Investors at LVMH are anxiously awaiting indications that China’s recent fiscal stimulus measures might finally encourage both wealthy individuals and the middle-class population to break free from their spending hesitations. This anticipated shift would potentially lead them to indulge in high-ticket luxury items, such as designer leather handbags that retail for around $4,300, as the country gears up for Singles Day – China’s largest annual shopping event.
LVMH, which boasts an impressive portfolio that includes iconic brands like Louis Vuitton and Dior for fashion and accessories, Tiffany & Co. for exquisite jewelry, and Sephora for beauty products, is scheduled to announce its third-quarter revenue on Tuesday. This comes at a time when global sales for premium goods, encompassing clothing, accessories, and cosmetics, are predicted to remain stable or see a modest increase of up to 4 percent year-over-year, according to consultancy Bain. However, the luxury market is facing significant challenges, particularly in China, where economic uncertainties are making middle-class consumers more cautious about extravagant purchases.
The shares of LVMH, alongside other luxury giants such as Kering, Hermes, and Richemont – the parent company of Cartier – have experienced considerable fluctuations throughout the year. Analysts from Bank of America have indicated that affluent consumers are currently feeling “shopped out,” particularly highlighting a notable decline in sales to Chinese consumers, who had previously been the main driving force behind growth in the first half of the year.
In anticipation of challenging market conditions, experts are predicting that the third quarter could be the most difficult period for the luxury sector in four years, with an estimated 1% decline in organic sales compared to the previous year. Moreover, earnings per share estimates for next year have been reduced by an average of 17 percent.
Markus Hansen, a portfolio manager at Vontobel, which holds shares in LVMH, Hermes, and Richemont, expressed that a prevailing “lack of confidence” among Chinese consumers continues to be a concern, stemming from downturns in the country’s property market. However, he noted that should consumer confidence begin to rebound, even marginally, spending on luxury goods in China could experience a significant resurgence.
While analysts believe that the allure of high-end fashion will eventually rekindle among Chinese shoppers, Jefferies pointed out that current forecasts are already optimistic, anticipating a robust increase in demand from China by 2025. In a bid to strengthen its foothold in this vital market, LVMH has recently reinforced its collaboration with Alibaba, aiming to leverage the e-commerce giant’s advanced cloud and artificial intelligence capabilities. Additionally, LVMH’s travel retail division, DFS Group, is actively involved in constructing a major shopping and entertainment complex on China’s duty-free Hainan Island.
Despite potential trade repercussions from the EU, luxury brands are bracing for significant sales declines in China, with projections indicating potential drops of around 10 percent. This is a stark contrast to earlier estimates that had anticipated a more modest growth rate of 5 percent to 6 percent. Patrice Nordey, the CEO of Shanghai-based innovation consultancy Trajectry, emphasized the widespread nature of the growth challenges, affecting a range of consumer segments from top-end buyers to middle-class and Gen-Z shoppers.
In a recent analysis, TD Cowen analysts have adjusted their organic sales forecasts for LVMH and rival Kering to -10.4 percent and 2.9 percent, respectively, while Richemont’s second-quarter estimates have been set at 2 percent. Kering, known for its influential Gucci brand, derives a significant share of its revenues from China, with the Asia-Pacific region – excluding Japan – contributing 35 percent of its overall sales. However, Gucci’s recent focus on “timeless” styles over trend-driven designs may not resonate with shoppers looking for fresh and exciting fashion options, according to Cowen.
