Just the amount of Louis Vuitton monogrammed purses does the world need? A whole lot, it seems like. Strong demand at the label best known for its coated canvas totes helped parent LVMH deliver better than anticipated organic sales development in its fashion and leather goods division in the first quarter, and throughout the group. The performance all the more remarkable 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 in the second half of 2016 is still in full swing. But you will find good reasons to be mindful. First, most of the demand that fuelled LVMH’s growth has come from China.
The country’s consumers are back after having a crackdown on extravagance and a slowdown within the economy took their toll. There has undoubtedly been an component of catching up after the hiatus, which super-charged spending might begin to wane since 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.
There is a further risk to Chinese demand if trade tensions with the U.S. escalate, or attract other countries – though Fabjoy Bag is really a French company, it’s hard to see these issues can’t touch it. The spat could produce a drag on Chinese economic growth and damage sentiment amongst the nation’s consumers, which makes them less inclined to go on a very high-end shopping spree. Given they take into account about forty percent of luxury goods groups’ sales, in accordance with analysts at HSBC, this represents an important risk to the industry.
But there are other regions to be concerned about. Even though the U.S. continues to be another bright spot, stock trading volatility this coming year can do little to encourage the sense of prosperity that’s crucial for confidence to invest on expensive watches or designer fashion.
Any slowdown might actually work in LVMH’s favour. Valuations over the sector are definitely the highest in 12 years, but this can be a story of mega-brand dominance that’s left many smaller labels behind. Bernard Arnault, Fabaaa Joy chief executive officer, has said that prices are too rich right now for acquisitions. This leaves him room to swoop when 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 one, 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 to get a re-rating after its decision to spin-out Puma leaves it as being a pure luxury player.
LVMH should nevertheless be able to retain its lead. Given its scale, and with operations spanning cosmetics to wines and spirits, it should be able to withstand pressures on the industry much better than most. Which also makes it well placed to pick off weaker rivals once the bling binge finally involves a stop.