PARIS – LVMH Moët Hennessy Louis Vuitton said its key fashion and leather goods division slid back into negative territory in the third quarter, weighed down by a slowdown in demand in China.
The division, which includes brands such as Louis Vuitton, Dior and Loro Piana, posted an organic sales decline of 5 percent in the three months to Sept. 30, after breaking a two-year losing streak in the second quarter.
That was below a consensus forecast for a 1.6 percent drop.
Analysts had revised down their expectations in recent weeks in light of a Chinese tax crackdown on wealthy individuals and the fallout of Louis Vuitton’s trademark dispute with Chinese tea chain Molly, which sparked a nationalistic backlash.
Adding to the uncertainty, U.S. credit card spending on luxury goods tracked by Citi fell for a third consecutive month in September, suggesting a potential normalization of demand in the world’s number one market for luxury goods.
LVMH said group revenues rose 1 percent in the third quarter to 18.50 billion euros, broadly in line with market expectations. This represented a rise of 1 percent in organic terms.
“In the third quarter, organic revenue growth reflected the impact on business activity of a less buoyant environment in China, while the United States, Europe and Japan saw good growth,” LVMH said in a statement released after the market close on Monday.
The wines and spirits division maintained its momentum with a 6 percent increase in organic sales, while revenues in perfumes and cosmetics were flat in the quarter. The watches and jewelry unit posted a 6 percent increase, while selective retailing was up 8 percent.
HSBC last month downgraded LVMH to Hold from Buy, lowering its share price target to 490 euros from 600 euros, citing the weight of the fashion and leather goods unit.
“While we remain confident on the mid-to-long term growth potential of this division and the LVMH Group overall, we move to the sidelines for now, given a challenging macro backdrop and slower than expected pick-up at Dior,” it said in a report.
LVMH shares have fallen by more than 41 percent this year, causing the group to lose its crown as France’s most valuable company to L’Oréal, and pushing Bernard Arnault out of the top 10 of the Bloomberg Billionaires Index.
Jelena Sokolova, senior equity analyst at Morningstar, said analysts would scrutinize the post-results conference call for signs that consumer demand is stabilizing in China, and any insight into the performance of the fashion and leather goods division.
“While the luxury sector is showing early signs of recovery, LVMH’s flagship division has yet to return to the level of outperformance investors have come to expect. We will be looking for evidence that Dior’s new collections and Louis Vuitton’s product pipeline can help close that gap,” she said.
However, she said the medium-term outlook remains encouraging.
“Despite a challenging few years for the luxury industry, we continue to see significant long-term value in LVMH. With shares trading at their lowest valuation in over a decade on top of cyclically depressed earnings, the market appears to be pricing in a much weaker outlook than we believe LVMH’s brand strength and competitive positioning warrant,” Sokolova said.