LVMH Is Firing on the One Cylinder That Matters

The wider company performance was more mixed but far better than in the first half. Sales at constant exchange rates were down just 7% in the three months through September compared with the same period last year, a vast improvement on the 38% decline clocked in the second quarter. Chinese shoppers are spending freely again on luxury, and demand from local U.S. and European consumers was also surprisingly strong.

Tiffany

& Co.’s attempt to steal

LVMH’s

LVMUY 1.83%

thunder with an unscheduled update earlier on Thursday got little attention. The U.S. jeweler said sales in August and September were down slightly, but operating profit increased by a quarter compared with the same months of 2019. The legal dispute over the two companies’ derailed $16 billion takeover was barely mentioned on a call with investors.

Of LVMH’s 70 or so luxury brands, a handful are carrying the entire group for now. Louis Vuitton and Christian Dior are the group’s biggest profit engines, with the lucrative fashion and leather division generating around two-thirds of total operating profits in normal times. Their rapid recovery bodes well for margins. Sales of Hennessy cognac were also robust in the U.S., although management did attribute this to a temporary boost to consumers’ disposable income from federal subsidies.

There are problems in every other part of the business, however. A slump in travel retail hit sales of watches and jewelry, as well as LVMH’s perfume and cosmetics brands. The retail unit was the weakest performer of all. The company’s cratering duty-free business DFS dragged comparable sales down 29% in the third quarter. Until travel gets back to normal—possibly not until 2024, according to the International Air Transport Association—these businesses will weigh on performance.

LVMH’s share price is now very close to the record set in January and on a much higher multiple of expected earnings. Can that be justified with the outlook for one-third of its profits so uncertain? Investors seem happy to ignore the company’s knottier problems for now. In those parts of the business that management can control—and the ones that matter most for the bottom line—LVMH’s performance is hard to fault.

Write to Carol Ryan at [email protected]