LVMH is back in fashion

The luxury goods bellwether reported strong sales. But are investors too optimistic about the outlook? Ben Judge reports.

“Luxury is back from the brink,” says Andrea Felsted on Bloomberg Gadfly. LVMH, the Paris-listed firm that is the world’s largest maker of luxury goods, saw first-quarter sales “beat expectations across every division”. Revenues rose by 13% to 9.9bn, more than the 9.5bn that analysts predicted. China’s economy is rebounding, Europe is “benefiting from a return of the travelling luxury consumer”, and the market remains positive in the US. That said, the performance was to some extent “flattered by comparisons with a year earlier”, when China’s stockmarket was in turmoil and tourists were “abandoning trips to Europe” in the wake of terrorist attacks.

That downturn in demand has made it hard for LVMH to raise prices recently, says the Financial Times’s Lex column. And Bernard Arnault, LVMH’s chairman, chief executive and controlling shareholder, remains cautious on this front: “He prefers to let cost control, innovation and [currency effects] lift profit margins.” Still, “price rises could soon be feasible”, since demand in Asia seems to be remaining firm. Certainly, with LVMH’s shares trading “at valuations not seen since the financial crisis”, investors will need some help from improving margins if they are to “carry on toasting the recovery in luxury”.

“Investors should be wary of partying like it’s 2010,” agrees Stephen Wilmot in The Wall Street Journal. The last boom was fuelled by “corrupt gift-giving and extravagant store rollout programmes” in China, neither of which are likely this time. What’s more, the tastes of China’s middle classes are maturing in “unpredictable directions”. Given that, LVMH looks pricey on 22 times forecast earnings. Peers are even dearer, with Prada on 29 times earnings. “It is hard to reconcile these multiples with the ‘new normal’ of lower growth most in the industry expect.”

On the plus side, strong cash flows are “swelling [LVMH’s] war chest”, says Carol Ryan on reakingViews.com. Arnault likes to do deals: he spent almost 10bn between 2000 and 2015, two-thirds more than Richemont, LVMH’s closest rival. But the “really big targets”, such as Hermes or Patek Philippe, are “out of reach for now”, since their owners are not keen to sell. There is speculation around Burberry, but the British firm “doesn’t fill any obvious gap in the LVMH stable of brands”. Still, that’s not necessarily bad news for shareholders. With LVMH’s shopping instincts hemmed in, the scope for share buybacks or fatter dividends has gone up.