Are markets judging LMVH shares unfairly?
Shares in the world’s leading luxury goods group, LVMH, have fallen by about 18% this year, largely on investor expectations of a global downturn. But analysts think there could be a disconnect between that pessimistic view and a detailed examination of the group’s prospects. db investigates…
The evidence on which they have formed that opinion was spearheaded by the group’s third quarter performance.
Third-quarter sales came to €19.8 billion (£17.3 billion), which was 19% above the 2021 level – achieved at a time when business was booming as pandemic restrictions were lifted in much of the world.
That easily beat consensus expectations of 13% growth in the quarter.
More significant, however, was the cumulative performance over the first nine months of 2022.
Revenues so far this year are €56.5 billion, up 28% compared to the same period of 2021. Organic revenue growth was 20%.
In the third quarter, organic revenue growth was 19%, which the company said was “in line with the trends observed in the first half of the year.”
The Moet Hennessy wines and spirits division (in which Diageo owns a 34% stake) grew its gross revenues by 23% in the first nine months of the year or 14% in organic terms.
LVMH suggested, however, that champagne sales could have been higher. It said there had been “pressure on demand”, indicating that it was unable to satisfy some customers in Europe the US and Japan where growth was “particularly strong”.
So far inflation and higher input prices have not been a headache. Its “firm policy” of price increases across all regions offset the effects of the logistical disruptions in the United States and the impact of health restrictions in China, LVMH said.
In other words, LVMH is able to hike its prices and is not hesitating to do so to combat inflation at the same time as rigorously controlling its input costs.
The implication of that is that the seriously wealthy are unfazed by global conditions and are continuing to spend. As analyst Luca Solca said in a note to clients: “Nobody wants to be the richest person in the graveyard.”
Chief Financial Officer Jean-Jacques Guiony warned against using LVMH’s latest results as a “proxy” for the general health of the economy. He told analysts that a recession expected by investors “hasn’t materialized in full swing yet.”
LVMH says it is not immune to the wider economic distress and pledged to keep a tight rein on costs and only invest selectively. That was a change of tone for the company — in past quarters, the outlook has tended to focus on growth.
Indeed the latest figures have set a very high bar for the rest of this year at least, hence Guiony’s caution.
But there are factors working in LVMH’s favour, hence the discussion about whether the shares have lost too much this year and now look undervalued.
The strength of the dollar continues to encourage Americans to resume travelling in large numbers and to spend significantly on luxuries, including wines and spirits.
While that phenomenon may cool once the initial impact of post coronavirus relief has worked its way through personal psychologies, there is the prospect of a recovery in China moving into higher gear, despite the economy slowing.
Third quarter sales to the Asia region, excluding Japan, lagged other geographies, posting 6% growth between June and September after seeing a drop in the previous three months due to being hit by the renewed lockdowns in China.
China accounts for almost 40% of global luxury goods sales and Asia, including China, suffered slower growth over the first nine months of the year. Notably, however, LVMH said it accelerated in the third quarter due to the easing of COVID-19 restrictions,
Now the restrictions have largely passed, analysts believe that demand from China will pick up, especially once travel begins to approach more normal levels.
There are, however, factors that mitigate against over-optimism.
First, despite the present “relief spending”, the danger of a recession and personal retrenchment remains real. The rich will continue to spend but they might only buy a case of Dom Perignon at a time, not two or three.
Second, the Moet Hennessy wines and spirits arm could come under pressure in China because Beijing is said to be set on banning drinking colleagues in both the civil service and the Communist party.
Third, the Chinese authorities are making big efforts to encourage their citizens to holiday and spend at home rather than in traditional locations such as South Korea or Singapore. The outstanding example of this is the rapid development of the massive Hainan resort and duty free complex in southern China.
From duty free sales of $7.9 billion in 2021, an 83% rise, there are hopes that figure will double to almost $16 billion this year.
But even if the wealthy Chinese choose to “staycation”, LVMH should be a winner.
Not only did it open a network of outlets in China’s provincial cities during the pandemic to cater for those who could not travel, it is also one of the biggest presences in Hainan.
For LVMH money spent in Hainan is the same as that spent in Paris.
Also on the bright side, Bloomberg Intelligence calculates that LVMH could have net cash on its balance sheet in 18 months time.
So it has considerable muscle to invest in marketing during any downturn in the luxury market. It also means chairman Bernard Arnault will be able to make further acquisitions, especially if target asset prices are depressed.
All eyes will be on LVMH’s full-year figures when they are announced in early March.