Hey Big Spender! LVMH Splashes Billions on Stores and Events
PARIS — Despite a softening in demand in the key U.S. market, LVMH Moët Hennessy Louis Vuitton is feeling flush, digging deep into its cash reserves to splash out on spectacular shows and unique store locations.
Reporting first-half results on Tuesday, the world’s biggest luxury group said its operating investments soared to 3.6 billion euros during the period, of which 1.5 billion euros was spent on commercial real estate, including a major acquisition on the Avenue des Champs-Élysées in Paris.
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As a result, operating free cash flow was down to 1.8 billion euros from 4 billion euros during the same period a year earlier.
French specialized publication CFNews Immo reported in June that LVMH dropped 770 million euros on the Art Deco building housing its Louis Vuitton flagship, but the group declined to comment.
Jean-Jacques Guiony, chief financial officer of LVMH, merely said the conglomerate acquired “an exceptional building” on the famed thoroughfare, as part of its strategy of investing selectively in key locations in Paris, London, New York City’s Fifth Avenue and Rodeo Drive in Los Angeles.
“I would say it’s quite opportunistic. We do not have global strategy of owning our stores,” he said on a webcast with press and analysts. “There may be a little bit more to come, but it will depend on the quality of the opportunities that we see.”
In parallel, LVMH outgunned its competitors with spectacular events including Pharrell Williams’ debut show as creative director of menswear at Louis Vuitton. Staged on the Pont Neuf bridge in central Paris, the event featured a gospel choir and was capped with a live performance by Jay-Z, garnering more than 1.1 billion views online.
The Vuitton show generated $42.6 million in media impact value, leading the ranking for the men’s season in Paris, according to the latest tallies from data research and insights firm Launchmetrics.
Those large-scale investments weighed on the operating margin of LVMH’s key fashion and leather goods (FLG) division, which fell to 40.5 percent in the first six months of the year, from 41.4 percent during the same period last year.
Weak currencies in China and Japan also dented profitability, but Guiony said margins should recover in the second half, with fewer big-ticket events on the cards and price increases in the pipeline in Japan.
“We intend to defend our full-year margins at the level of last year, obviously, barring significant currency movements,” he said.
However, LVMH revealed on Monday it has signed on to become a premium partner of the Paris 2024 Olympic and Paralympic Games, a move that cost it another 150 million euros, according to sources familiar with the matter.
And it plans to continue investing significantly in U.S. jeweler Tiffany & Co. following the inauguration in April of its sprawling new flagship on Fifth Avenue, dubbed the Landmark. That multiyear refurbishment is understood to have cost hundreds of millions of dollars, according to sources, including artworks by Julian Schnabel and Jean-Michel Basquiat.
“It’s doing very well,” Guiony said of the store. “The benefit of the Landmark is not only the business we do there, but the impact it has on the global image of the brand.”
While the U.S. accounts for around 42 percent of its sales, the jeweler is upgrading its stores worldwide, the latest being its renovated flagship in Tokyo’s Ginza district.
“We have to redo basically the whole fleet. I mean, not one single store, apart from the few ones that we have already renovated, are up to our standards, and it will take time and a lot of money to redo them,” Guiony said.
“What we want is within three, four years, max, to have redone most of the network of stores at Tiffany, and that’s a significant capital cost that we have to bear,” he added.
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LVMH’s sheer scale puts it in an unparalleled position to invest in its brands. “This doesn’t mean that we are immune to any external shocks, it just means that we have the ability to face more adverse conditions and to emerge from them stronger than ever,” Guiony said.
The group said net profit jumped 30 percent to 8.48 billion euros in the first half, as strong demand in Europe and Asia helped fuel double-digit growth in most divisions.
Profit from recurring operations totaled 11.57 billion euros, representing an increase of 13 percent year-over-year. This was below a FactSet-compiled consensus estimate of 11.75 billion euros.
But several indicators pointed to weakening momentum, with a drop in cognac sales reflecting a slowdown in the U.S. market, according to the figures published after the market close.
Group sales in the three months to June 30 amounted to 21.20 billion euros, broadly in line with analysts’ expectations. This represented a rise of 17 percent at constant exchange rates, in line with the first quarter.
“LVMH achieved outstanding results during a six-month period of ongoing economic and geopolitical uncertainty,” LVMH chairman and chief executive officer Bernard Arnault said in a statement.
“Thanks to the desirability of our brands, we approach the second half of the year with confidence and optimism but will remain vigilant within the current environment and count on the agility and talent of our teams to further strengthen our global leadership position in luxury goods in 2023,” he added.
The FLG division recorded a 21 percent increase in organic sales in the three months to June 30, a quarterly acceleration in line with analysts’ forecasts. The division posted an operating profit of 8.56 billion euros, up 14 percent year-on-year, boosted by star brands Louis Vuitton and Christian Dior.
But sales of wines and spirits fell 8 percent in organic terms during the second quarter, as demand for Hennessy cognac was impacted by the worsening U.S. economic environment and high inventories in the market. This compared with a 3 percent increase in the first quarter, and with forecasts for a 2 percent decline in the second quarter.
Luxury stocks took a hit last week after rival Compagnie Financière Richemont reported a surprise drop in revenue from the Americas in the three months ended June 30, as the region was impacted by a cost of living crisis, rising interest rates and an overall slowdown in luxury spending on the part of the aspirational consumer.
LVMH said sales in the U.S. were down 1 percent in the second quarter, following an 8 percent increase in the first three months of the year.
“We are experiencing drops with entry-price products, with online sales, with second-tier cities, which is a clear sign that the aspirational customers are not shopping as much as they used to, and conversely, the rest of the portfolio is doing pretty well,” Guiony said.
By contrast, sales in Asia, excluding Japan, were up 34 percent in the second quarter, following a 14 percent rise in the first quarter.
Overall sales of watches and jewelry rose 14 percent on an organic basis, up from an 11 percent increase in the first quarter, while perfumes and cosmetics posted a 16 percent rise, versus a 10 percent increase in the prior quarter.
In selective distribution, sales were up 25 percent in the quarter, versus 28 percent in the first three months of the year, reflecting the continued strong performance of Sephora, which opened its first U.K. store in March, and a recovery of its travel retail business DFS, as tourism resumes in hubs such as Hong Kong and Macau.
“Overall, we may see a modest negative share price reaction to this print, given lack of top line beat particularly at fashion & leather, and the slight EBIT miss (although we believe it is a ‘high quality’ miss, given it relates to elevated marketing spend,)” Piral Dadhania, analyst at RBC Capital Markets, said in a research note.
Kering is due to unveil its second-quarter results on Thursday, and Hermès International on Friday.
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