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LVMH - revenue drops as shops and manufacturing sites shut

Sophie Lund-Yates, Equity Analyst | 17 April 2020 | A A A
LVMH - revenue drops as shops and manufacturing sites shut

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LVMH Moet Hennessy Vuitton SE Euro.30

Sell: 691.10 | Buy: 691.30 | Change 4.60 (0.67%)
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In an after-hours announcement, LVMH said it recorded revenue of €10.6bn for the first quarter, a 17% decline on an organic basis.

That reflects the impact of the coronavirus outbreak, which has "led to the closure of stores and manufacturing sites in most countries in recent weeks". LVMH hopes for a gradual recovery from May or June, although the second quarter will still be heavily influenced by the pandemic, especially in Europe and the US.

The uncertainty means LVMH is unable to provide financial guidance for the rest of the year. It's also decided to reduce the dividend proposed at the end of January by 30%. The total dividend for 2019 will therefore be €4.80 per share, with €2.60 due to be paid in July.

The shares rose 5.2% the morning after the announcement.

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Our View

CEO, Chairman and 47% shareholder Bernard Arnault has guided LVMH group through a lot in 30 years, but nothing has come close to this.

Swathes of global stores are closed. That has an immediate impact on the revenues and profits of most retailers, but it's a particular problem for luxury names. An uber luxe in-store experience is part of the USP. The rapid increases in online sales is good news, but the business model is based in part on consumers getting a VIP experience - and for that to continue the boutiques need to reopen.

The good news is the important Chinese market has started to reawaken, which protects at least some of the group's revenue stream. We should also note the high net-worth of LVMH's customer base means it should in theory be able to weather an economic downturn better than some. This demographic tends to be less sensitive to economic shocks or recessions, meaning their discretionary spending holds up better in a downturn.

The extent of the damage will depend largely on how long the disruption lasts. It's therefore important to look at the financial strength of the company. That leads us to the deal to buy Tiffany & Co. for $16.2bn. Shareholders approved the deal back in February and it's due to complete in the middle of this year.

Prior to the outbreak, the deal made a lot of sense. It would increase LVMH's exposure to the US, while jewellery is one of the fastest growing areas in the luxury market, and an area where LVMH is arguably underrepresented. We understand the rationale, but a net debt pile of almost £20bn is higher than ideal in the current circumstances. When profits fall, it makes servicing the interest payments on debts harder.

If shops are closed for a long time, it will cause long-term damage to the balance sheet. We think LVMH will weather the storm, but it's likely to incur some bruises. How quickly they heal, and how badly they hurt, depends on when it can reopen its doors.

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Q1 revenue details (numbers are organic)

Fashion & Leather Goods saw revenue fall 10% to €4.6bn. The decline reflected global store closures, however online sales grew very strongly. Louis Vuitton and Dior showed good momentum in the quarter. Manufacturing sites have been closed since mid-March.

In Selective Retailing revenue fell 26% to €2.6bn. Sephora stores were closed in China for most of the quarter, and EU and US stores have been closed since mid-March. Online sales grew well, and Chinese shopping has started to pick up. The travel business DFS has been significantly impacted by the suspension of international travel.

Despite "rapid" online growth Perfumes & Cosmetics revenue was down 19% to €1.4bn as retailers reduced inventory levels.

Wines & Spirits sales fell 14% to €1.2bn. Hennessey cognac volumes slowed in China given lower demand linked to the pandemic, and the timing of 2020 Chinese New Year.

The closure of Bvlgari stores, especially in Asia, contributed to a 26% fall in revenue in Watches & Jewellery to €792m. TAG Heuer and Hublot were affected by the reduction of orders by retailers, but had a positive start to the year. There was a "very successful" launch of TAG Heuer's new smart watch in the quarter.

CEO and Chairman Bernard Arnault and other Executive Board members have decided to forgo their salaries for April and May, as well as variable remuneration for 2020. Other Board members have reduced their attendance fees by 30% for 2020.

The group said: "in the current situation, the Group will further strengthen its policy of controlling costs and being selective in its investments".

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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 for more information.