LVMH Is Firing on the One Cylinder That Matters
October 16 2020 - 7:04AM
Dow Jones News
By Carol Ryan
Take away Louis Vuitton and Christian Dior and the world's
biggest luxury company looks down at heel. All that matters for
now, though, is the rapid recovery of those two brands.
Shares in LVMH Moët Hennessy Louis Vuitton jumped 7% on Friday
morning following the release of its eye-catching third-quarter
results on Thursday evening. The standout surprise was the fashion
and leather division, home to Louis Vuitton and Christian Dior,
where sales increased by 12%, much better than the slight drop
analysts had penciled in.
The wider company performance was more mixed but far better than
in the first half. Sales at constant exchange rates were down just
7% in the three months through September compared with the same
period last year, a vast improvement on the 38% decline clocked in
the second quarter. Chinese shoppers are spending freely again on
luxury, and demand from local U.S. and European consumers was also
surprisingly strong.
Tiffany & Co.'s attempt to steal LVMH's thunder with an
unscheduled update earlier on Thursday got little attention. The
U.S. jeweler said sales in August and September were down slightly,
but operating profit increased by a quarter compared with the same
months of 2019. The legal dispute over the two companies' derailed
$16 billion takeover was barely mentioned on a call with
investors.
Of LVMH's 70 or so luxury brands, a handful are carrying the
entire group for now. Louis Vuitton and Christian Dior are the
group's biggest profit engines, with the lucrative fashion and
leather division generating around two-thirds of total operating
profits in normal times. Their rapid recovery bodes well for
margins. Sales of Hennessy cognac were also robust in the U.S.,
although management did attribute this to a temporary boost to
consumers' disposable income from federal subsidies.
There are problems in every other part of the business, however.
A slump in travel retail hit sales of watches and jewelry, as well
as LVMH's perfume and cosmetics brands. The retail unit was the
weakest performer of all. The company's cratering duty-free
business DFS dragged comparable sales down 29% in the third
quarter. Until travel gets back to normal -- possibly not until
2024, according to the International Air Transport Association --
these businesses will weigh on performance.
LVMH's share price is now very close to the record set in
January and on a much higher multiple of expected earnings. Can
that be justified with the outlook for one-third of its profits so
uncertain? Investors seem happy to ignore the company's knottier
problems for now. In those parts of the business that management
can control -- and the ones that matter most for the bottom line --
LVMH's performance is hard to fault.
Write to Carol Ryan at carol.ryan@wsj.com
(END) Dow Jones Newswires
October 16, 2020 06:49 ET (10:49 GMT)
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