Fashion revenue at LVMH, the luxury group behind Louis Vuitton and Dior, fell 5% from a year earlier as consumer sentiment in China, the world's largest luxury market, showed little sign of recovery. Compounding the weakness, a trademark lawsuit the company filed against a Chinese milk tea chain fueled a consumer backlash against Louis Vuitton in the country.
LVMH posted third-quarter revenue of 18.5 billion euros (about 27.7 trillion won), up just 1% from a year earlier, The Wall Street Journal reported on the 12th, local time. The result marked a setback after the company logged 3% revenue growth in the second quarter, which had raised hopes of a recovery. Revenue at the fashion and leather goods division, home to mega brands including Louis Vuitton and Dior, fell 5% to 8.245 billion euros, missing market estimates.
There were some bright spots. The watches and jewelry division, which includes Tiffany and Bulgari, reported a 5% increase in revenue. The selective retailing division, which houses cosmetics chain Sephora, posted an 8% gain.
LVMH's American depositary receipts fell as much as 3.6% in New York trading after the weaker-than-expected results. In Paris, the shares have plunged more than 40% this year, putting the company on course for its worst annual performance since the 2008 global financial crisis.
Trademark Suit Over Logo Triggers Backlash
The biggest drag was falling revenue in China. Sales in Asia excluding Japan fell 5%, the only region to post a decline in the quarter. Beyond the sluggish recovery in Chinese consumer sentiment, the trademark suit against a local milk tea brand damaged public perception. Cecile Cabanis, LVMH's chief financial officer, said on a conference call on the 12th that consumer conditions in China were more challenging in the third quarter, citing the trademark dispute with Chinese milk tea brand Molly Tea.
Louis Vuitton sued Molly Tea, arguing its logo resembled the French brand's monogram pattern, and recently won the case. The suit drew sharp criticism from Chinese consumers over the world's largest luxury group taking legal action against a small company. Cabanis said it was difficult to quantify the impact of the Molly Tea case on Louis Vuitton's sales, but added that the consumer reaction had a negative effect at least early in the quarter. According to JL Warren Capital, Louis Vuitton's sales in China are estimated to have fallen about 30% in July and another 20% to 25% in August.
Luxury Shares Down 20% This Year; Analysts Urge Price Cuts
Shares of European luxury companies have fallen an average of more than 20% so far this year. The surge in Chinese demand that lasted for years has run out of steam, while middle-class consumers in the West have less room to spend on high-end goods as inflation squeezes household budgets. The prolonged conflict in the Middle East has also curbed luxury demand from customers in that region. Analysts see few catalysts to stimulate luxury demand in the near term.
Berenberg said in a report that fragile demand has left the luxury sector exposed to external shocks, and that the luxury supercycle is over. Bernstein wrote in a report following LVMH's results that the company now needs to show it can adjust prices so that a broader audience can afford its core products. The Journal said the situation suggests luxury companies will have to make enormous efforts to achieve a sustainable recovery.
Kering, the parent of Gucci, and Hermes are due to report results, with other European luxury companies including Prada expected to release earnings from this month through next month.
