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LVMH - slowdown in US luxury market

LVMH's half-year revenue rose 17% on an organic basis, which ignored the effect of exchange rates, to €42.2bn.

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LVMH's half-year revenue rose 17% on an organic basis, which ignored the effect of exchange rates, to €42.2bn. That reflects double-digit growth in most business areas. In the important Fashion & Leather Goods division, many brands gained market share and there was "strong growth" in Europe and Asia, while the US saw declines.

Operating profit was €11.6bn compared to €10.2bn the previous year. Free cash flow, which includes lease liabilities, more than halved to €1.8bn, due to a sharp increase in investments, including real estate. Net financial debt rose from €11.1bn to €12.5bn at the end of June.

LVMH said the economic environment remains uncertain and singled out the US with this in mind. The group is approaching the second half of the year with "caution".

LVMH shares fell 4.2% following the announcement.

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Our view

LVMH is showing once again the stronghold it has over the luxury market. But this is no accident.

The fashion conglomerate's ability to churn out growth quarter after quarter comes down to its biggest superpower. Brands. Louis Vuitton, Christian Dior, TAG Heuer watches and Hennessy cognac are status symbols, and revenue is much stickier than for many traditional retailers. It also helps that LVMH's mega-wealthy customer base are able to weather an economic downturn better than some. Spending is more reliable when things take a turn for the worst.

Having high-net worth individuals as your core demographic also means the sky-high ticket prices simply don't deter these shoppers. And those higher 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 and repeatedly encourage high demand means LVMH's operating margins are in the mid-twenties. A feat engineered by the group's enormous scale. We're also aware that LVMH overspent on marketing in the second half of last year, when compared to revenue growth. This is unlikely to be a recurring theme, which leaves room for margin growth in the new financial year.

Adept management is a serious asset too. The group has Bernard Arnault, CEO, and now the richest person in the world, for the best part of five decades, to thank. He is also the group's largest shareholder, which probably explains the focus on long-term success.

No investment comes without risk and we think it's prudent to remember there would be knocks to the valuation if LVMH ever put a foot wrong when it comes to its creative reputation. That's not to say this will ever happen, but it can never be fully ruled out.

Debt is worth keeping an eye on. The root cause of the balance sheet stretch was the acquisition of jewellery giant Tiffany. The deal seems to be bearing fruit, but debt reduction is likely to be a focus in the short term.

The other main development is weaker demand in the US. We maintain the view that luxury customers are more resilient than average consumers, but that doesn't mean LVMH will be fully immune to economic problems. There could be some short-term bumps in the road when it comes to sentiment towards luxury stocks.

LVMH's more resilient customer base and higher margins means it generates billions in free cash flow. In turn, that helps it to pay dividends. The prospective yield of 1.7% doesn't shoot the lights out but we view LVMH shareholder returns as less vulnerable than some other businesses. As ever, no shareholder returns or dividends are guaranteed.

We think LVMH can thrive over the long-term and could provide a compounding opportunity thanks to its unrivalled stable of brands. But keep in mind the group's valuation is relatively demanding these days, which increases the risk of ups and downs.

LVMH key facts

All ratios are sourced from Refinitiv. 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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 26th July 2023