LVMH eases luxury sector fears of major Hong Kong hit

October 10, 2019 3:09 AM

By Sarah White

PARIS (Reuters) - A strong sales update from LVMH boosted stocks across the luxury goods sector on Thursday, as months of unrest in Hong Kong proved less of a drag on the Louis Vuitton owner in the third quarter than expected.

Luxury labels rely on Hong Kong as a magnet for travelers and shoppers across Asia, and several months of pro-democracy protests have forced some retailers to close their doors temporarily.

In the first real glimpse of the impact across the sector, LVMH said revenues were down roughly 25% in the July to September period in Hong Kong. Analysts had projected industry sales there could potentially have halved.

But the French conglomerate, which owns labels from Christian Dior to Hublot watches and Krug champagne, also cautioned that the demonstrations would impact margins in what is usually a highly profitable market.

And the group said the fallout was not yet over, as store closures had stretched into October.

"We will try to react to the situation by lowering our cost base. And chiefly the rental costs, which are amongst the highest in the world," LVMH Financial Chief Jean-Jacques Guiony told a conference call on Thursday, adding that discussions were underway with landlords.

Helped by a booming fashion and handbag division - home to Vuitton and Dior - LVMH shrugged off much of the hit from Hong Kong, with a strong performance in the rest of Asia, Europe and the United States, and third-quarter sales beat forecasts.

Some countries performed particularly well, such as Japan, while business in France also improved, although Guiony said it was hard to conclude that it was necessarily due to spending shifting away from Hong Kong to those sectors.

Japan increased its sales tax from 8% to 10% on Oct. 1, for instance, which helped spur purchases ahead of the deadline.

LVMH shares were up 4.8% by 1449 GMT, while the stock prices of rivals from Gucci owner Kering and Birkin-handbag maker Hermes to Germany's Hugo Boss and Britain's Burberry (OTC: BRBY) also rallied.

Cartier and IWC parent Richemont (NYSE: CFR) as well as Omega maker Swatch Group - among the most exposed groups to Hong Kong, a major center for watch exports - profited from the stock market bounce. Sales growth in LVMH's watch division slowed less sharply than expected.


Some analysts have warned that LVMH may be an outlier in the industry, however.

It is riding high on massive investments in marketing and hot new designers for its top brands, and has benefited more than most from thriving demand for luxury wares from Chinese shoppers in recent years.

Gucci, Hermes and Italy's Moncler are also among the stronger performers, but some peers are struggling to attract younger customers or crack markets such as mainland China, and the divide in the sector is growing.

"We think it is more than likely that LVMH materially outperformed its direct peers," analysts at Morgan Stanley wrote in a note.

Luxury firms also benefited from a stock market relief rally after leather handbags and spirits such as cognac - LVMH produces Hennessy - were left off a list of new U.S. tariffs.

But some have pointed to a tougher economic backdrop in the United States in recent quarters, one of several headwinds with which the industry is grappling.

Guiony said that a sharp slowdown in make-up sales, particularly in the United States, had extended into the third quarter - a potential setback for big cosmetics players like L'Oreal or Estee Lauder (NYSE: EL).

(GRAPHIC - Share performance of luxury retailers:

(Reporting by Sarah White and Sudip Kar-Gupta; Additional reporting by Elaine Hardcastle; Editing by Dale Hudson and Alexandra Hudson)