LVMH First Half Profit Hit by Exchange Rates

In What's New, Industry News by Jeff Prine

Pre-fall look at LVMH's Fendi brand, a strong first half performer

Pre-fall look at LVMH’s Fendi brand, a strong first half performer

Paris—LVMH—the world’s largest luxurygoods conglomerate—felt the sting of a “pressured” Asian market that pushed its profit and margins lower in the first half.

Profit from recurring operations fell 5% to 2.58 billion euros (about $3.5 billion). Analysts had expected 2.76 billion euros.

According to CFO Jean-Jacques Guiony, so-called organic sales declined 11% in Japan where luxury consumers face a new value-added fax. Prior to the tax increase, sales were up 32%.

Asia ‘Under Pressure’

LVMH posted first half revenue growth of 3%, or 5% on a like-for-like basis. First half sales rose to 14 billion euros, missing analysts’ forecast for 14.349 billion in sales. Operating margin dropped to 18 percent from 19.8 percent last year.

LVMH said trading in Europe was resilient “despite a still challenging economic environment and sales continued to grow in Asia and United States.”

“It looks as if LVMH is taking the full brunt of a subdued demand environment and an adverse foreign-exchange context,” Luca Solca, an analyst at Exane BNP Paribas, said.

Speaking of Asia, Guiony said political unrest in Hong Kong and a weakening of demand from tourists hurt sales.

“Throughout the region we’ve seen some weakness in fashion and leather,” Guiony said. Asia is “under pressure.”

Still, Chairman/CEO Bernard Arnault defended the results, saying “results of the first half demonstrate LVMH’s excellent resilience, thanks to the strength of its brands and the responsiveness of its organization in a climate of economic and financial uncertainties…Following the first half’s good resilience, it is with confidence that we approach the second half of the year and rely on the creativity and quality of our products, and the effectiveness of our teams, to pursue further market share gains in our traditional markets, as well as in high potential emerging territories.”

By division, Fashion & Leathergoods reported 4% organic growth in the first half with a flat profit compared to the same period last yeardue to a strongly adverse exchange rate effect.”

Fendi: Bag Benefit

“Louis Vuitton continues its strong creative momentum with new artistic director, Nicolas Ghesquière, receiving an enthusiastic response to his first show. The innovations in leather goods are seeing strong success. Fendi benefited from the focus on its iconic bags, for which sales progressed strongly. Céline’s growth continues to be driven by the success of its leathergoods and the rapid development of footwear. “

At Watches & Jewelry, organic revenue growth was 3%. “The uncertainties linked to the economic environment continue to make multi-brand retailers prudent in their purchasing. The performance in the brands’ own boutiques exhibited significant growth.”

Bulgari benefited from positive momentum in jewelry. TAG Heuer focused on the development of its iconic lines. The decrease in profit from recurring operations, which stood at 107 million euros, is principally explained by a negative exchange rate effect, while investments in communications continue, LVMH said.

In the Selective Retailing division (DFS) organic revenue growth of 9%. Profit from recurring operations was 398 million euros in the first half of 2014.

“DFS relies on growth of sales to Asian clientele in a context of a fall in spending by Japanese tourists due to the weakness of the Japanese yen. Major expansion and renovation work at several airport concessions weighed on its profitability.”

In the Wines & Spirits division, sales were down 1% on an organic basis, weighed down by cognac in China as destocking by distributors continued in the second quarter, LVMH said. Profit at the unit declined 15%.

Finally, LVMH predicted that despite “an uncertain European economic environment,” the company expects to gain market share “thanks to the numerous product launches planned before the end of the year and its geographic expansion in promising markets, while continuing to manage costs.”

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