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The France headquartered luxury group said its profits were severely hit by Covid-19’s impact on Europe and the U.S. despite promising signs of recovery in China. However, despite a sales drop of 37%, the Group expressed confidence that it can ride out the economic storm thanks to its flagship brands Louis Vuitton and Dior, which have shown good resilience.
Same-store sales fell 38% in the second quarter, while operating profits sank 68% to €1.67 billion in the first half of 2020, well below market expectations after markets closed in Paris.
While LVMH cut costs in the first half, with operating expenses down 16% in organic terms, the conglomerate mostly maintained its marketing spend and staff levels, signalling confidence that it can regain market share amid the crisis. Despite the measures, the fashion and leather goods division, which represents more than 60% of the conglomerate’s profits, was down 37% to €3.3 billion. LVMH attributed profitability at Louis Vuitton and Dior for remaining “at a high level”.
“Thanks to the strength of our brands and the responsiveness of our organisation, we are confident that LVMH is in an excellent position to take advantage of the recovery, which we hope will be confirmed in the second half of the year, and to strengthen our lead in the global luxury market in 2020”, said LVMH Chairman and Chief Executive Bernard Arnault.
LVMH is ahead of the luxury industry overall, which is expected to shrink by 45 to 50% in the second quarter, according to forecasts by financial analysts. In comparison, Burberry sales were down 49% in its first quarter ended June 27 at constant exchange, while Richemont also fell 47% in the first quarter ended June 30 and Moncler, which also published on July 27, took a hit of 52% in the second quarter ending June 30.
Meanwhile, LVMH’s China business is showing strong performance, particularly for Dior and Louis Vuitton, having achieved more than 65% growth in Q2. However, the Group warned that the Chinese business alone will not be able to mitigate the overall impact of the pandemic. “Given the magnitude of the pressure on the offshore business, that cannot be seriously expected to be offset on the [Chinese] domestic market in such a short time,” said LVMH Chief Financial Officer Jean-Jacques Guiony. “This being said, the business in China is doing well, particularly for Dior and Louis Vuitton. On average, the division in China is doing more than 65% growth in Q2, so a very good offset in China. For Asia as a whole, the fashion and leather business is flattish in Q2,” he said, adding Dior was “positive” and Louis Vuitton “flattish”.
Accelerating online sales were not enough to compensate for store closures, the Group stated, with the suspension of international travel having “severely penalised” its travel retail and hotel business. However, LVMH is not expected to make further adjustments to its spending. “It would be stupid on our side to adjust too much the capital base, the human base or even to streamline too much some brands because when things recover, we want to be in good shape to benefit from that”, said Guiony.
Source: Vogue Business / Financial Advisor Magazine