LVMH puts fears of a luxury crunch to rest

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When the sea gets choppy, it is better to be on a transatlantic liner than a lifeboat. That is the message from LVMH. The luxury behemoth’s fourth-quarter results have reassured investors that, for megabrands at least, a luxury crunch is not on the horizon.

That lifted the stock by 12 per cent on Friday. The sector as a whole also breathed a sigh of relief, with the S&P Global Luxury index rising almost 3 per cent.

The market was understandably nervous about a potential unravelling of the luxury thread. Burberry recently cut full-year profit expectations on a 4 per cent drop in comparable sales in the last quarter of 2023, highlighting a further deceleration in December. Its troubles are in part homegrown, but updates from Hugo Boss, Swatch and Watches of Switzerland also caused investors to skip a beat.

In this context, LVMH looks all the more comforting. Yes, sales growth slowed compared with a bumper post-Covid period. But a 10 per cent increase in quarterly revenues is nothing to sniff at. Its key fashion and leather goods division, which accounts for more than 70 per cent of the group’s ebit, continues to perform strongly.

Being big has clear advantages. Luxury groups typically spend between 5 and 10 per cent of turnover in marketing, reckons Luca Solca at Bernstein. With €86bn in revenues LVMH has a big budget to play with. Its brands have become so desirable that sales growth comes not so much from volumes but from customers trading up.

That gives even this juggernaut a growth runway without the risk of its bags becoming ubiquitous — and devalued. Moreover, scale brings fat ebit margins, which LVMH managed to hold at 26.5 per cent. Rival Prada is on 22 per cent, Burberry on 15. This strong showing enabled boss Bernard Arnault, who has moved to install more of his children in the business, to rebuff suggestions that LVMH should pursue a break-up.

LVMH made reassuring noises about its December “exit rate”, suggesting that, while 2024 will be a year of slowing luxury spend, the much-feared contraction is nowhere to be seen. That raises the prospect of a soft landing for the giant, which may well return to a reasonable revenue growth rate of 5 to 7 per cent after the Covid-induced spending bonanza.

If luxury spend — at least for megabrands — is set to normalise rather than crash, the shares deserve a second look. LVMH trades on 21 times forward earnings, compared with a post-Covid multiple in the region of 25 times. That is not a bad price for an all-weather outfit.