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Financial results below expectations but remain relatively high
LVMH published its annual report summarizing revenues for the third quarter and the past nine months of 2024. The earnings indicate that in the last quarter, there was an organic decline in revenues of 3% (excluding the effects of exchange rates, acquisitions, and divestitures) to €19.08 billion ($20.8 billion). The company attributes the weaker performance primarily to insufficient purchasing power in Asia. While the Japanese market saw a slowdown in sales growth mainly due to a stronger yen, which disadvantaged foreign customers, sales in the rest of Asia plummeted by as much as 16%. In particular, the company highlights China as consumers there began to spend less on luxury goods. Despite relatively stable revenues in Europe and the US, concerns have started to emerge about this sector and a potential shift in consumer preferences overall. Revenues in the fashion and leather goods segment, the largest within LVMH, fell year-on-year by 5%, while market expectations were for a half-percent growth.
LVMH points out that consumer sentiment in China is at its lowest since the beginning of the Covid-19 pandemic. Nevertheless, the company believes it can reverse the situation in this market. In the past nine months of this year, total revenues reached €60.8 billion ($65.9 billion), representing a year-on-year decline of 2%. However, there was a reported increase in revenues in the fragrance and cosmetics segment by 5% and in selective retail by 6%. Since the results are compared to a period when revenues were significantly high after the worst months of the pandemic, it's important to emphasize that even with these declines, there is a notable resilience to current economic uncertainties caused by high living costs, which are forcing consumers to significantly cut back not only in Asia but also in Western countries.
Chinese stimulus brings new wave of optimism
LVMH shares dropped by more than 4% after the results were published on October 15, 2024.* As the world's largest luxury goods retailer, its performance also impacted other companies in the sector, with shares of firms like Kering, owner of the Gucci brand, and luxury fashion seller Hermès, also declining.* However, on Friday, October 18, news emerged of better-than-expected retail sales in China, along with the government's announcement of a market revival plan through stimulus measures totalling over $110 billion. These updates brought a fresh wave of optimism among investors, leading to a rebound in luxury stock prices.* However, it should be noted that compared to the period before and shortly after the pandemic, the entire sector is still experiencing significant losses in valuation.
Kering stock performance for the last 5 years: https://www.google.com/finance/quote/KER:EPA?window=5Y
Hermès stock performance for the last 5 years: https://www.google.com/finance/quote/RMS:EPA?window=5Y
Source: Investing.com*
The favourable impact of further interest rate cuts on European stocks
The movement of LVMH and other luxury retailers' stocks had a significant impact on the value of the European index, STOXX 600.* After weakening following the aforementioned earnings report, by October 21 it neared its all-time high, reached at the end of September. Recovery was also driven by the European Central Bank's decision to cut key interest rates in October for the second month in a row, this time by 0.25% to 3.4%.* A similar trend was seen in the French CAC 40 index, where LVMH holds the largest weight. However, the CAC 40 remains down by around 7.6% from its peak in May this year, primarily due to the uncertain political situation in France and the growing budget deficit.*
Source: Investing.com*
What are the prospects of different sectors for the upcoming earnings season?
Based on data from Morgan Stanley, which has gathered key indicators from nearly 200 European companies, the earnings season in Europe for the third quarter is expected to be more or less neutral, with varying performance across different market segments. The aerospace and defence, tourism, and utility sectors are expected to dominate. Additionally, the tech hardware and telecommunications sectors, along with the food retail, are expected to exceed expectations due to their lower accruals in previous quarters, which historically leads to stronger future revenues. In contrast, the luxury goods, media, automotive, and transportation sectors showed stronger numbers in the previous period, which may result in weaker outcomes in the next quarter. Furthermore, the semiconductor, mining, and capital goods are expected to lag behind the rest of the market. The report also mentions concerns about the sustainability of margins, weak demand in Europe, and uncertainty surrounding the upcoming elections in the U.S. [1]
Conclusion
It is evident that the entire luxury goods sector has faced challenges in recent quarters, as several brands recorded lower sales, impacting their stock prices as well. Generally, consumer sentiment is largely dependent on the economic situation in the respective regions, and currently, key markets are experiencing tougher times. This is particularly reflected in the earnings of companies like LVMH, as their products mean extra spending for consumers. However, with falling interest rates and an overall economic recovery, the situation should gradually improve. Risks in the form of returning high inflation or geopolitical uncertainty persist, and unpredictable scenarios must always be considered.[2]
David Matulay, analyst of InvestingFox
* Data relating to the past are not a guarantee of future returns.
[1] Forward-looking statements represent assumptions and current expectations that may not be accurate or are based on the current economic environment, which may change. These statements are not guarantees of future performance. Forward-looking statements inherently involve risk and uncertainty because they relate to future events and circumstances that cannot be predicted, and actual developments and results may differ materially from those expressed or implied in any forward-looking statements.
Warning! This marketing material is not and must not be understood as investment advice. Data relating to the past are not a guarantee of future returns. Investing in foreign currency may affect returns due to fluctuations. All securities transactions can lead to both profits and losses. Forward-looking statements represent assumptions and current expectations that may not be accurate or are based on the current economic environment, which may change. These statements are not guarantees of future performance. InvestingFox is a trademark of CAPITAL MARKETS, o.c.p., a.s. regulated by the National Bank of Slovakia.
Sources:
https://www.lvmh.com/publications/lvmh-shows-good-resilience-in-the-current-context
