2023-04-18 18:40:58 ET
Summary
- LVMH's 1Q23 results exceeded expectations, with robust growth across all sectors, particularly in China and the United States.
- The Fashion and Leather Goods segment is a primary growth driver for LVMH, with Louis Vuitton and Dior leading the way.
- Management has expressed optimism regarding the ongoing recovery in China and the potential for double-digit growth in the segment.
Description
LVMH Moet Hennessy Louis Vuitton ( LVMHF ) is the world's largest luxury goods company, with Louis Vuitton at the helm of its luxury fashion division. In my opinion, LVMH is succeeding because it has made a number of sound strategic choices, including emphasizing innovation, maintaining and even improving the brand's logo, expanding into the digital realm in a measured manner, etc. As a result, LVMH has been able to increase its market share across the board. In my opinion, the Dior brand is also gaining tremendous traction and has the potential to become the next mega brand, further strengthening the Fashion & Leather Goods segment. The combination of this and strict financial management has resulted in unprecedented growth in both revenue and profit. Throughout its history, LVMH has consistently outperformed its competitors, both in good times and in bad. The results of 1Q23 have only bolstered my opinion. Group sales increased by 17%, which is significantly higher than the 10% increase that was expected. Specifically, LVMH exceeded expectations in 1Q23 with organic sales growth of 17% y/y. The Fashion and Leather Goods business unit led the way with 18% underlying growth and solid results across the board. Selective Retailing was the biggest source of surprise, growing by 28% thanks to the success of Sephora and the advantages of China's reopening. Significantly, during the conference call, the management affirmed that the Fashion and Leather segment in Mainland China witnessed growth in the range of double digits, and the progress observed during the period indicates a positive outlook for the remainder of the year. The robust growth across the board is indicative of the advantageous geographic exposure, and I anticipate further market share gains. I recommend a Buy rating.
China and US
The driving force that I was anticipating, which was China, appears to be unfolding as expected. The management has verified that Mainland China is rebounding, and for the primary segment, Fashion and Leather, growth has returned to double-digit percentage levels. Management believes that the fashion, leather, and jewelry industries will see the greatest growth as the market returns to normal. The positive momentum seen in 1Q23 was said to be indicative of the year's continued success. During the call, CFO Guiony made a specific claim: that at most F&LG maisons, spending by Chinese nationals was up by more than 30% year over year, with offshore spending growing at a faster rate than onshore spending. Although the number of mainland Chinese to Europe is still a few quarters away (which I feel is another catalyst), management has stated that Mainland Chinese have begun traveling again, starting with neighboring regions like Macau/HK/Japan/Korea. In general, I appreciate the sentiment expressed by management in this statement. They expressed high levels of optimism regarding the significant increase in spending from Mainland China in 2023, particularly in the F&LG and W&J categories where the cluster's spending was 40-50% higher than in 2019.
In another region of the world, the United States exhibited noteworthy results, albeit with a minor drop in performance in Q1 2023. The QoQ growth rate has slightly improved from the previous quarter, reaching 8%. Sephora's contribution to the growth of the Selective Retailing sector was significant. The management has acknowledged a slowdown in the Fashion and Leather and Jewelry sectors during the same period. The volumes of Cognac also continued to show a slow pace.
Pricing
After a year of price hikes to counteract inflationary pressures, I anticipate more targeted increases in specific regions rather than a blanket increase worldwide in 2023. This likely reflects the re-opening of the Chinese market and efforts to prevent regional price differences from widening. I anticipate that price mix will remain a growth driver within the Fashion and Leather industry, especially for Louis Vuitton and Christian Dior Couture.
View on industry
Investors are likely to view the strong performance in all sectors, especially F&LG, as advantageous for the overall industry. This dynamic might lead to incremental investors coming into the industry go give valuation support to key players - which LVMH will surely benefit from.
Guidance
Typical of previous years, LVMH did not offer any formal guidance or comment on the 1H23 or FY23 profitability outlook. Despite this, I think the call was generally upbeat, reflecting management's confidence in China's ongoing recovery, the brands' momentum across business units, and their global execution. However, management estimates that it will take three to four months for cognac inventories in the United States and China to clear, so I think investors should adjust their expectations accordingly and not expect LVMH's sales to pick up until 2H23.
Summary
1Q23 results exceeded expectations, with robust growth across all sectors, particularly in China and the United States. I believe investors are likely to view this as advantageous for the overall industry, leading to incremental investors coming into the industry to support key players such as LVMH. Although LVMH did not offer formal guidance, the management expressed optimism regarding the ongoing recovery in China and the brands' momentum - which is a key catalyst that I was looking out for. All in all, I recommend a Buy rating for LVMH.
For further details see:
LVMH: China Reopening Finally Coming Into Play