Amid investors’ optimistic expectations that the market and macroeconomics will recover steadily, the STOXX European Luxury 10 Index, including France’s LVMH, Italy’s Ferrari and Britain’s Burberry, set a record high in early 2023. However, after encountering factors such as soaring inflation, rising interest rates, and slowing economic growth, the STOXX European Luxury 10 Index recently recorded its largest quarterly decline since 2020.
In a report on index performance in September, STOXX noted that among indexes on topics ranging from global health to electric vehicles, the luxury goods index was the worst performer. The index group of 10 European luxury goods companies has lost about $175 billion in market value since the end of March.
Luxury goods giant’s stock price plummets after performance falls short of expectations
On October 10, LVMH (LVMH), the world’s largest luxury goods group, released its third quarter financial report for 2023. Data showed that the company’s third quarter sales increased by only 1% year-on-year to 19.96 billion euros. Excluding the impact of exchange rate changes, organic sales Revenue growth was 9%, much lower than the 17% in the previous quarter, and the quarter-on-quarter growth rate was nearly halved.
In terms of business, alcohol declined. Its organic revenue growth in the second quarter was -8%, which worsened to -14% in the third quarter. The organic revenue of LVMH’s fashion leather goods business, which has always been the leader, was 9.75 billion euros, with year-on-year growth plummeting to 9% from 21% in the first quarter. The organic growth of the fragrance and beauty business and the jewelry and watch department also fell back to single digits, 9% and 3% respectively.
Benefiting from the recovery of global travel retail, the selected retail sector performed relatively well. The organic revenue of this sector increased by 26% year-on-year, becoming the best-performing business of the LVMH Group in the quarter.
Divided by different markets, the Asian market (except Japan) including China is still the largest market of LVMH Group, accounting for 32% of revenue in the first nine months of this year. In addition, LVMH’s growth rate in the European market fell from 19% in the second quarter to 7%, in the US market it increased from negative growth to 2% growth, and the Japanese market continued to maintain high growth, leading the world with a growth rate of 30%.
During the earnings conference call, LVMH Group Chief Financial Officer Jean-Jacques Guiony analyzed that compared with two years ago, China’s demand for fashion and leather products has not changed significantly. The decline in growth is due to a large number of Chinese consumers switching to overseas consumption. . At the same time, he believes Europe’s slowdown is normal, meaning that after three glorious years, growth is trending toward numbers more in line with historical averages.
After the financial report was released, LVMH Group’s share price fell nearly 7% during the session. As of November 2, LVMH’s share price was reported at 701 euros, down more than 20% from this year’s highest point of 904.6 euros.
The fall of LVMH is just the beginning of the decline in the share prices of European luxury goods companies. The share price of Kering, the second largest luxury goods company, has halved from the highest peak of 603.6 euros this year to 395 euros; Richemont has dropped from its highest peak of 603.6 euros. 161 Swiss francs fell to 109.6 Swiss francs; Hermès fell from the peak of 2050 euros to 1819 euros.
The financial report disclosed by Kering Group on October 24 showed that its third-quarter performance declined again. Sales fell 9% to 4.464 billion euros based on fixed exchange rates, and fell 13% based on real-time exchange rates, which was far less than analysts’ expectations. Core brand Gucci’s revenue fell 7% to 2.217 billion euros, Saint Laurent fell 12% to 768 million euros, Bottega Veneta dropped 7% to 380 million euros, and Balenciaga’s other departments fell 15% to 805 million euros. Regarding the reasons for the decline in performance, Kering Group explained that it was due to the unfavorable macro background and the impact of weakening passenger flow.
Unlike its peers, which failed in the third quarter, Hermès achieved double-digit sales growth in all markets around the world. On October 24, Hermès released its third quarter performance report for 2023 as of the end of September. During the reporting period, the company achieved revenue of 3.37 billion euros, a year-on-year increase of more than 15.6%, although it was lower than the 27.5% in the second quarter of this year and last year. The high growth rate of 32.5% during the same period still exceeded analyst expectations and was better than other luxury goods companies. In the first nine months of this year, Hermès sales surged 21.7% to 10.06 billion euros, breaking the 10 billion euro mark for the first time. At the same time, Hermès’ sales in various global markets in the first three quarters all grew by more than 20% year-on-year.
Revenue growth will return to normal at 5% to 12%
In the past three years, the development momentum of the European luxury goods industry has been strong. After experiencing the sluggish global market in the early stages of the COVID-19 epidemic, the European luxury goods industry as a whole, represented by LVMH, only suffered a setback in performance in 2020, and achieved record growth in both 2021 and 2022.
Financial report data shows that from 2020 to 2022, LVMH’s revenue was 44.651 billion euros, 64.215 billion euros and 79.184 billion euros respectively, and its net profits were 4.702 billion euros, 12.036 billion euros and 14.084 billion euros respectively, both of which maintained rapid growth.
Kering Group’s revenue in 2022 increased by 15% year-on-year to 20.351 billion euros, and net profit increased by 14% year-on-year to 3.614 billion euros. Hermès’ revenue exceeded the 10 billion euro mark for the first time in 2022, reaching 11.602 billion euros, a year-on-year increase of 23%; net profit increased by 38% year-on-year to 3.367 billion euros, the highest level in 10 years.
Driven by high-speed growth, the share prices of luxury goods companies have also become expensive in the past three years. Still taking LVMH as an example, the company’s stock price has increased nearly 4 times in the past three years. Its total market value once exceeded US$500 billion in April this year, making it the company with the highest market value in Europe and ranking 11th among listed companies in the world.
Bernard Arnault, the president of LVMH, has also seen his fortune soar. Forbes official website shows that from 2014 to 2020, Arnott’s net wealth rose from US$33.5 billion to US$76 billion, and to US$150 billion in 2021, almost doubling; in 2022 and 2023, the net worth of wealth will be US$158 billion and US$158 billion respectively. 211 billion US dollars, surpassing Musk and reaching the top of Forbes’ 2023 list of the world’s billionaires.
However, the turning point came in 2023. Bain & Company and Italian luxury goods group Altagama previously released a report stating that the personal luxury goods market growth will fluctuate between 5% and 12% in 2023, while it will be as high as 20% in 2022.
At the same time, the share prices of luxury goods companies have also begun to come under pressure, with the STOXX European Luxury 10 Index experiencing its worst quarterly performance on record in the third quarter of this year due to factors such as rising interest rates and cut profit expectations. Jean-Jacques Guiony responded to analysts at the earnings conference: “We have found that high-net-worth customers around the world are facing some pressure, especially in the United States, where consumption has been very weak this year.” In the market, investor sentiment has also fluctuated
. Richemont Group Chairman John Rooper said at the shareholder meeting in September this year that high inflation is affecting demand for luxury goods in Europe. As soon as this statement came out, 25 billion US dollars of luxury goods stocks on the market were sold off.
However, the ability of different companies to withstand stress also varies. Taking Hermès as an example, the group has achieved double-digit growth in all regions of the world in the first three quarters. Citigroup analyst Thomas Chauvet believes that Hermès Group benefits from “a high share of loyal, high-end people”. Hermès’ high-net-worth customers have a strong interest in Less sensitive to inflation and economic fluctuations and able to afford higher priced products.
Companies with advantages in bargain hunting are expected to outperform the consumer industry index in the long term
Some analysts have expressed caution about the outlook for the luxury goods industry and expect demand for luxury goods to decline this year in the United States and Europe. Morgan Stanley reported that U.S. credit card data showed that spending on luxury goods fell 16% year-on-year in July and August this year. As a result, luxury goods earnings per share forecast for 2024 was lowered by 6%, while Bank of America lowered its forecast by 7%.
So, is investing in luxury goods stocks a thing of the past for investors?
Bruno Vacossin, senior portfolio manager at Palatine Asset Management in Paris, said now is a good time to reduce holdings and lock in gains. “I don’t think the driving force of luxury goods stocks has been broken, but the growth trend has weakened.” Vacossin said he has reduced his positions in LVMH and Hermès.
DayByDay analyst Valerie Gastaldy said: “Hermès will be a bellwether and key to the change in the growth rate of the industry. It has performed very well and may buy the rest of the industry some time. But, overall, if we look towards the end of the year, “Both absolute and relative performance, downside risks remain.”
Gilles Guibout, head of European equity strategy at AXA Investments, said: “In the long term, I think buying these luxury stocks on dips makes sense. Historically, these have Companies tend to be more stable than must-have consumer companies because they target high-net-worth clients with more discretionary spending. The bottom line is that these stocks will rebound if central banks start cutting interest rates significantly.” Analysis of FactSet
Survey The analysts have an average rating of “buy” on four stocks – LVMH, Richemont Group, Kering Group and Hermès. Their average target price means that these four companies still have 19%, 33%, 24% and 6% % upside.