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LVMH - a very tough second quarter but China picking up

Sophie Lund-Yates, Equity Analyst | 28 July 2020 | A A A
LVMH - a very tough second quarter but China picking up

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LVMH Moet Hennessy Vuitton SE Euro.30

Sell: 626.50 | Buy: 628.30 | Change 12.10 (1.96%)
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LVMH has delivered revenue of €18.4bn in the first half of 2020, down 28% on an organic basis with a 38% fall in the second quarter. The decline reflects coronavirus-related store closures and international travel suspensions.

Despite cost savings measures, the lower sales meant operating profit stood at €1.5bn, compared to €5.2bn in the same period last year.

The decision to pay an interim dividend has been delayed and will be decided in October. The continued uncertainty means LVMH is unable to give financial guidance for the full year.

The shares fell 2.6% the morning after the announcement.

View the latest LVMH share price and how to deal

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 coronavirus.

Swathes of global stores were forced to close, which has knocked the wind out of revenue's sails. What's disappointed the market is that profits have come off even worse, with wider losses than expected.

That's a function of LVMH's largely fixed cost base. That model helps boost profits when times are good, because once operating at capacity each additional sale doesn't cost a lot. But sadly the reverse is also true. When sales dry up it has a rapid and negative impact on margins.

The group also relies heavily on international travel with airport and hotel spending crawling to a halt in recent months. It's unclear when this side of trading is expected to normalise, but it's likely to act as a drag for some time. The final challenge faced by the likes of Louis Vuitton and Christian Dior is that they will find it more difficult to plug any gaps with online sales while in-store footfall is weak. A visit to a swanky boutique is a crucial part of the experience for their customers, and that's a VIP feeling a website simply can't replicate.

The good news is the important Chinese market has rebounded well, and the US and Europe are showing gradual signs of recovery. We should also note the high net-worth of LVMH's customer base means it should be able to weather an economic downturn better than some. This demographic tends to be less sensitive to economic shocks or recessions, meaning in store spending should turn back on quickly.

That will rely on LVMH getting the balance right between controlling costs and making sure the brands get enough attention and share of the company's wallet to stay ahead of the fashion curve.

So much uncertainty means it's important to look at the financial strength of the company. That leads us to the deal to buy Tiffany & Co. for $16.2bn.

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. We understand the rationale, but net debt is higher than ideal in the current climate, and LVMH is now seeking to renegotiate the deal to potentially lower the price tag.

As doors continue to reopen LVMH's trading should prove more resilient than cheaper rivals, but for now we'll have to wait and see exactly what the full year sales trajectory looks like. We can't rule out further pressure on the balance sheet, but for now this is something to be mindful of rather than an out-and-out red flag.

LVMH key facts

  • Current forward 12m price to earnings ratio: 31.5
  • 10 year average 12m forward Price/Earnings ratio: 18.9
  • Prospective yield: LVMH has delayed a decision on the interim dividend.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half year results

In the second quarter revenue was most significantly impacted in the USA and Europe, however trends are more positive in Asia - particularly China.

The group's largest division, Fashion & Leather Goods underlying sales fell 24% to €8bn, however high costs meant profits fell faster and were down by 46%. China showed a "very strong" recovery during the second quarter and things are gradually starting to improve in Europe and the US. The Louis Vuitton and Christian Dior brands are said to have been resilient.

Selective Retailing, which includes beauty business Sephora and luxury travel retailer DFS, saw sales fall 33% to €4.8bn, and reported an underlying operating loss of €308m. Sephora gained market share in its key geographies, helped by a strong online performance, although this wasn't enough to offset the effect of store closures. DFS was more significantly impacted because of travel restrictions.

Underlying Perfumes & Cosmetics revenue fell 29% to €2.3bn. The decline reflected lower stock intake from shops as well as LVMH's decision not to partake in increased wholesale activity. Operating losses amounted to €30m. Online sales are growing strongly, and the latest Dior perfume launches are "promising".

Wines & Spirits was affected by a decline in volumes, particularly in Champagne. As a result revenue fell 23% to €2.0, and profits were down slightly ahead of this, dropping 29%. Hennessy cognac sales rebounded well in June in both the US and China.

Momentum in Watches & Jewellery was also negative and sales fell 39% to €1.3bn. TAG Heuer and Hublot were impacted by the decline in orders from retailers during the pandemic, but had a good start to the year. Operating losses were €17m.

Operating free cash flow was broadly flat compared to last year at €1.7bn, reflecting lower operating investments. Net debt of €9.1bn was lower than 2019's €9.5bn.

Regarding the Tiffany deal, the group said: "The closing date of the planned acquisition of Tiffany & Co depends on the receipt of the final regulatory approvals." Looking ahead, CEO Bernard Arnault said LVMH is continuing to bring costs down where possible, and although trading has been more positive since June, it's unclear when sales will normalise.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.