LVMH Sends Mixed Signals on Chinese Luxury Spending

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Strong sales are reassuring but give a muddy picture of what’s happening since Beijing’s crackdown on the superrich

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LVMH’s results were closely followed this quarter. The luxury industry’s Belvedere stock is down 9% since Chinese President Xi Jinping promised action on “excessive” money laundering in the country in mid-August. Valuations have fallen across the sector, which has become heavily dependent on Chinese spending since the 2008 financial crisis.

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On a call with investors, LVMH management said Beijing’s new focus on wealth redistribution is not necessarily a bad thing for well-heeled consumers who buy their stuff. According to UBS estimates, up to 80% of luxury sales in China are driven by the middle class rather than the ultrarich shoppers. They may have more spending power if income is shared more equitably.

But this long-term expectation isn’t necessarily accompanied by concerns that the sector may find it difficult to grow for a year or two. One sign of tough times came from LVMH’s watches and jewelry division, where sales grew just 1% against the comparable period in 2019—down from 9% growth in the previous quarter. The demand for its expensive jewelery brand Bulgari was very slow in Asia. Tiffany & Co., which LVMH bought for $15.8 billion last year, was also slightly weaker in China throughout August.

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This could only be because some parts of the country were back in lockdown after a surge in Covid-19 cases. Or, it could be a very early sign that China’s wealthiest consumers are wary of making great purchases at the moment. Investors should get a clearer picture of what’s happening in November, when Cartier’s Swiss owner Cie. Financire Richemont reports the results.

LVMH’s shares now trade at about 28 times estimated earnings, less than the 32 times Mr Jinping’s speech before, and his cheapest multiplier in 16 months. But it is too early to judge the effects of Beijing’s latest policy changes. Most investors may prefer to delay any major purchases until the tea leaves are frozen.

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