The Long View by Vogue Business: The big takeaways from luxury’s first half

This article is part of our Advanced Membership package. To enjoy unlimited access to The Long View from Vogue Business and bi-monthly Market Insights Reports and webinars, sign up for Advanced Membership here. Never mind lockdowns in China and inflationary and recessionary pressures. The luxury industry’s heavyweight brands have proved encouragingly resilient in the first half of the year. LVMH, Kering, Hermès, Moncler and Prada, which all reported earnings last week, share the same message. Sales in China, which has been hit by Covid-19 lockdown, have shown signs of a pickup in June and July. Sales in the US are growing, albeit at a slower pace. And Europe has been boosted by the return of American tourists. LVMH, the largest luxury conglomerate, posted 19 per cent growth in sales in the second quarter compared with the same period in 2021, along with record margins. Moncler reported sales up by 23 per cent, with China on the rebound and showing double-digit improvements at the end of June, according to chairman and CEO Remo Ruffini. Kering megabrand Gucci posted modest 4 per cent growth in sales, but Kering-owned Saint Laurent surged 31 per cent while its division that includes Balenciaga grew 24 per cent. Hermès posted sales up 9.6 per cent in Asia despite Chinese lockdowns and, like Moncler, saw double-digit growth in China in June. Brunello Cucinelli logged an impressive organic sales growth of around 41 per cent in its second quarter and was more upbeat than other brands about sales in China for the full quarter. “So far, so good,” says Luca Solca, senior luxury analyst at consultancy Bernstein, reflecting on the luxury industry’s overall performance “Despite significant concerns over the lockdowns in China, second quarter and first half numbers have been very decent indeed. Of course, a recession would dampen growth figures, but — as LVMH chief financial officer Jean-Jacques Guiony says — we are entering the second half with strong momentum.” Big trends: South Korea, Americans in Europe South Korea received plenty of mentions in the earnings calls, as did Americans flooding back to Europe — led by Ben Affleck and Jennifer Lopez shopping in Paris during their honeymoon. Also on the agenda: the risks of recession, the impact of inflation, price increases, the strong dollar and Russia. Luxury companies believe sales in South Korea and South East Asia can offset the unpredictability of China (particularly in connection to its zero-Covid policy). Moncler’s Ruffini says South Korea has been its most resilient market with double-digit growth during the first semester and strong double digit growth in the second quarter. “What is remarkable is that Korea is probably the [country] that has embraced the most new ways of selling, with private appointments and distance sales,” he notes. “They now represent 30 per cent of sales in Korea, similar to Japan, which has 20 per cent of sales from private appointment and distance sales." During Covid, luxury companies ramped up their marketing efforts with local consumers in their home markets. That approach is clearly paying off. In addition, tourists are back, at least in Europe. LVMH’s Guiony was upbeat on the European performance of LVMH’s fashion and leather goods division in the second quarter: “The German, French, British and Italian were growing in the double digits with most of our fashion brands, so we cannot complain about European customers. On top of that, we got significant touristic activity in Europe, which explains the pretty strong numbers we have reported.” The Eurozone economy fared better than expected in the second quarter, with GDP growing by 0.7 per cent but inflation was higher than expected. Growth in the US returned to an even keel, after explosive growth last year. The US economy shrunk by 0.9 per cent in the second quarter, according to the Bureau of Economic Analysis. Luxury sales remained strong across the Americas — Richemont up 25 per cent, Hermès rose 26.3 per cent while LVMH was up 22 per cent in the US and Kering up 8 per cent in North America. Investors: Anxious about recession Luxury sector investors’ concerns are primarily focused on the future and the possibility of economic recession in Europe and the US. “If you look at the magnitude of the beat [a 6 per cent beat against consensus expectations] of LVMH and the fact that the stock is doing nothing much recently, that’s [the impact of] investors saying the second quarter is backward looking and we are fearful about the future,” says Erwan Rambourg, HSBC global head of consumer and retail research. “I don’t think they are that fearful about inflation — investors understand the pricing power of luxury — but it’s more about recessionary risk in Europe and the US. The market is factoring in a steep slowdown.” Inflation is indeed a lesser concern. Luxury players have increased prices in the first half as a precautionary measure, thus padding their margins. Hermès said on average it raised prices by 4 per cent. Analysts also point out that luxury consumers are the least affected by inflationary pressures. High-end brands and categories are faring best — and are likely to continue to do so if there is a recession. LVMH’s Guiony notes that leather has outperformed canvas at Louis Vuitton. “The top end of the portfolio has done better than the entry price, but it's on purpose, because we intend to rebalance the two. Demand is also a function of what we make available. We tried to favour the availability of reasonably expensive products at the expense of the entry part of the product range.” Euro/dollar parity The strong dollar, which stokes up price differences between markets, is not a cause for concern. “In some cases, excessive price differences would create some grey market, [but] it's not something that we see a lot these days. We are not particularly worried,” says LVMH’s Guiony, pointing out that a strong dollar benefits American luxury shoppers in Europe. A weak euro is helpful for luxury brands manufacturing in Europe and selling elsewhere, notes Adam Cochrane, Deutsche Bank Research retail and luxury equity research analyst. “You have scope for margin expansion, particularly if you are already increasing your prices to cover the cost of raw materials and freight. The manufacturing and labour costs are largely in euros. It's actually a good position.” In response to the war in Ukraine, luxury brands have kept stores in Russia closed during most of the first half. Many retailers, including Nike, H&M and LVMH-owned Sephora, are shutting down operations in the Russian market entirely. Luxury brands are holding back from this step for now. “We keep our business in a frozen state, in a wait-and-see attitude,” says LVMH’s Guiony. Outlook How will the industry navigate the macro environment during the second half? Rambourg highlights plenty of uncertainties about China. “Will it be a stabilisation, a V-shaped rebound, or a muted recovery? It will be very difficult to assess because things are very volatile.” He also emphasises a “growing disconnect between macro pressures and recruitment potential in the US — the reality of a sector where demand is still very strong.” A key issue for the second half is the likely speed of deceleration of sales in Europe and America in the event of recession. For the second-half outlook, investors may remain anxious about the possibility of recession, but analysts are more relaxed. Mario Ortelli, managing director of luxury advisory firm Ortelli & Co, says: “In a recession, luxury customers are the last ones in, the first ones out.” Cochrane of Deutsche Bank Research forecasts overall growth decelerating from 15 to 20 per cent in the first half to around 10 per cent in the second half. He says: “Despite an economic slowdown, I don't think there's going to be a huge luxury slowdown.” To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com.

Make better business decisions

Make better business decisions