LVMH's China letdown points to prolonged luxury industry pain

LVMH's quarterly fashion and leather goods sales miss, driven by weak demand in China for its flagship Louis Vuitton brand, has raised fresh doubts that the $350 ‌billion luxury industry may emerge from a three-year slowdown anytime soon. A year ago LVMH, the world's biggest luxury firm, reported signs of slightly better Chinese demand, triggering a sharp rally across the entire luxury sector — but today there are signs of a longer, deeper decline.

Its Paris-listed shares were down 1.5% by 0850 GMT, trading near their lowest ‌price in more than six years. Europe's leading luxury groups have lost around €330 billion ($369.1 billion) in market value since the start of the year, with LVMH ‌alone shedding roughly 40%.

"Despite the recent share price weakness, we expect some further pressure on the space as a whole today, with confirmation that the Chinese cluster seems to have taken a material (and bigger than feared) step down", JPMorgan analysts said in a note to clients. China emerged nearly two decades ago as the main growth engine for the luxury sector, but sales have been sluggish since the end ⁠of a ​post-pandemic boom as weak growth and a ⁠property sector crisis trickle down to shoppers. A tax crackdown on the wealthy is the latest headache for brands.

Five sell-side analysts have cut their target price on LVMH shares by an average 7% ⁠following the results, the first quarterly report by a major sector player, expecting the miss to also signal weak performance at some of its competitors. Shares in luxury groups Hermes, Kering and Richemont ​were also down between 1% and 2.2% on Tuesday.

RECOVERY TO TAKE TIME, CFO SAYS LVMH on Monday posted a 5% drop in organic sales at ⁠its fashion and leather goods division, which generates nearly half of group revenue, missing expectations in a Visible Alpha consensus for a 1.8% decline.

The group said a "less buoyant environment" in China had impacted its revenues, ⁠contributing ​to 1% organic sales growth overall, excluding currency swings, to €18.5 billion ($20.68 billion), below expectations for 1.3% growth. Asia, dominated by China, accounts for over a quarter of the group's total sales.

Asked about Louis Vuitton's recovery prospects in a call with analysts, the group's Chief Financial Officer Cecile Cabanis said: "It takes a bit of time, but I ⁠don't think there are a lot of shortcuts here". Cabanis said the brand has so far avoided drastic moves such as price cuts, choosing to focus on ⁠longer-term initiatives.

Adding to investor concerns, growth in ⁠LVMH's watches and jewellery division, home to brands including Bulgari and Tiffany, slowed to 6% from 9% in the first half of the year, marking a changing trend in one of luxury's few bright spots. ($1 = 0.8947 euros)