Home Fashion Industry Financial LVMH is well dressed for our period of inflation

LVMH is well dressed for our period of inflation

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LVMH Moet Hennessy Louis Vuitton SE has not been immune to lockdowns in China that have hurt luxury sales. But he is best positioned among bling retailers to weather what could be a bumpy recovery in the region, as well as mounting pressures from soaring inflation and gyrating U.S. stock markets.

LVMH’s organic sales – excluding currency movements and mergers and acquisitions activity – rose 19% in the second quarter, well above analysts’ consensus expectations for a gain of 13.5%.

The company’s crucial fashion and leather goods division increased organic sales by 19%. That’s a slowdown from the 30% rise in the first quarter of 2022, but it’s still commendable, especially given the disruptions in China and jolting consumer confidence elsewhere due to falling stock markets and cryptography and the war in Ukraine.

Less affluent Americans are limiting their spending on discretionary items, prompting Walmart Inc.’s second profit warning on Monday in just over two months. But more affluent shoppers, including American tourists returning to Europe, continue to spend, with both sides of the Atlantic benefiting from demand for champagne and Christian Dior accessories.

While this may shield LVMH from the ravages of inflation, it is only a matter of time before there is a trickle down from low- and middle-income consumers to the high end.

More marginal U.S. luxury buyers may already be feeling the pinch. Burberry Group Plc said recently that demand for sneakers has weakened. While this may reflect consumer preferences shifting from casual to more formal attire, it could also be due to younger shoppers, once filled with stimulus checks and crypto gains, now retreating.

LVMH said at the moment it was having “a good run” in the United States. Consumers did not react after price increases in fashion and leather goods of 3 to 7% in the first half.

Nonetheless, sales for all major luxury goods groups, including LVMH, will now compare to the second half of 2021, when Americans were spending on everything from handbags to high-end jewelry. It is also unclear how quickly and with what force China will rebound. After the country’s first lockdowns in 2020, shoppers unleashed a wave of revenge spending. Following repeated outbreaks, they may be less prone to splashing this time around.

LVMH said while the latest lockdowns had been “painful,” with second-quarter Chinese sales down double digits and store traffic well below a year earlier, it expected demand rebounds as restrictions ease.

The company is also well positioned to weather a tougher consumer backdrop elsewhere. Names such as Louis Vuitton and Dior remain top buyers, while others such as Loewe are gaining traction. If the luxury shopper is cutting back on spending — say buying one handbag a year instead of two — they’ll likely focus on the brands that have the most cachet. They may even spend more for a single item.

This is good news for LVMH, Hermes International and private company Chanel. It’s less welcome for Kering SA’s Gucci, which is trying to move from avant-garde to classic, and the groups trying to get more traction in categories such as handbags, including Burberry and Prada SpA. .

Let’s not forget LVMH’s strong balance sheet – free cash flow was over 4 billion euros ($4.1 billion) in the first half and borrowings have fallen since the Tiffany acquisition in early last year – and its diversified portfolio – the wines and spirits division, the second most profitable unit, grew 30% in the second quarter. Both will help the luxury giant defend its business if high-end strength falls.

Shares of LVMH have rallied over the past month, but they still trade at only a small premium to the MSCI World Textiles, Apparel and Luxury Goods Index.

It seems short-sighted considering this bling monster is well-dressed for tougher times.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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