The King of Luxury Is Armed for Uncertain Times

(Bloomberg Opinion) -- When even LVMH misses estimates, it’s not a good look for the luxury sector.

While the owner of the Louis Vuitton and Christian Dior brands still delivered 8% growth in organic sales in the final quarter of the year, this was slightly below the consensus of analysts’ estimates of 8.7%. Organic sales from the fashion and leather goods division — its driver, accounting for 41% of sales and 64% of operating profit in 2019 — rose by 15%. That’s impressive, but still slower than the second and third quarters.

The world’s biggest luxury group hasn’t been immune from the unrest in Hong Kong and a slowdown in Japan after the country increased its consumption tax in October. The backdrop could get worse, given the spread of the deadly coronavirus, which has claimed more than 130 lives.

LVMH’s chairman and founder, Bernard Arnault, said on Tuesday that if the outbreak was contained quickly — say in two to two-and-a-half months — the effect would be manageable. If it lasted longer, it would be more serious, he added. Given that Chinese consumers accounted for about 35% of luxury purchases last year, according to Bain & Co. and Altagamma, all top end groups are exposed to the spread of the deadly virus. It’s clearly too early to say how things will progress, and with China grappling with how best to stop the spread of a novel virus that’s infected thousands of people, now isn’t the time to worry about handbag sales. But the uncertain outlook speaks to just how dependent many of the world’s global consumer brands are on China’s market and Chinese consumers wherever they are.

For example, on Tuesday Starbucks Corp. said that it would have upgraded its financial projections for the year had it not been for the outbreak in mainland China, its most important growth market. While its high-end Roastery in Shanghai may look like a luxury temple, with queues to rival those at Louis Vuitton, it is just one of its 4,000 outlets across the country. The group has closed more than 2,000 cafes in response to the spread of the illness.

As for LVMH, while it will be hit just like the other big brands, it may be better placed to weather any impact than most of its rivals. Its exposure to Chinese consumers is around the industry average — about 30% — according to analysts at UBS. Thanks to both its geographic and product diversification, with sizable operations in the U.S., for example, it is less dependent on Chinese shoppers than many of its rivals.

With sales about three times that of its nearest competitor, it also has scope to change its focus, for example by investing in marketing campaigns to attract domestic customers in the Europe and the U.S., where it’s just bought diamond jewelry specialist Tiffany & Co. It also has scope to cut costs in Asia, if the situation deteriorates further. Consequently, LVMH would face a potential 3% fall in this year’s earnings from a 20% drop in Chinese consumption in the second quarter, according to UBS, which expects some other luxury groups would be hit harder.

LVMH hasn’t been immune from the sell-off in luxury shares over the past 10 days. It’s down about 6% since Jan. 17. Even with the recent dip, the shares are up about 60% over the past year, and remain at a deserved premium to the Bloomberg Intelligence top luxury peer group.

It’s still early days in terms of establishing the toll the deadly virus might take on luxury and consumer groups. But LVMH’s scale and financial strength should make it one of the more resilient.

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 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.

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