PARIS — LVMH Moët Hennessy Louis Vuitton said profits took a hit in the first half as price-conscious Chinese consumers shifted their purchasing to neighboring Japan, but it plans to maintain investment with an eye toward reaping long-term rewards.
Even as customers worldwide reined back spending on high-end goods including Champagne and engagement rings, LVMH continued to spend money on sprucing up stores, staging spectacular runway shows and marketing its wares to the all-important Chinese clientele.
Then there is the cost of its sponsorship of the 2024 Paris Olympic and Paralympic Games, which sources pegged at 150 million euros.
Tony Estanguet, models in Paris 2024 Olympic medal bearers’ uniforms, Antoine Arnault.
“The first half of the year once again demonstrated LVMH’s ability to adjust to a very varied range of circumstances without losing sight of long-term objectives, be it in good times or in more challenging circumstances,” chief financial officer Jean-Jacques Guiony told analysts and journalists on a webcast on Tuesday.
Net Profits Dropas Currency Fluctuations Bite
The luxury conglomerate, which owns more than 75 brands including Louis Vuitton, Dior, Tiffany & Co. and Sephora, said net profit fell 14 percent to 7.27 billion euros in the first six months of 2024, missing analysts’ forecasts.
Profit from recurring operations was down 8 percent to 10.65 billion euros, equating to an operating margin of 25.6 percent. Wines and spirits, together with watches and jewelry, were the two segments with the biggest declines in operating profit, down 26 percent and 19 percent, respectively.
Currency fluctuations cost the group 607 million euros, representing two-thirds of the operating profit decline.
Guiony said the company was taken aback by the magnitude of the shift in business to Japan, where the yen is trading at a 34-year low versus the euro, making luxury goods cheaper for tourists.
As a result, organic revenues there jumped 57 percent in the second quarter, even as they fell 14 percent in the rest of Asia. Sales were up 2 percent in the United States and 4 percent in Europe.
“We are happy with growth in Japan, but it comes at a notable cost from a profit and margin perspective,” Guiony said. “It’s extremely violent. We really have a big shift of business from Asia into Japan.”
LVMH has not been able to fully offset the currency differential with price increases, and also faces higher rent and salary costs in Japan, meaning that its margins have taken a hit, he explained.
The discount-hunting by Chinese tourists is also having a deflationary effect in mainland China, Guiony said.
Despite this, LVMH continues to see good business with Chinese nationals overall in its key fashion and leather goods, or FLG, division, where sales to this cohort are up in the high-single digits for the year to date, he reported. Business in watches and jewelry is down.
Overall, brands that spend less on marketing in China have been penalized, underscoring the need to continue investing in the market despite the current slump, Guiony said.
LVMH’s share price has fallen by more than 20 percent from its intra-year peak of 872.80 euros on March 14 as inflation has curbed discretionary spending.
Traffic in Chinese luxury shopping malls is down in the single digits year-to-date, while luxury sales are posting double-digit declines, Bernstein said in a recent report.
Revenues Down 1 Percent
Reporting results after the market close, LVMH said group revenues fell 1 percent year-on-year in the second quarter to 20.98 billion euros, below a Visible Alpha consensus estimate of 21.48 billion euros.
Stripping out the impact of currency fluctuations, sales in the three months to June 30 were up 1 percent year-on-year, indicating a slowdown from the first quarter, when organic revenues increased 3 percent.
The FLG division posted sales of 10.28 billion euros in the second quarter, up 1 percent on a like-for-like basis versus the same period last year, below the Visible Alpha forecast for a 2 percent increase. The division saw profit from recurring operations fall 6 percent in the first half.
Its operating profit margin eased to 38.8 percent from 40.5 percent in the corresponding period last year, but margins for the segment remain historically high, especially for star brands like Louis Vuitton and Dior, the group said.
Guiony said there were no huge variations in performance between brands, though he noted the lower end of the group’s portfolio did less well than the middle or upper part, with ready-to-wear outperforming leather goods.
Dior Strong in U.S.
Dior did better than Vuitton in the U.S., while the opposite was true in China. The executive confirmed media reports that Vuitton increased its prices by 2 to 3 percent in early July, marking its first global price increase since February 2023.
Dior outperformed Louis Vuitton in the U.S.
Guiony said that while the division’s spending on advertising and promotions, or A&P, is now higher as a percentage of sales than it was in 2019 before the coronavirus pandemic, the scope for cutting costs is limited.
“At the end of the day, the gas we put in the engine is to a large extent — at least in the short term — A&P, so we can lower A&P; we have done it and we’ll do it further, but this has to be handled with care,” he said.
For example, the cost of runway shows has increased, but they now reach a much wider audience, with 300 million to 500 million qualified viewers tuning in online, Guiony said.
Then there are the unexpected expenses.
Dior will require further investment as a result of an Italian investigation into illegal practices at some of its suppliers. Guiony said that while the fashion house took full responsibility for the irregularities detected, it was not aware of the conditions at companies subcontracted by its official manufacturers.
In addition to stepping up the pace of audits, Dior now plans to speed up the vertical integration of its production process, he added.
Meanwhile, LVMH has eased up a little on huge real estate deals, after going on a buying spree last year. But it continues to refresh its store network.
Tiffany Hits Jewelry Division
In the watches and jewelry division, revenues were dragged down by the ongoing repositioning of Tiffany & Co. to focus on its iconic collections, such as the Tiffany T and Lock lines. “We know this is the right strategy and we will carry on,” Guiony said.
A Tiffany Lock design.
The U.S. jeweler completed nearly 30 store renovations in the first half, with nearly one quarter of its network of boutiques now converted to the new store concept.
“We made the strategic decision to maintain the pace of store renovations and relocations at Tiffany. We’ve told you that consistency and long-term thinking are of the essence in this business and we are walking the talk,” Guiony said.
He confirmed that watch brand Tag Heuer has been in discussions to take over from Rolex next season as the official timekeeper for Formula 1, but emphasized that nothing is decided at this stage.
Organic sales of watches and jewelry were down 4 percent in the second quarter, while wines and spirits posted a 5 percent decrease. Perfumes and cosmetics were up 4 percent, and selective retailing rose 5 percent.
“The results for the first half of the year reflect LVMH’s remarkable resilience, backed by the strength of its maisons and the responsiveness of its teams in a climate of economic and geopolitical uncertainty,” Bernard Arnault, chairman and chief executive officer of LVMH, said in a statement.
“While remaining vigilant in the current context, the group approaches the second half of the year with confidence, and will count on the agility and talent of its teams to further strengthen its global leadership position in luxury goods in 2024,” he added.
Guiony hedged his bets, saying that although the group faces easier comparables in the second half, the outlook is unclear. “I’m neither more optimistic nor more pessimistic and visibility is limited,” he said.
The LVMH results come on the heels of figures from Compagnie Financière Richemont showing sales at constant exchange rates rose 1 percent in the April-to-June period, weighed down by a 27 percent decline in China, Hong Kong and Macao combined.
Meanwhile, Burberry reported a 20 percent decline in retail revenue at constant exchange rates and warned of an operating loss in the first half, while Swatch Group said revenue for the first six months of the year was down 10.7 percent in organic terms as the absence of Chinese tourists also impacted Southeast Asia.
French group Kering is due to unveil its second-quarter results on Wednesday, followed by Hermès International on Thursday.
