Shares in luxury goods companies take a hit – will they recover?

Shares in luxury goods companies have slumped after LVMH, which owns Moët & Chandon and Dior, reported an unexpectedly steep decline in third-quarter sales, says Joanna Partridge in The Guardian. Revenue in the “bellwether” fashion and leather goods division fell by 5%, which LVMH blamed on an “uncertain economic and geopolitical environment”, especially in Asia. The news unsettled investors in Hermès, Burberry and LVMH’s smaller rival Kering (the owner of Gucci).

Chinese shoppers have cut back amid the ongoing real-estate crisis, wiping “the equivalent of $60,000 off the net worth of Chinese households”, says Carol Ryan in The Wall Street Journal. This is bad news, as China has been a key growth driver for luxury over the past two decades, with the country now accounting for a third of global luxury sales, compared with just 1% in 2000. While there are still hopes that the Chinese government’s stimulus plans will boost the economy, details about the size of any stimulus remain “scant”, and it will bolster sales of consumers’ staples rather than high-end products.

Where are shares in luxury goods companies going?

The markets are still underestimating the extent to which LVMH’s “horrible” figures point to a “much sharper slowdown than feared”, says Lex in the Financial Times. It is by no means obvious that “when the macro drag eventually clears, the luxury sector will seamlessly return to rapid growth successive price rises” may have “turned some customers off”, especially given the shift towards “quiet luxury”. As a result, investors should expect “further disappointments” from the luxury sector, with LVMH in the firing line as the group “is in the midst of a creative and managerial transition”.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Yet even if the formerly “mighty” LVMH hasn’t escaped the “bursting of the bling bubble”, there is some hope for the group, says Bloomberg’s Andrea Felsted. When times are tough, “consumers typically gravitate to the names they know best”. What’s more, shaking up its portfolio with new designers at its Celine fashion house, Fendi womenswear and Givenchy isn’t a sign of weakness. It “shows the company is not content to rest on its considerable laurels”. LVMH could also take advantage if “rivals are less able to compete”, and there may be “opportunities” to employ its “strong balance sheet” to invest in areas where it still has “white space”.

The fact that the pain “may get worse still” for the sector creates an opening for the “stronger players”, says Yawen Chen on Breakingviews. “[Cash]-rich giants” such as LVMH and Hermès can boost their positions “by spending more on advertising and marketing than their rivals while also stripping out costs”. And larger firms can still “scoop up bargains”, by entering into partnerships, or even buying outright, those smaller firms, such as Kering, Burberry and Salvatore Ferragamo, that have seen their shares do even worse than those of their larger peers in the past 12 months.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.