The value of companies in the luxury goods sector worldwide has been negatively impacted by disappointing numbers from luxury goods conglomerates LVMH and Kering, as consumers curtailed their spending on handbags, designer clothes, and champagne due to concerns about persistently low demand.
The company that owns Louis Vuitton, Dior, and Tiffany – LVMH – saw its shares plummet by almost 5% after disclosing that sales in the major Asian markets aside from Japan had decreased by 14% in the three months leading up to June. This was due to a decline in China’s demand for cognac and slowdowns in the markets for watches, fashion, leather goods, perfumes, and cosmetics.
According to analysts, items with smaller prices, like handbags, could be doing better than items with greater prices, like clothing.
Performance of luxury brands in key markets
At the beginning of the year, company revenues dropped by 11% to €9 billion, with Gucci leading the way with a decline of 18%. This resulted in a more than 4% decline in Kering shares. Gucci, Bottega Veneta, and Yves Saint Laurent all saw their group’s underlying operating profit drop precipitously to €1.6 billion—a 42% decline.
Amidst “uncertainties weighing on the evolution of demand from luxury consumers in the coming months,” the company warned that profits could drop by 30% in the second half of this year compared to the same period in the previous year.
Chief executive and head of Kering, François-Henri Pinault, stated: “We are working assiduously to create the conditions for a return to growth in a challenging market environment, which adds pressure on our top line and profitability.”
Challenges and market reactions
Fears of a continuous decline in luxury goods sales have caused the value of bag maker Hermès International, the British brand Burberry, coach owner Tapestry Inc., Richemont, and Brunello Cucinelli to decline on stock exchanges.
The demand for luxury goods has fallen, particularly for less expensive items purchased by aspirational consumers, since rising interest rates have made living expenses more expensive for middle-class consumers.
In the three months ending in June, LVMH revealed a 1% increase in underlying sales to €20.98 billion, which was a decrease from the 3% reported in the first quarter, but still a third of the amount anticipated by City analysts. The half-year group profits from recurring activities decreased by 8% to €10.7 billion.
“The results for the first half of the year reflect LVMH’s remarkable resilience, backed by the strength of its maisons and the responsiveness of its teams in a climate of economic and geopolitical uncertainty,” stated LVMH’s chair and CEO, Bernard Arnault.
While the decline in China was countered by “substantial growth” in Japan, which was fueled by Chinese tourists, LVMH claimed to have suffered from the “substantial negative impact of exchange rate fluctuations.”
Specific product segments and regional performance
Sales of wine and spirits decreased by 5% during the quarter, but it was still an improvement over the 12% decline in the previous three months. The division’s profits decreased by 25% in the first half of the year, according to the business, which also said that champagne sales had decreased in the US and Europe as demand normalized following a Covid lockdown boom. Cognac’s underlying sales decreased by 10% in China due to “weak demand.”
“LVMH’s sales in the second quarter were lacklustre, with 1% constant-currency growth, though better than weaker peers, like Burberry and Swatch, and in line with Richemont,” stated Jelena Sokolova, a senior equities analyst at Morningstar.
She went on to say that Chinese consumers moved to Japan in order to “take advantage of currency weakness,” and that during the first half of this year, sales to Chinese consumers worldwide increased by more than 8%.
Watch and jewellery sales fell 4% in the quarter, compared to a 2% decline in the previous one, while profits dropped by 19% throughout the half-year.
According to Sokolova, this was caused by Tiffany’s subpar performance, which was “affected by sluggish aspirational consumer demand in the US, and sales decline among Chinese consumers, as well as listless bridal demand.”
Additionally, there was a slowdown in the group’s retail division’s development as good growth at Sephora was offset by weak sales at the duty-free store DFS, and sales of perfumes and cosmetics increased just 4% in the second quarter after growing 7% in the previous three months.
(Tashia Bernardus)