LVMH’s organic revenue rose 3% to €20.7bn in the first quarter. This was slower than the 10% achieved in the previous quarter. Wines & Spirits saw a 12% decline as champagne sales fell, with demand normalising after the pandemic. There’s also been “cautious” behaviour from Hennessy customers and a decline in Watches & Jewellery. All other divisions saw growth, with the group’s biggest division, Fashion & Leather Goods, recording revenue growth of just 2%, reflecting weaker growth in Asia.
LVMH referenced the “uncertain geopolitical and economic environment”, but said it remained “confident” at this early stage of the new financial year.
The shares rose 2.4% following the announcement.
Our view
LVMH's organic revenue growth is continuing to slow.
Tough economic conditions mean even some luxury shoppers are controlling their budgets a bit more.
The slowdown in revenue hasn’t come as a surprise, given the extent of economic and political uncertainty around the world. The important Asia region has come off the boil in terms of growth in LVMH's biggest division, Fashion & Leather Goods. But while we are seeing a reduction in growth, we still view performance as very resilient. This comes down to LVMH's biggest superpower: brands. Louis Vuitton and Christian Dior are status symbols. The group's mega-wealthy customer base is able to weather an economic downturn better than some. Spending, although not fully immune, is more reliable when things take a turn for the worse. This is highlighted by the difficulties being faced by mid-fashion names in comparison. The likes of ASOS saw revenue drop 18% in the first half.
And LVMH’s higher item price points are supported by what we view as genuine creative and marketing superiority at LVMH. We're not alone in thinking LVMH has a best-in-class stable of labels. Being able to charge more means LVMH's operating margins are healthy too, which has also dripped down into free cash flow, ultimately underpinning the group's current ability to pay dividends. However no dividend is ever guaranteed.
Adept management is a serious asset too. The group's CEO Bernard Arnault, is the group's largest shareholder, which probably explains the focus on long-term success.
No investment comes without risks and we think it's prudent to remember there would be knocks to the valuation as and when Arnault steps down. Succession planning has stepped up a notch, and he can’t stay in the job forever. We have faith it will be well-handled, but given his huge influence, there are likely to be jitters when the day comes. Also, if LVMH ever put a foot wrong when it comes to its creative reputation, we view this as the other risk to monitor in terms of sentiment.
Debt's worth keeping an eye on. The root cause of the balance sheet stretch was the acquisition of jewellery giant Tiffany, and debt reduction is likely to be a focus for now.
Shorter-term demand needs to be watched too. Chinese consumers aren't necessarily poised to prop up earnings as they have done in the past, with slower economic growth and an underwhelming tapering of post-pandemic activity, rather than the rocket to the moon some were hoping for. European and American consumers have also started to normalise their spend which leaves a gap to be traversed.
We think LVMH could thrive over the long term and provide a compounding opportunity thanks to its unrivalled stable of brands. The valuation isn’t as demanding as it has been which suggests not all these strengths are currently priced in. Please remember there are no guarantees and all share prices can go down as well as up.
LVMH key facts
This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.