Luxury can only Dream of a 2010-Style Comeback

Sharp fall in Louis Vuitton owner’s sales suggests the global financial crisis is a poor guide to how designer brands will fare amid coronavirus.

By guest author Carol Ryan from Wall Street Journal

Luxury brands have a well-earned reputation for resilience. Major labels bounced back from the 2008 financial crisis within 18 months and shrugged off political protests in Hong Kong last year. But the Covid-19 pandemic looks different and could lay them much lower.

LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury company, gave investors their first read on the industry’s performance through the health crisis after the Paris stock market closed Thursday. It reported a 17% decline in sales for the first quarter versus the comparable period of 2019.

Revenue at its flagship fashion and leather goods division was down a better-than-expected 10%. But its perfume and cosmetics unit shrank by a fifth—double the reduction seen at L’Oréal’s luxury cosmetics business, which reported the same day. LVMH slashed its dividend to save cash and cut its 2020 capital expenditure budget by 40 %. The two measures will save around EUR 2.3 billion (USD 2.5 billion), Credit Suisse estimates.

LVMH’s diverse portfolio shows how the pandemic impacts luxury brands in multiple ways. The Belmond chain of exclusive hotels bought in 2018 will be hurt by a hard stop in international travel. So will the French company’s majority holding in airport duty-free retailer DFS. The spring-summer collection for apparel brands such as Christian Dior and Louis Vuitton must be extended into the fall to clear a backlog of unsold inventory. Sales at its Champagne and spirits division will only recover once stock held by wholesalers has been depleted.

The global financial crisis is a poor guide to how the industry will fare. Luxury brands recovered from the 2008 downturn because of a surge in demand from Chinese consumers. In 2009, sales across the Chinese spending will be vital this time too, only the hole they need to fill is much bigger. Sales across the global luxury industry will shrink by between 22% and 25% in 2020, according to Bain estimates—three times the decline in 2009. The Chinese economy has been hit hard by the new coronavirus and Beijing doesn’t have the same room to spend its way out of the problem. Output in the country fell 6.8% in the first quarter, according to data released Friday, with consumer spending showing little recovery in March.

LVMH said sales in mainland China for big fashion brands like Louis Vuitton and Christian Dior increased 50% year over year in the first two weeks of April, as restrictions on movement were lifted. However, spending by Chinese nationals is still down across the entire portfolio. And with global travel flows not expected to return to their pre-Covid levels until late 2021, travel retail sales will remain depressed—as will traffic to LVMH’s network of European boutiques, where up to half of sales are made to tourists.

Stock market valuations in the luxury sector are still well above their financial crisis levels. Among seven major European companies that were also publicly listed a decade ago, enterprise values now trade for an average of 3.9 times projected sales, compared with 1.5 times during the last major downturn.

LVMH shares rose 5% early Friday April 17, 2020, in a buoyant market. Luxury companies’ strong balance sheets and savvy management teams have pulled them through squalls before, but the market reaction still seems optimistic. For nonessential consumer spending—which includes luxury by definition—the pain is only just beginning.