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The fortunes of three of the world’s biggest luxury groups are diverging as the sector navigates an industry-wide transition to a lower growth phase and more challenging conditions in the critical Chinese market.
French groups Hermès, LVMH and Kering have delivered widely different sales growth in the first quarter, in a test of the sector’s resilience following years of rapid expansion and margin gains during the pandemic. This reflects in part the clientele they serve, with companies orientated towards the wealthiest customers faring better.
High-end Hermès, maker of the coveted Birkin bag, smashed analysts’ expectations with a 17 per cent revenue growth on a like-for-like basis in the first three months of the year. This is despite the high basis of quarterly comparison from a year ago, when China emerged from zero-Covid lockdowns.
LVMH, the world’s biggest luxury company with a complex business spanning fashion house Christian Dior to hotels and vineyards, ticked up 3 per cent as demand for its fashion and handbags softened and champagne sales fell.
At Kering, customer disaffection for Gucci, the group’s biggest brand accounting for half of consolidated sales and two-thirds of profits — led the company to warn profits would fall as much as 45 per cent in the first half of the year. Gucci sales contracted 18 per cent, dragged down by China.
“You are disappointed, you are frustrated, have no doubt that I am as well,” Kering’s billionaire chief executive François-Henri Pinault told shareholders at the group’s annual meeting on Thursday.
“The first quarter luxury reporting season flagged a widening divergence between the well-off and the aspirational shoppers, and a likely weakening shape to sales in recent weeks,” said James Grzinic, analyst at Jefferies.
He added: “The dislocation in commercial and share price performance between winners and losers has rarely been this wide . . .[and] it is in Asia-Pacific that the divergence between aspirational and wealthy customers seems even more marked in recent months.”
In general however, Kering is the odd one out, with analysts expecting continued growth, not a contraction, throughout the sector.
Commenting on LVMH’s earnings, Bernstein’s Luca Solca said: “Positive growth in the first quarter — as compared with fears of negative growth as recently as January — is a material and meaningful step towards a 2024 soft landing scenario for LVMH and the sector at large.”
Smaller luxury groups including high-end Brunello Cucinelli, arty Prada and sports performance-orientated Moncler all grew sales in the mid-to-high teens.
However sales at Kering are expected to continue to trend downwards for the rest of the year given the poor visibility on how the new creative director’s collections will fare, said Carole Madjo, analyst at Barclays.
“In a sector driven by market polarisation, Kering management also mentioned that Gucci is not in a sweet spot as it is [neither] high-end enough and [also] not aspirational, which is not reassuring,” she said.
Hermès shares are up 22 per cent so far this year, LVMH is up 9 per cent and Kering has fallen 9 per cent in the same period. At Hermès, the forward price-to-earnings ratio over the next year based on projected earnings is 51, according to data from Eikon. That compares with 24 times at LVMH, and 16 at Kering.
How brands are navigating the more restrained mood among Chinese shoppers, particularly aspirational ones, is being closely watched by investors worried about the outlook for a market that drove luxury growth for much of the past decade.
Hermès managed to grow in the mid-teens in what is now the world’s second-largest market for luxury goods. But it noted that traffic softened in March, with strong demand from wealthy clients offsetting fewer visits from aspirational clients who tend to purchase lower-priced silk scarves and accessories.
At LVMH, considered the bellwether of the industry, sales in Asia outside Japan — dominated by greater China — dropped 6 per cent, indicating some weakness too. However, chief financial officer Jean-Jacques Guiony said revenues from Chinese customers buying globally increased 10 per cent, reflecting higher rates of tourism among wealthy clients travelling to destinations such as Japan to shop.
“The Chinese clientele, whether in China or not, has progressed. I think this is a trend that will continue [and] I think China will succeed in reviving the economy,” said LVMH’s billionaire chief executive Bernard Arnault.
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