Louis Vuitton’s Owner shows Wear And Tear

A 68 % drop in first-half operating profit at LVMH demonstrates that top luxury brands aren’t as defensive as investors think.

By guest author Carol Ryan from Wall Street Journal

Caption and graphic courtesy by Wall Street Journal

In one of the stranger trends of the global pandemic, top luxury brands have been treated as safe haven stocks. LVMH’s LVMUY first-half profit plunge is a reminder that an industry that relies on international travel and the feel-good factor won’t get off lightly.

After the Paris market close Monday, July 27, 2020 LVMH Moët Hennessy Louis Vuitton, the bellwether luxury company controlled by Europe’s richest man, Bernard Arnault, said that operating profit fell 68% year over year in the six months through June. That was steeper than the 59 % drop that analysts were expecting, although sales growth was in line. Operating margins fell to 9 %, compared with 21 % for the same period of last year.

Luxury brands have high fixed costs, so any slowdown in sales has a big impact on their bottom line. At its fashion and leather-goods division, for instance—home to particularly lucrative brands like Christian Dior and Louis Vuitton—a 24 %  fall in sales almost halved the division’s operating profit over the six months through June.

Some of the bad news will be temporary. Despite keeping its spring-summer collection in stores longer than usual, LVMH still had to slash the value of stock that couldn’t be sold. Unless a second wave of infections shuts down boutiques globally again, the worst of the write-downs should now be behind it.

But the company’s reliance on travel spending makes a quick recovery later in the year unlikely. Duty-free retailer DFS won’t rebound until consumers feel safe to take long-haul flights again. Sales of the company’s jewelry and watch brands fell 52 % in the second quarter, in part because of their dependence on travel spending. Bookings at the Belmond chain of luxury hotels, bought in 2018 for an all-in price of USD 3.2 billion, are also likely to remain weak.

LVMH has been one of Europe’s best performing luxury stocks this year. As a multiple of projected earnings, its shares are trading 68 % above a 10-year average of 19 times. Investors see a diverse portfolio of over 70 brands as defensive. That may be true long-term, but for now LVMH’s breadth is just exposing the company to a wider range of problems.