LVMH's impressive financial report: Is the downturn in the luxury goods industry over?

LVMH's impressive earnings report does not necessarily mean that the entire luxury goods industry is out of the woods.

Overnight, luxury goods giant LVMH released its earnings report, with organic revenue in the fourth quarter exceeding expectations by growing 10%, without the anticipated slowdown in further growth as predicted by analysts. The company's revenue and net profit for 2023 both reached new annual highs, surpassing the records set in 2022.

Among them, the fashion and leather goods business, which accounts for the largest proportion of revenue and profit, performed steadily. Boutique retail businesses such as Sephora experienced strong growth in the fourth quarter, while the wine and spirits business showed signs of recovery.

The earnings report also revealed that LVMH plans to propose a dividend of €13 per share at the shareholders' meeting in April this year, higher than the previous year's €12 per share.

The better-than-expected earnings report alleviated some concerns in the market about the demand for luxury brands. However, LVMH's scale and financial strength far surpass its peers, and this does not fully indicate an improvement in the overall industry situation, as Kering, the parent company of Gucci, showed weak performance.

In Friday's trading, LVMH's stock price surged by 12%, reaching a market value of €382 billion, but still 16% lower than its historical high in April 2023. The significant increase in LVMH's stock price was enough to drive the French benchmark index, CAC40, up by more than 2%.

Revenue Rebounds Exceed Expectations

In the fourth quarter, the group's organic revenue increased by 10% compared to the same period last year, surpassing analysts' expectations of 8%. This was mainly due to better-than-expected recovery in the wine and spirits business and strong demand from the retailer Sephora.

For the full year of 2023, LVMH's sales increased by 9%, in line with analysts' expectations but lower than the 23% growth in 2022. The group's profit increased by 8% to reach €15.2 billion, and the operating profit margin remained stable at 26.5%.

Looking at specific businesses, the standout performer was the boutique retail business, including the cosmetics brand Sephora, with organic revenue growing by 25% YoY and operating profit increasing by 76%, both reaching historical highs. This indicates that consumer demand for skincare and cosmetics has withstood the impact of inflation.

The fashion and leather goods business, which generates the highest revenue and profit, saw organic revenue growth of 9% in the quarter, lower than expected. However, for the full year, it achieved a 14% growth in revenue, reaching a historical high.

In addition, on January 25th, LVMH CEO Bernard Arnault announced the nomination of his two sons, Alexandre Arnault and Frédéric Arnault, as members of the board of directors. Analysts pointed out that this move strengthens the control of the next generation of the family and is a sign of LVMH's recovery. Looking ahead, Arno said:

The performance in 2023 demonstrates that our brand has extraordinary appeal in a year of economic and political tension.

While remaining vigilant about the current situation, we are confident about 2024. The group will continue to grow and expand market share this year.

Is the downturn of the luxury goods industry over?

After two years of rapid growth following the outbreak of the COVID-19 pandemic, the consumption of luxury goods has continued to cool down, especially among young consumers and less affluent groups who are most affected by high inflation.

The positive performance report from LVMH brings good news to the luxury goods consumption sector, but this does not fully reflect the situation of the entire industry, as LVMH's scale and financial strength are far ahead of its peers.

LVMH stated that demand in the US market accelerated in the fourth quarter, not only for Sephora but also for other divisions. This indicates for the first time that American buyers, especially the affluent middle class, may have passed the worst period.

Previously, Richemont, the parent company of Cartier, pointed out last week that its performance in the fourth quarter was better than at the beginning of the year. The jewelry brands Cartier and Van Cleef & Arpels offset the slowdown in the watch business, and Hermès sales remained resilient.

However, other luxury goods companies are still facing challenges. Kering's performance is particularly bleak among its peers, as the company is trying to revive its Gucci and smaller brand Balenciaga. Meanwhile, Prada has achieved decent performance, but sales growth is still slowing down.

In addition, the economic recovery in Europe and the United States in the last quarter may be temporary, mainly driven by holiday consumption.

Barclays analysts predict that the overall sales growth of the high-end luxury goods industry in 2023 will be 5%, lower than the 9% growth rate in 2022, and far below the double-digit percentage growth in 2020 and 2021.