Christian Dior's Book Bags Are Red Hot Right Now

(Bloomberg Opinion) -- Despite the pressures piling onto the luxury industry, LVMH has pulled a great performance out of its roomy monogrammed bag.

Sales excluding currency movements rose by 11% in the three months to Sept. 30, better than the consensus of analysts’ forecasts of 9.2%. That’s creditable given the ongoing disruption in Hong Kong.

Don’t be lulled into a false sense of security, though. LVMH is the world’s biggest luxury group, with a broad geographic reach and a portfolio spanning fashion to spirits. Not all of the sales reports from high-end sellers in the coming weeks will be as alluring.

Purveyors of bling have enjoyed more than three years of frantic growth, driven primarily by Chinese consumers, who account for about a third of sales and have snapped up Christian Dior book bags and Balenciaga sneakers. Some slowdown was inevitable. Despite the reassurance from LVMH, the risk of a hard landing, rather than a gentle deceleration, is rising.

LVMH’s fashion and leather goods sales growth of 19% was much stronger than the consensus for a 15% expansion. That indicates that many purchases that would have been made in Hong Kong were diverted to the mainland, or to other Asian shopping destinations. The group has about 1,340 stores across Asia excluding Japan, so it can pick up sales wherever they are made. It helps that the Christian Dior brand is red hot right now, too.

Even so, Bernstein forecasts that the protests will shave 0.6-1.2 percentage points off of the entire industry’s growth rate this year, so that expansion will be a figure in the mid-single digits.

That’s not disastrous. But Hong Kong isn’t the only cloud on the high-end horizon. Trade tensions between the U.S. and China continue to simmer. So far, consumers appear to be adapting to the new reality. But some data points are more worrying. For example, Chinese consumer confidence slipped in July. Analysts at Citigroup have also noted the potential for Japanese sales to be hurt by the recent increase in the country’s consumption tax from 8% to 10%.

And it is not just Asia that luxury-goods groups have to fret about.

In general, consumers are more willing to splurge on things they can’t really afford, or don’t really need, when they’re feeling confident and flush with cash. With political turmoil on both sides of the Atlantic, and concerns mounting about economic growth, that’s unlikely to be the case. LVMH said it made “good progress” in the U.S. But increasing fears of a downturn next year will do nothing to encourage spending there.

Like LVMH, Kering SA also has a broad reach, but it’s navigating Gucci’s transition from stellar to steady growth. Conditions are not ideal for those groups trying to revive their performances, such as Prada SpA and Salvatore Ferragamo SpA, although there are signs that Burberry Group Plc is gaining momentum with young Chinese shoppers.

There’s another reason why the pain might not be spread evenly. With fat margins, and little debt, the biggest groups have plenty of scope to invest. If they keep up capital expenditure when times are tough, they can emerge even stronger. Louis Vuitton designing clothing for characters in the popular fantasy game League of Legends is a case in point. As all of the industry’s growth is coming from the under 40s, investments that appeal to the cool kids are wise. The big groups also have the balance-sheet firepower to make acquisitions.

Share prices have been hurt since mid-September by the escalation of protests in Hong Kong. Even so, the Bloomberg Intelligence top luxury peer group trades on a forward price-earnings ratio of about 22 times. That’s a decline to be sure, but it’s not that far off the peak of about 27 in June 2018.

Bernard Arnault, chairman of LVMH, has bemoaned high valuations as a barrier to deals. There may still be some way to go until prices are more palatable. But if nascent industry woes become more pronounced, he may finally get his chance to swoop.

--With assistance from Nisha Gopalan.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

For more articles like this, please visit us at bloomberg.com/opinion

©2019 Bloomberg L.P.