Major European luxury stocks have experienced a slowdown in growth, primarily due to softened global purchasing power, particularly in China.
ADVERTISEMENTLVMH, the world’s largest luxury brand, reported its worst quarterly performance since 2020 during the three months leading up to September, resulting in a 10% drop in its American Depositary Receipts (ADR) shares on US markets on Tuesday. According to its press release, the Paris-based conglomerate’s third-quarter organic sales fell by 3% year-on-year, marking the first decline since the pandemic, driven by weakened demand in China and Japan.
During the earnings conference call, chief financial officer Jean-Jacques Guiony remarked: “Consumer confidence in mainland China today is back in line with the all-time low reached during Covid.” The strengthened Japanese yen has also impacted consumer demand in Japan, which remains one of the group’s primary markets.
Additionally, LVMH may pay additional corporate tax of between €700 million and €800 million next year under the new prime minister’s policy to raise levies on France’s biggest companies, according to chief financial officer Jean-Jacques Guiony on an analyst call.
Financial results
Europe’s second-largest company reported revenue of €19.08 billion in the third quarter, down from €19.964 billion during the same period last year, and a significant 10% decline from €21.206 billion in the second quarter. Analysts from Barclays had expected 2% revenue growth for the third quarter.
By category, the largest segment, the Fashion & Leather Goods business group—home to brands such as Louis Vuitton and Dior—generated revenue of €9.151 billion, representing a 5% decline from the previous year. Wines & Spirits continued to experience a sharp downturn, declining by 7% year-on-year, following a 12% and 5% drop in the first and second quarters, respectively.
Notably, sales in Japan showed signs of slowing, with a 20% increase compared with 32% and 57% surges in the first two quarters. In the rest of Asia, predominantly China, sales fell by 16% year-on-year, following declines of 14% and 6% in the first and second quarters. While revenue growth was flat in the United States, sales in Europe rose by 2% compared with the previous year.
It is worth noting that a significant portion of LVMH’s sales in Europe and Japan is driven by Chinese tourists, highlighting the sweeping impact that China’s sluggish demand has had on the world’s largest luxury brand.
Despite this, LVMH maintained a positive outlook, stating: “In an uncertain economic and geopolitical environment, the Group remains confident and will maintain a strategy focused on continuously enhancing the desirability of its brands, drawing on the authenticity and quality of its products, excellence in distribution, and agile organisation. LVMH will leverage its powerful brands and the talent of its teams to reinforce its global leadership position in luxury goods once again in 2024.”
China’s stimulus optimism fades
The post-pandemic shopping spree for European luxury brands has been losing momentum since last year, with optimism surrounding China’s stimulus measures fading from the recent surge. LVMH’s shares surged 19% in late September during the week of the stimulus package announcement in China. However, most of these gains were wiped out in October as Beijing’s economic briefing lacked convincing details, and a slew of disappointing economic data from China was released this week.
Given the company’s reliance on Chinese consumers, it will be crucial to monitor upcoming policy briefings and economic data. China’s housing minister is set to hold a press briefing on Thursday, where further details regarding stimulus measures aimed at reviving the slumping property market and boosting consumer confidence are expected to be revealed. Additionally, China is scheduled to release several key economic indicators on Friday, including third-quarter GDP, industrial production, retail sales, and fixed asset investment.
Dilin Wu, research strategist at Pepperstone, commented: “With China’s debt-to-GDP ratio well below that of major developed nations like the US, any signal from the upcoming NPC Standing Committee later this month on boosting the supplementary budget or expanding the 2024 fiscal deficit could, in my estimate, add 40 to 50 basis points to China’s 2025 GDP growth.” She added: “As China remains a key trade partner, any stimulus from Beijing could spur demand for European luxury goods and mining products, offering a tailwind for Europe’s economy.”