LVMH Struggles to Bounce Back Amid Deepening Luxury Downturn

LVMH’s fashion and leather goods sales fell 9 percent in the second quarter, just missing analyst estimates as the Louis Vuitton and Dior owner struggles to bounce back from a deepening industry slump.

Group sales fell 4 percent, following a 3 percent slide the previous quarter. Sales improved in the retail division powered by Sephora, growing 4 percent. Beauty sales grew 1 percent, while watches and jewellery were flat. Drinks revenue continued to decline, albeit more slowly, falling 4 percent compared to last quarter’s 9 percent drop.

First-half profit fell 15 percent to €9.01 billion. Efforts to preserve margins by reining in costs include scrutinising fashion show budgets to reduce spending on elements that don’t enhance creativity or client experience, chief financial officer Cécile Cabanis said.

After flying high in the wake of the coronavirus pandemic, LVMH has been hard hit by slowing economic growth, including in the key Chinese market, as well as the impact of lingering inflation and the return of competing spending categories like travel, restaurants and wellness. Customers have also balked at steep price hikes, and shown their fatigue with mega-brand merch by defecting to more subtle, craftsmanship-focussed labels like Hermès or else trendier niche luxury brands like Miu Miu.

“LVMH showed good resilience and maintained its powerful innovative momentum despite a disrupted geopolitical and economic environment,” the group said in a statement.

The group is making an effort to better justify price hikes with upgrades to products, while adjusting for inflation and tariffs on like-for-like products cautiously, Cabanis said.

Group-Wide Challenges

LVMH has found itself under scrutiny in recent months as simultaneous challenges across key units weakened the case for its sprawling conglomerate structure.

Falling sales in its fashion and leather goods division — anchored by Louis Vuitton — is the group’s most pressing concern. But additional challenges include turning around drinks unit Moët Hennessey, lacklustre sales at duty-free shopping chain DFS and a downturn in the Swiss watch market that has hit all but the biggest and most powerful watch brands.

LVMH — which has long succeeded in cultivating an aura of operational excellence and ineluctable expansion — is also facing a punishing news flow: Recent reports include multiple data leaks at Louis Vuitton and Dior, labour abuses in Loro Piana’s supply chain; layoffs and a problematic workplace culture at Moët Hennessey. Shares in the company have fallen 26 percent since the start of the year, with its valuation being surpassed by arch-rival Hermès.

As chairman Bernard Arnault, aged 76, prepares his succession amid the ongoing downturn, some analysts have floated the idea that the group should spin off underperforming and non-core units to simplify its structure. In an after-market call on Thursday, one analyst asked whether the group would keep growing or scale back its portfolio in the coming years.

“It depends on opportunities. We will not miss good opportunities, and we will not keep brands if we believe they are not a good add on or we are not the right operator for them,” Cabanis said.

Vuitton Under the Microscope

With plans for bolstering several problem units underway — a new designer at Dior, new management at Moët Hennessey, transferring the governance of loss-making department store La Samaritaine from DFS to Le Bon Marché — investors are now turning their focus to the core of LVMH’s business: its largest and most profitable brand, Louis Vuitton.

Sales volumes remain down at the bag maker, though “slightly less” than the group average, according to Cabanis.

The brand’s strategy of perpetually upscaling its handbag offer while entering new categories to connect with aspirational customers remains unchanged.

“The brand is very focused on elevating its offer with more sophisticated products — very high quality, very desirable. Then you also need to connect with the younger generation with some offer where you can meet them and onboard them. We refuse to do that with cheap bags,” Cabanis said. “It’s not about downtrading. It’s about using the firepower and DNA and desirability of Vuitton, and replicating it on accessible categories.”

In terms of marketing, the brand remains focused on doing things “no one else can do,” like building a steamer-ship-shaped flagship store in Shanghai, “The Louis,” which opened last month. “You like it or you don’t, but it’s some place you need to visit,” she said.

Tariff Turmoil

Luxury’s slump is likely to deepen should the EU fail to ease tensions with the US, where president Donald Trump is threatening high taxes on imports from a slew of trading partners.

LVMH has been tirelessly lobbying for a reprieve, both in Brussels and Washington. In an interview with the Wall Street Journal Thursday, chairman Arnault announced plans to open a second Louis Vuitton factory in Texas, signalling support for American manufacturing, a key talking point for Trump.

Cabanis said the EU and US appeared to be “near a deal. A general tariff rate of 15 percent, instead of the 30 percent rate Trump has threatened to put in place from August 1, would be an ”overall good outcome for the general mood of our clients,” she said.

Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.