Unlock Editor’s Digest for free
FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
Luxury is a temptation. Aesthetics, texture, and an aura of exclusivity all conspire to turn savvy customers into true believers. This logic should not apply to die-hard investors. However, their approach to this field also turns into blind faith.
Take, for example, the market’s reaction to LVMH’s — appalling — sales numbers. The luxury brand’s core fashion and leather goods business, which includes brands like LV and Dior, fell 5% in the third quarter as Chinese consumers finally capitulated. This represents a much sharper slowdown than feared.
However, investors were surprisingly calm about this. Indeed, the main shock to Wednesday’s drop in light luxury goods was just how minor it was. Competitors’ stock prices fell by several percentage points. And the decline in LVMH itself was smaller than the downward revision in earnings forecasts. In fact, with Citigroup’s Thomas Chauvet predicting next year’s earnings will be 21 times, the group’s valuation is not far from its mid-cycle multiple of 23 to 24 times. The market appears to view this as a classic macro-economic downturn, one that will soon reverse.
That’s rich. We assume that China’s still-ambiguous economic stimulus measures will rapidly spread to expanding consumption. For example, analysts expect LVMH’s sales growth to be in the mid-single digits next year.
More worryingly, it is by no means clear that the luxury goods sector will seamlessly return to rapid growth when the macroeconomic effects eventually subside. It is possible that some customers have left due to the successive price hikes. There are also whispers about the product’s desirability in an age of wonderfully chic but not-so-exciting “quiet luxury.”
This leaves the entire luxury goods sector exposed to further disappointment. True super-premium companies like Hermès and Ferrari should be relatively protected as they are less affected by macro and fashion cycles. Brands like Prada and Miu Miu, which have recently been embraced by consumers, may help cushion the worst effects.
LVMH is not in this camp. The group’s size has traditionally been an advantage, allowing it to invest in human resources, marketing and real estate. But LV and Dior’s momentum is relatively weak, Bernstein’s brand favorability analysis suggests. It may not help that the group is in a creative and operational transition, but it will take time to gain traction.
LVMH’s premium to the sector has narrowed to about 6% now from about 40% in March, according to Bloomberg figures. The luxury goods sector is far from regaining its dignity. Unusually, LVMH has its own challenges to regain its luster.
camilla.palladino@ft.com
