LVMH’s Growth Slowed In Fourth Quarter. Is It An Omen For 2023?
By Pamela Danziger
Tuesday, 14th February 2023

LVMH CEO Bernard Arnault opened the 2022 year-end earnings call with a simple statement that summed the year’s accomplishments in a nutshell.

I want to say once again, at the risk of tiring you, record results for the Group LMVH. We achieved just over €79 billion ($86 billion) in revenue, just over €21 billion ($22.8 billion) for profit from recurring operations and increased 23%, net income above €14 billion ($15.2 billion), free cash flow just over €10 billion ($10.9 billion). So financial performance that’s quite remarkable.

He capped his opening remarks saying, “In difficult times in terms of the macro economy or political difficulties, LVMH is gaining market share and making progress and this has been the case since 2019.”

Among the highlights of the company’s 2022 performance are:

  • Louis Vuitton exceeded €20 billion ($21.8 billion) for the first time, Celine topped the €2 billion ($2.2 billion) milestone and Christian Dior gave a standout performance. Fendi, Loro Piana, Loewe and Marc Jacobs also reached record levels of revenue and earnings.
  • Sephora enjoyed a remarkable rebound with record revenue and earnings. The Selective Retailing sector, where it reports, grew 26%.
  • Tiffany & Company enjoyed a record year, credited to the increased desirability of the brand, with High Jewelry revenue doubling and its new Lock bracelet collection being well received in North America.
  • Wine & Spirits segment benefited from dynamic price increases, which helped offset challenges in China and logistical disruptions early in the year in the U.S. The company also acquired Joseph Phelps vineyard, “one of the most renowned wine properties in Napa Valley.”

The company’s outlook for 2023 remains exceedingly strong, noting that January started on a high note, despite an uncertain geopolitical and economic environment.

“LVMH is confident in its ability to continue growth observed in 2022. The Group will pursue its brand development-focused strategy, underpinned by continued innovation and investment as well as a constant quest for desirability and quality in its products and distribution,” the company stated.

And the company added, “LVMH enters 2023 with confidence and, once again, sets objectives of reinforcing its global leadership position in luxury goods.”

No two ways about it, the company’s performance has been remarkable over the last five years – growing from €46.8 billion ($51 billion) in 2018 to €79.2 billion ($86.2 billion) in 2022 – and had an exceptionally dynamic recovery from the pandemic.

Yet dark clouds potentially hang over the company’s outlook and the luxury market overall. According to Bain-Altagamma, the luxury market is expected to grow only between 3% to 5% – or 6% to 8% best case – in 2023.

China Hangs In The Balance

China remains problematic. “We did not fully expect that sharp decline in China in December,” said CFO Jean-Jacques Guiony, as he reported that in the fourth quarter, Asia, excluding Japan, declined 8% year-over-year in organic revenue. (Note: The company reports only organic change on a quarterly basis.)

“It’s actually difficult to predict what’s going to happen,” Arnault added but announced the company sees green shoots in Macau, where the Chinese can now travel.

Overall, Asia ended the year flat, after growing 1% in the first half of 2022, followed by a 2% decline in the second. It resulted in an overall loss in China’s share of LVMH revenues, which dropped from 35% in 2021 to 30% in 2022.

Deloitte’s global fashion and luxury co-leader Karla Martin remains watchful. “It’s hard to overstate how much the uncertainty around the opening and closing of the Chinese market hit the space,” she shared. “Now that things are open again, it will be interesting to see if pent-up demand pumps the luxury market in the next two quarters.”

There may be plenty of pent-up demand to be fulfilled in China, as Bain reported the personal luxury market in Mainland China dropped 1% from 2021. Indeed, in an analyst report, Cowen announced that LVMH traffic was down (85%) from 2019 in Dec., followed by an improvement to (40%) over 2019 in Jan.

Much will depend on how robustly the Chinese economy recovers from its slowdown in 2022 when the economy grew only 3%, less than half the 8.1% rate in 2021. Further complicating prospects there, youth unemployment remains high, according to the World Bank. And its available workforce, people aged 15 to 64 years, is on the decline, according to Pew Research Center.

Young Chinese consumers with discretion to spend have been the primary driver of growth for LVMH and other luxury brands for the last decade. Whether they continue to have the appetite and/or the ability to buy LVMH’s high-priced goods remains a question after they unleashed so much pent-up demand for its brands in 2021, when revenues grew 37%.

Yet, the company remains confident. “The past few weeks gave us reason to believe that what we had in China at the end of the year was a sudden drop, but now we are back to normal,” Guiony said.

Fourth Quarter Slowdown

China aside, LVMH experienced a sharp slowdown in growth during the fourth quarter.

Organic revenue rose only 9%, a rate any company of its size would be proud of, but a steep decline from the double-digit increases throughout the rest of the year.

Even during second quarter 2022, when it was going up against extremely high comps, it posted a 19% rise.

Adding insult to injury, the U.S., its second-largest market after China with 27% share in 2022, slowed sharply in the third and fourth quarters, to 11% and 7%, respectively, after rising 24% in the first half of 2022.

Guiony sloughed it off. “If you think it’s a slowdown, a closer look would reveal that it’s a bit more subtle than that,” he said, explaining that due to favorable currency exchange rates, American tourists traveled to Europe to make their purchases.

Europe advanced 28% in the fourth quarter, with market share reaching 24% up from 21% in 2021.

Brakes On In The U.S.

That may be the perception from their Paris offices, but here on the ground, I sense things differently, as reflected in the latest survey conducted by Chandler Mount, founder of the Affluent Consumer Research Company, among 2,300 affluent Americans.

Nearly half (48%) said, “Now is a good time to limit my purchasing.” This finding is significant since 70% of the survey sample comprised high-net-worth-individuals (HNWI) with $1+ million net worth, excluding their primary residence, and only 30% were defined as high-earners-not-rich-yet (HENRYs) with less than $1 million in wealth.

Noting that over 80% of those surveyed believe there will be a recession this year, Mount said, “The HNWI likely have calibrated their budgeting and will keep major spending categories as is. But HENRYs will face more pressure – and that’s where luxury brands need to worry.”

Deloitte’s Martin concurs. “According to Deloitte’s Global Powers of Luxury Goods 2022 report, we are not seeing a slowdown in the consumer that historically would buy five or more $3k-$5k luxury items each year or season. But for the consumer making one to two luxury purchases, they seem to be hanging back.”

These more moderate luxury purchasers would largely be the HENRYs. “Recent job cuts in areas such as tech now have those white-collar and knowledge workers feeling slightly less optimistic. Since luxury goods are a ‘want’ as opposed to a ‘need,’ it appears those consumers are choosing to wait out the market a bit to see where things land,” she continued.

Price Points Have Pushed Too High

Inflation has certainly impacted the luxury sector, with Milton Pedraza of The Luxury Institute, sharing, “For all top tier luxury brands and groups, a major portion of the growth in 2022 has come from strong pricing, and much less from like-for-like volume growth.”

According to Daniel Langer, CEO of consultancy Équité and executive professor at Pepperdine University, the ability to raise prices in the luxury sector is a critical success factor for brands.

“The stellar performance of LVMH’s top brands, including Louis Vuitton and Dior, is the result of an uncompromising focus on brand equity building, brand storytelling and precise execution of the brand experiences. Over the last two years, the leading brands increased prices beyond historical precedent, translating the continuous brand equity building into profitable growth,” he shared.

Brand equity is found in the desirability factor that Arnault talked much about during the earnings call. It hinges on continued investment in brand building, which he said the company will continue to do aggressively.

“We’ll be able to continue to develop our investments, gain market share, because even when the situation is somewhat more challenging, from one month to next, we continue to invest, whereas some of our peers may have tighter financial constraints, they stop investing or they invest less. And so, things are more difficult afterward,” he said during the earnings call.

But Pedraza warns that even a powerhouse brand builder like LVMH may have pushed prices too high. “Even HNW and UHNW consumers tell the Luxury Institute that continuing to increase prices for the same products has its limits. We expect growth to be subdued for most of the luxury industry in 2023 and recovery in 2024.”

He also warns that the less-affluent HENRYs may be forced to slow their spending, which will hamper growth in both the U.S. and China.

Regression To The Mean

Specific to LMVH’s slowdown in the second half of 2022, researcher Mount sees it more as a natural “regression to the mean, meaning it’s simply reached a natural high point from an unsustainable burst of spending representing about two years of consumption.”

One thing is for sure, as the global luxury market slows in 2023, LVMH will continue to own the lion’s share and its appetite for more keeps growing with the eating.

“We plan to increase our lead across market segments,” Arnault said, and the way he will do it is by continuing to increase LVMH brands’ desirability, come what may.

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