China Slowdown Impacts LVMH’s Key Fashion Unit in Q3

Dior Momentum 

The wines and spirits division maintained its momentum with a 6 percent increase in organic sales, while revenues in perfumes and cosmetics were flat in the quarter. The watches and jewelry unit posted a 6 percent increase, while selective retailing was up 8 percent.

In the fashion and leather goods division, Dior, Loro Piana and Rimowa were the top performers. While Dior was flat in the third quarter, it was positive year-to-date and up by double-digits with U.S. clients as creative director Jonathan Anderson's designs gained traction, Cabanis said.

"What we are seeing is a lot of appetite on the ready-to-wear for women. Men is less advanced, so we need to do a bit more work," she said.

In bags, Dior saw demand for its revisited icons, like the Lady Dior, but also for new styles like the Toujours Hobo. "There are many good things. We need more while the context is a bit under pressure," she said.

However, Cabanis emphasized that LVMH is pleased overall with the brand's performance.

"We are very confident with Dior," she said. "We believe that Jonathan has a very clear vision on Dior and where he wants to take the brand, and he's been building very nicely and consistently, quarter after quarter."

Louis Vuitton was slightly below the division average, impacted by a one-off logistics and transportation disruption stemming from one of its freight forwarders, which cost it a bit more than a point of growth in the third quarter, she said.

Beyond that temporary glitch, LVMH's star brand is seeing "robust" growth with evergreen handbags like the Alma and the Speedy, with the high-end leather version known as P9 generating waiting lists worldwide.

New styles like the Multipass and the Squire have been well received, while innovative materials such as the Monogram Emblème, a jacquard canvas, and Silk Tech, a twill-woven hybrid of silk and reclaimed nylon, have also seen good response, Cabanis said.

 No Price Cuts 

Asked whether Vuitton needed to take more drastic action to win back aspirational consumers, who have deserted the luxury sector in droves, Cabanis cautioned against lowering prices.

"We don't believe this is something that is advisable, because whatever you do, you need to keep in mind the desirability of your brand and making sure that what you do can endure momentum for the next cycle to come," she explained.

"Vuitton has been the most resilient brand for a long time. I think the work we're doing in ensuring that we have the right balance between elevation on one side, and recruitment on the other side, is the right strategy," Cabanis added.

Faced with higher inflation in the U.S., slower growth in China and uncertainties in Europe, brands are broadening their product offer and adjusting their price mix.

Chanel, for instance, has introduced new smooth bags that cost less than its classic quilted styles. Gucci, meanwhile, has quietly lowered retail prices by roughly 20 to 30 percent on select carry-over items.

"You can be tempted when there is deterioration to go for very tactical or drastic change, or things that are a bit disruptive," said Cabanis.

"In our case, what we need absolutely to do is continue to be hitting the sweet spot between desirability on one hand, and perceived value on the other hand, so it's really about finding the differentiated designs that stay fresh," she added.

In China, Vuitton recently closed its store in Guiyang, but opened another in Changchun, leaving its overall store surface in the country roughly stable. One year after its opening, The Louis, its Shanghai megastore shaped like a cruise ship, continues to draw crowds.

"It shows that when traffic is subdued, if you are able to create real experiences, you can get the customers to come to you," Cabanis noted.

While she said it was difficult to estimate the precise impact of the Molly tea lawsuit, which triggered a debate over cultural ownership, she confirmed it had a negative impact on Vuitton's sales in China at the beginning of the third quarter.

 Looking Ahead 

Among the smaller brands, the executive noted that Celine is improving fast and building momentum in the U.S., with a double-digit increase in shoes and growing demand for its recently launched Soft Triomphe handbag collection.

"We are very confident that Celine is now getting the right level of traction to become a growth driver for us," Cabanis said.

The slowdown in China also impacted the watches and jewelry division, where growth slowed from 11 percent in the second quarter. Tiffany & Co. faced a tougher comparison basis in the U.S., despite the continued strength of its HardWear and Knot collections.

The watch and jewelry division's growth is set to continue into the fourth quarter, Cabanis said, though she cautioned that Bulgari would also face tougher comparatives.

LVMH's shares have fallen by more than 41 percent this year, causing the group to lose its crown as France's most valuable company to L'Oréal, and pushing Bernard Arnault out of the top 10 of the Bloomberg Billionaires Index.

HSBC last month downgraded the stock to Hold from Buy, lowering its price target to 490 euros from 600 euros, citing the weight of the fashion and leather goods unit.

"While we remain confident on the mid-to-long-term growth potential of this division and the LVMH Group overall, we move to the sidelines for now, given a challenging macro backdrop and slower than expected pick-up at Dior," it said in a report.

Jelena Sokolova, senior equity analyst at Morningstar, also remains positive in the medium-term.

"Despite a challenging few years for the luxury industry, we continue to see significant long-term value in LVMH. With shares trading at their lowest valuation in over a decade on top of cyclically depressed earnings, the market appears to be pricing in a much weaker outlook than we believe LVMH's brand strength and competitive positioning warrant," she said.

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