Luxury’s China wobble will accelerate M&A
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Oct 16 (Reuters Breakingviews) -The luxury sector is headed for a new wave of M&A. On Wednesday, shares in $330 billion giant LVMH LVMH.PA fell 7% after it revealed the bleak state of consumer spending in China. Although the pain was felt across the sector, cash-rich giants like the Louis Vuitton owner will be in the best position to scoop up bargains like Kering PRTP.PA.
LVMH’s core business of flogging high-end dresses, shoes and leather goods is under pressure. Sales in the unit, which accounts for nearly three-quarters of the company’s operating profit, fell 5% in the three months ending September versus 1% growth in the second quarter. Analysts had expected the top line to hold steady in that division. The sputtering performance of the world’s second-largest economy was the main driver of the decline. Sales to mainland Chinese consumers were down by mid-single digits compared with LVMH’s own estimate in July of mid to high single-digit growth.
More disheartening for investors is there are few signs of growth elsewhere. Consumer spending is slowing outside of China, according to Bank of America analysts. LVMH finance director Jean-Jacques Guiony said he saw a “slight improvement” in American and European consumers, but it was “nothing to write home about”. And if President Xi Jinping’s fiscal stimulus plan fails to materialise, and tariff wars between Brussels and Beijing intensify, the pain may get worse still.
This, however, creates an opening for the stronger luxury players. Cash-rich giants like LVMH and Hermès HRMS.PA can stay competitive by spending more on advertising and marketing than their rivals while also stripping out costs. Shares in Kering, Burberry BRBY.L and Salvatore Ferragamo SFER.MI have underperformed their larger rivals over the past year. And if LVMH manages this crisis better than these smaller players including Moncler MONC.MI, which formed a closer alliance with LVMH boss Bernard Arnault last month, he may be in a position to pounce.
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CONTEXT NEWS
French luxury giant LVMH said on Oct. 15 that its sales growth, adjusted for currency fluctuations, acquisitions and disposals, fell 3% to 19 billion euros ($20.8 billion) for the three months ending September.
It marked the luxury giant’s first decline in quarterly sales since the pandemic.
LVMH’s fashion and leather goods division, home to Louis Vuitton and Dior labels, reported a decline of 5%. Fashion and leather goods comprise almost half of LVMH revenue.
LVMH shares fell 7.1% to 581 euros as of 0719 GMT on Oct. 16.
Graphic: Luxury stocks are on the way down https://reut.rs/4dJBuMw
Editing by Aimee Donnellan, Streisand Neto and Oliver Taslic
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