LVMH Earnings: Asia Is Strong, but U.S. Weakens Further With Margins Under Pressure

We are maintaining our fair value estimate for wide-moat LVMH MC as the company reported solid first-half results. Whereas demand in Asia, as expected, led growth, on a rather easy comparison base, demand trends in the United States weakened further, also in line with our thinking. Further, operating income came slightly under pressure (50-basis-point decline). We view shares as expensive at current levels.

Organic revenue was up 17% in the second quarter and the first half, led by the most profitable fashion and leather division (up 21% in the quarter and 20% in the first half). That said, profitability of the division, which reached peaks of 40%-plus in operating margin in recent couple of years (low 30% over the past 10 years), came under pressure, declining to 40.5% from 41.4% in 2022. Management attributed the decline to increased marketing costs (particularly into Louis Vuitton brand) as well as currency headwinds in Asia. The wines and spirits division was the only one to experience revenue declines (down 8% organically) on weakening demand in the U.S. and high distributor stock. Other divisions recorded double-digit growth with sequential acceleration in perfumes and cosmetics and watches and jewelry. Margin picture was mixed, with improvement in selective retailing and perfumes and cosmetics but erosion in wines and spirits and flattish in watches and jewelry.

Geographically, growth was driven by Asia excluding Japan (up 34% in the quarter) following China’s reopening and easy comparison base (down 8% in second-quarter 2022). Japan and Europe, also performed strongly (up 29% and 19%), but sales in the U.S. deteriorated further to negative 1%, in line with trends we are seeing across the industry and consistent with our expectations. Like peers, LVMH stressed weakness in aspirational consumers in the U.S. with declines in lower-price products, second-tier cities, and online sales in cognacs, fashion and leather, and jewelry to a lesser extent.