PPRUF - LVMH's U.S. consumer pullback could reverberate across luxury brands

2023-07-26 11:55:36 ET

U.S. consumers pulled back in the second quarter, hampering results for LVMH Moët Hennessy ( OTCPK:LVMHF ) and potentially sending a warning shot across the luxury sector.

While LVMHF's business groups achieved double-digit organic revenue growth over the first half of the year except for Wines & Spirits, which faced a particularly high basis of comparison, Americans curbed spending across various segments.

"All in all, we experienced a little bit of pressure with the American customer to varying degrees amongst brands," Chief Financial Officer Jean-Jacques Guiony said on an earnings call on Tuesday .

"We have a situation where, by and large, the aspirational customer is suffering a bit. We are experiencing drops with enterprise products with online sales with second-tier cities, which is a clear sign that the aspirational customer is not shopping as much as they used to."

Compared to the first half of 2022, revenue for the first half of this year in euros rose 2 percentage points in Asia, 1 percentage point in France and dropped 3 percentage points in the U.S., Rodolphe Ozun, deputy director of investor relations, said on the same call. Europe and the rest of the world were unchanged.

The U.S. represents 24% of sales, while Asia represents ? of sales. Europe makes up 23% of sales, while Japan and the rest of the world make up 7% and 12%, respectively.

Shares of LVMHF are down 1.3% on Wednesday.

The luxury read-through from LVMHF could indicate slower U.S. sales for luxury stocks such as Kering SA ( OTCPK:PPRUF ), Compagnie Financière Richemont SA ( OTCPK:CFRHF ), Burberry Group plc ( OTCPK:BURBY ), The Swatch Group ( OTCPK:SWGAY ), Hermès International Société ( OTCPK:HESAF ), Prada S.p.A. ( OTCPK:PRDSY ), Hugo Boss AG ( OTCPK:BOSSY ), Christian Dior SE ( OTCPK:CHDRF ), TPR Tapestry ( TPR ), Fossil Group ( FOSL ), Canada Goose Holdings ( GOOS ) and Movado Group ( MOV ).

Wine and spirits hit hard

The hardest hit area was cognac and spirits, which saw organic revenue drop by 11%, reflecting "softer demand in the U.S. due to the inflationary economic environment and high inventory distributors at the beginning of the year," Christopher Hollis, outgoing director of financial communications, said on the call.

For the second quarter, organic growth dropped 1% in the U.S. on wine and spirits as well as "softer demand from American consumers compared to other Western clienteles and continued growth in American purchases out of the U.S."

For cognac, LVMHF has "reignited a fairly significant promotion activity in the U.S., and it is already bearing fruit in the areas or in the states where we have been able to implement them," Guiony said.

"It will take a while. I mean, the U.S. distribution system is extremely complex. And it takes — we have to do it on a state-by-state basis. And it will take a lot of time before we are probably, I would say, in between two and four quarters before we are really able to benefit from the impact of a renewed marketing activity."

Some states are already showing some promising signs of early recovery, Guiony said. "My crystal ball doesn't tell you more than this, but we feel that we have probably bottomed out in cognac in the U.S."

Pharrell Williams doesn't come cheap

Separately, profitability in fashion was eroded by investment in advertising and promotion, as well as costly runway shows, including the Louis Vuitton Men's creative director Pharrell Williams's debut show in June on Pont Neuf in Paris, attended by actress Zendaya and singer Rihanna.

Williams succeeded Virgil Abloh in the role earlier this year.

"We are very happy with what we've done, but this comes unfortunately with the cost," Guiony said. "I'm not saying we regret it. 1.1 billion views on the Pharrell Williams show on the Pont Neuf is quite extraordinary in my view and worth the investment."

Guiony said the second half would see fewer such star-studded events.

Shares of LVMHF are up 38% over the past 12 months.

More on LVMH:

• LVMH: Domination Continues In H1 2023 (Rating Downgrade)
• LVMH: The Reigning Icon And Epitome Of Global Luxury
• Luxury sell-off: LVMH trades down after reporting slowing U.S. champagne, wine and spirits sales
• LVMH launches partnership with Epic Games

For further details see: