PARIS — Wait and see.
That was the watchword from LVMH Moët Hennessy Louis Vuitton as the world’s largest luxury group, coming off a strong second quarter, assessed the threats of recession, surging inflation, supply chain disruptions, Chinese lockdowns and the war in Ukraine.
Jean-Jacques Guiony, chief financial officer at LVMH, used the expression repeatedly as he answered analysts’ questions after the company reported a 27 percent increase in revenues in the three months to June 30.
Asked about prospects in China, where business was down “heavy double digits” in the second quarter, he said it was too early to predict the timing of a turnaround. “We’ve seen some form of improvement toward the end of the quarter, but nothing very significant and nothing worth really reporting. We are very much in a wait-and-see attitude,” Guiony said.
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Questioned about Russia, where LVMH earlier this month shuttered its Sephora beauty business, he described a similar waiting game. “We keep our businesses in a frozen state,” Guiony said, “in a wait-and-see attitude.”
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The weakness of the euro against the dollar? You guessed it. “What currencies create, currencies can undo fairly quickly, so we tend to look at it very much in a wait-and-see attitude,” Guiony opined.
That’s not to suggest that LVMH is entering the third quarter under a cloud. On the contrary, the owner of brands including Louis Vuitton, Dior, Tiffany & Co. and Sephora is feeling positively bullish, though shouting it from the rooftops might come across as unseemly in the current climate.
“The first half of 2022 has seen an excellent performance despite the difficult environment, and clearly reflects the strengths of LVMH’s strategy of having a diverse and balanced portfolio of brands sold all around the world,” Guiony remarked.
Reporting first-half results after the market close, LVMH posted a net profit of 6.53 billion euros in the first six months of 2022, up 23 percent versus the same period in 2021.
Profit from recurring operations totaled 10.24 billion euros, representing an increase of 34 percent year-over-year, with fashion and leather goods, or FLG, accounting for 7.51 billion euros, up 33 percent.
Total revenues in the three months to June 30 totaled 18.73 billion euros, exceeding a FactSet consensus estimate of 17.42 billion euros.
And while uncertainties lie ahead, the group has a strong hand. Guiony noted that it benefits from good demand momentum; the aforementioned geographic balance and diversification, and financial strength that allows it to invest significantly in marketing and selling its brands.
“All this does not mean that we are immune to any external shocks, but it just means that we have the ability to face more adverse conditions and to emerge from them stronger than ever,” he reasoned.
LVMH remains optimistic about the U.S. market, regardless of a surge in inflation, tanking stock and cryptocurrency markets, and the rising risk of a recession. Its U.S. revenues were up 22 percent in the second quarter, despite a tough comparison with the same period last year.
“We see no tangible signs of slowing down,” Guiony said. Market share is growing, with the U.S. accounting for 27 percent of LVMH’s total revenues in the first half of 2022, up from 25 percent in the same period last year.
“We are not particularly gloomy and pessimistic as to the outlook. Obviously we hear what a lot of people are saying about the coming recession,” he added. “We are planning the business for growth. If things happen to be not as good as we anticipated, we will react and we will cut costs, openings, etc., as we always do. The key of this is to react swiftly.”
Likewise, the group is positive that China will recover fairly swiftly from its current woes, despite the continued weakness of store traffic. The country’s poor performance dragged down revenues in Asia in the second quarter, which fell 8 percent after a rise of 8 percent in the prior three months.
“It’s painful, but it shouldn’t last, or it will last as long as restrictions are being enforced and when it is over, we are fully confident that the strength of demand will kick back and will enable us to recover shortly,” Guiony said.
Even the prospect of a global downturn did not appear to spook the executive.
“If we end up with a sort of worldwide recession, with everybody staying at home and not shopping in luxury, as it happened in 2008, we’ll be affected. We were affected in 2008, but we’ve seen from previous recessions that they don’t last long, and we have a very strong rebound capacity,” he said.
To be sure, LVMH has plenty of reasons to be confident.
In the short term, the euro’s slide to parity against the U.S. dollar has boosted top-line revenues for companies that sell many of their goods abroad. In addition, U.S. tourists have taken advantage of the cheap euro to splurge on luxury goods in Paris this summer.
Stripping out the impact of currency fluctuations, overall revenues at LVMH were up 19 percent year-over-year in the second quarter, indicating a slowdown from the first quarter, when organic revenues increased 23 percent. Revenues in Europe were up 48 percent, versus 45 percent in the prior quarter.
“Being more or less at parity with the dollar is obviously having some positive impact on our business, and it will be the case as long as it lasts,” said Guiony, adding that LVMH had not noticed a spike in gray market activity as a result of the price differential between the U.S. and the euro zone.
“It creates a bit of activity with U.S. clients in Europe, which is something that we haven’t seen in a very long period of time. All in all, for the time being, it’s not a big issue and it doesn’t call for urgent action,” he said.
The key FLG division posted sales of 9.01 billion euros in the second quarter, up by 19 percent on a like-for-like basis versus the same period last year, reflecting not only the dominance of star brands Louis Vuitton and Dior, but also the progression of houses such as Fendi, Celine, Loewe, Loro Piana and Marc Jacobs.
Although the segment’s improvement was down from the 30 percent organic revenue growth recorded in the first three months of the year, it was above the market consensus forecast for a 17 percent increase.
The division’s operating margin grew to 41.4 percent in the first half, versus 40.8 percent in the same period last year, according to Chris Hollis, head of financial communications at LVMH.
Guiony believes that margins of more than 40 percent are here to stay, even without the kind of price increases seen in the first half, thanks to the growing profitability of Dior and smaller labels.
He noted that most brands have increased price tags by 3 percent to 7 percent this year to preempt inflation. “I don’t think we’ll be very active on pricing [in the second half] because we did most of the action in [the first half], but we’ll see,” he said. “We haven’t seen any pushback from customers.”
Bernard Arnault, chairman and chief executive officer at LVMH, also sounded a positive note. “LVMH has enjoyed an excellent start to the year, to which all of our business groups contributed,” he said in a statement.
Organic sales of wines and spirits were up 30 percent in the second quarter, while watches and jewelry posted a 13 percent increase. Perfumes and cosmetics were up 8 percent, and selective retailing rose 20 percent.
“We approach the second half of the year with confidence, but given the current geopolitical and health situation, we will remain vigilant and count on the agility and talent of our teams to further strengthen our global leadership position in luxury goods in 2022,” Arnault added.
By comparison, Compagnie Financière Richemont said sales at constant exchange rates rose 12 percent in the April-to-June period, while Burberry reported that the Chinese lockdowns dented its growth in the fiscal first quarter. At constant exchange rates, retail revenue was flat in the 13 weeks to July 2.
However, Brunello Cucinelli said sales jumped 46.4 percent in the second quarter, helped by a favorable comparison basis, and strong demand in Europe, North America and the Middle East. French group Kering is scheduled to publish its first-half results on Wednesday, followed by Hermès International on Friday.