France: Growth in luxury sales

1 August 2013

French luxury groups Kering (formerly PPR) and LVMH have reported a rise in second quarter sales, partly a result of increased European demand and stable Japanese growth.

Kering alluded to Japan's buoyant business, fuelled by a weak yen encouraging shoppers to spend money at home. LVMH said that it was experiencing "sustained momentum in Asia".

This comes after a poor start to the year for luxury goods sales. China, the industry's primary growth engine, has experienced a continued slowdown. Jean- Marc Duplaix, Kering's finance director, said to journalists during a conference call that Chinese demand remained "lower than what we have seen in the past." This was evidenced by Kering's Gucci sales, which fell by 4% in China, though rose 6% in Japan.

LVMH's fashion and leather division, which includes world No 1 luxury brand Louis Vuitton, saw first half revenues reach 5% on a like-for-like basis, an increase of 3% on the first quarter. Mario Ortelli, an analyst at Bernstein, commented that "it is interesting to see that LVMH's fashion and leather division has reversed its decline in sales."

With Louis Vitton accounting for almost 50% of LVMH's operating profits and 75% of leather and fashion revenue, some analysts have questioned whether the brand is approaching a critical mass, with few opportunities left for growth. Other have expressed concern that consumers, especially in China and other major markets, are becoming bored with logo plastered items and are instead choosing more exclusive brands.

LVMH's fashion and leather division's operating margin fell in the first half to 31.8% compared to 32.5% in the previous year. Overall profit from recurring operating was 2.71 billion euros, just under Thomson Reuters average estimate of 2.75 billion euros.

Kering's second quarter luxury sales increased 9.4% on a like-for-like basis, compared with a 6.4% increase in the first quarter. The firm's fashion brands, Bottega Veneta and Alexander McQueen, were responsible for the majority of the growth. Gucci, Kering's largest fashion brand, continued at a steady 4% growth on a comparative basis.

Antoine Beige, an HSBC analyst, said in a note that "Even if the Gucci brand shares some of the issues faced by Louis Vuitton around 'ubiquity', its margin momentum is superior, and at the group level, Kering's performance is boosted by brands like Bottega Veneta and YSL, which are big enough (they account for 43% of total luxury sales) to act as growth boosters."

Sales growth at both Kering and LVMH remains behind Hermes, the French manufacturer of Birkin and Kelly handbags which saw constant currency sales increase 16% in the second quarter and 14.4% overall for the first half. The figures surpass quarterly forecasts, and have led Hermes to increase their full-year targets.

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