LVMH: Growth Decelerates After European and U.S. Consumption Weakens As We Expected

We are maintaining our fair value estimate of EUR 640 per share for wide-moat LVMH MC as the company reported a moderated pace of growth in the third quarter. Constant-currency growth was 9%, a deceleration from 17% delivered in the first half. The fashion and leather goods division, the biggest and most profitable in the group, grew by 9% at constant currencies versus 20% in the first half. The wine and spirits division was particularly weak with a 14% constant-currency decline, largely driven by cognac weakness in the U.S. market. Perfumes and cosmetics sales were up 9% and watch and jewelry sales were up 3% with better performance of jewelry versus watches and stronger sales at Bulgari (which has stronger exposure to China) than Tiffany. Sales in selective retailing, the least profitable division of the group, were up 26% in the quarter, in line with the first half.

U.S. consumer sales remained subdued (sales in the U.S. up 2% versus a 1% decline in the second quarter) and European consumption weakened notably, in line with our previously highlighted expectations, to a mid-single-digit decline from high-single-digit to low-double-digit growth in prior quarters for fashion and leather. Its Chinese customers performed well in our view with sales up around 40% on a two-year stack for the fashion and leather division. More Chinese consumers are now spending abroad, doubling from 15% outside China last year. Chinese spending abroad still hasn’t recovered to prepandemic levels though, when two thirds of spending was outside China. We remain more optimistic about luxury demand from Chinese consumers, with some pent-up demand potential and in the longer term will be driven by high-wage employment. The Western luxury consumption pullback is in line with our expectations after a period of very strong postcoronavirus demand, which was helped by nonrecurring tailwinds such as payment checks in the U.S. and pandemic savings.