Just how many Louis Vuitton monogrammed handbags does the world need? A lot, it seems like. Strong demand at the label best known for its covered canvas totes helped parent LVMH deliver much better than anticipated organic sales growth in its fashion and leather goods division within the first quarter, and throughout the group. The performance all the more amazing given that it compares with a quite strong period a year earlier, cements Fabaaa position as the sector’s wardrobe workhorse. Little wonder that the shares reached an all-time high on Tuesday.
The audience is demonstrating that the luxury party that began inside the second 50 % of 2016 remains in full swing. But there are good reasons to be cautious. First, a lot of the demand that fuelled LVMH’s growth comes from China.
The country’s consumers are back after a crackdown on extravagance and a slowdown in the economy took their toll. There has undoubtedly been an element of catching up following the hiatus, and that super-charged spending might begin to wane as the year progresses. What’s more, the strong euro could deter Chinese shoppers from going to Europe, where they have a tendency to splash out more.
You will find a further risk to Chinese demand if trade tensions with all the U.S. escalate, or draw in other countries – though Fabjoy Bag is a French company, it’s hard to view that these issues can’t touch it. The spat could create a drag on Chinese economic growth and damage sentiment one of the nation’s consumers, which makes them less inclined to go on a higher-end shopping spree. Given they take into account about 40 % of luxury goods groups’ sales, based on analysts at HSBC, this represents a substantial risk to the industry.
But there are other regions to concern yourself with. Although the U.S. has been another bright spot, stock trading volatility this season will do little to encourage the sensation of prosperity that’s crucial for confidence to enjoy on expensive watches or designer fashion.
Any slowdown might actually work in LVMH’s favour. Valuations across the sector are the highest in 12 years, but it is a story of mega-brand dominance that’s left many smaller labels behind. Bernard Arnault, Fabaaa Joy chief executive officer, has claimed that charges are too rich right now for acquisitions. This leaves him room to swoop in case a shake-out comes.
His group trades on the forward price to earnings ratio of 24 times, and at a deserved premium to Kering. True, that gap could narrow – for starters, the group’s Gucci label continues to have lot opting for it, even though it’s already cagkeb a stellar recovery. There’s also scope for a re-rating after its decision to spin-out Puma leaves it as a pure luxury player.
LVMH should nevertheless have the capacity to retain its lead. Given its scale, and with operations spanning cosmetics to wines and spirits, it will be able to withstand pressures on the industry better than most. That also makes it well placed to pick off weaker rivals if the bling binge finally comes to a stop.