some resilience. Investors did show some appetite for LVMH today as its share price is up over 1%. LVMH’s valuation has turned more attractive over the course of the year with its P/E ratio declines from over 25x in March to around 21x now.