China saves LVMH and Big Bling from a fashion faux pas

China’s back, baby!

That was the exuberant message late on Wednesday from LVMH Moet Hennessy Louis Vuitton SE.

It also reflected relief. Shares in luxury groups soared this year on expectations of a fresh wave of revenge spending by Chinese consumers at home and abroad. But would those customers actually deliver? Without their largesse, company valuations would be seen to have risen too far and too fast — and would quickly plummet.

Fortunately, LVMH — the world’s biggest purveyor of luxury — delivered a blowout quarter driven by Asia. Organic sales — which exclude mergers and acquisitions as well as the results of currency movements — rose 17 percent in the three months to March 31, almost twice the level that analysts’ had predicted. At the all-important fashion and leather goods division, it was 18 percent, again almost twice the expectations.

Asia led the outperformance, with the region experiencing a “significant rebound” since the end of COVID restrictions. It’s also notable that the Selective Retailing arm , which includes beauty store Sephora and the travel retail unit, lifted sales by 28 percent, the strongest divisional growth. This reflected the the return of Chinese tourism, first to Hong Kong and Macau, but also indicated an increase in individual travelers to Europe.

Shares in big bling have increased sharply as investors anticipated a surge in China’s domestic spending along with waves of tourists from the country later this year and in 2024. The MSCI World Textiles, Apparel & Luxury Goods Index is up almost 20 percent since the start of this year through to Wednesday’s close, outpacing the MSCI World Index, which is up about 7 percent over the same period.

Shares in LVMH are up about 23 percent so far this year through Wednesday. But Hermes International, maker of Kelly and Birkin bags, which reports on Friday, has led the uptick, with the shares up about 30 percent.

So far, so good. LVMH’s fashion and leather goods sales in China rose by a percentage into the double digits in the first quarter, which bodes well for the rest of the year. “We are not talking about frantic or excess optimism and growth in China,” said Chief Financial Officer Jean-Jacques Guiony. “We are talking about a normalization at a fairly high level.”

Although LVMH shares rose as much as 5 percent early Thursday, the pace of China’s recovery may not be enough to meet investor expectations, given just how much luxury shares have appreciated. It’s also worth remembering that not all purveyors of  upmarket goods are created equal. LVMH owns two of the world’s leading fashion brands — Louis Vuitton and Dior — as well as a host of other names, including Celine, Loewe and Tiffany. Louis Vuitton passed the €20 billion ($22 billion) sales mark for the first time last year — ahead of all other luxury brands — with Dior generating sales of €8.5 billion last year, according to HSBC Holdings Plc.

Over the past three years, the biggest brands have taken sales from those that now have less relevance with customers. LVMH’s houses have likely gained share that way. Now, with a market value of €420 billion, the company has the scale to reinvest in its brands, gilding them with high-profile events and the most influential ambassadors to make them stand out even more for well-heeled clients. Case in point: recruiting pop star Pharrell Williams as the new menswear designer at Louis Vuitton.

With all eyes on China, it would be easy to overlook the fact that luxury demand in the US — which supported the industry while China grappled with COVID outbreaks — is slowing, particularly among younger, more aspirational buyers. Job losses in the technology sector, and turmoil in the banking industry don’t help either. Guiony said US fashion and leather goods and jewelry sales were decelerating. This is partly because more Americans are shopping in Europe, but it also reflects demand from local customers losing steam, with cognac suffering from a  “severe slowdown.”

LVMH is indeed more exposed to the US than most of its rivals, but scale and strength should help it outperform, even in the weakening American market. It can also count on beauty retailer Sephora and travel retail. Indeed, LVMH’s US sales rose 8 percent in the first quarter, broadly in line with the final quarter of 2022, driven primarily by Sephora. Travel retail had been a drag for the past three years, but should rebound nicely now.

For now at least, LVMH has reassured the markets on luxury’s fortunes. However, with valuations pricing in not only a recovery in Chinese spend but a soft landing in the US and Europe, there is no room for a fashion faux pas.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg