LVMH eases fears of a luxury slowdown in China

Paris

CHINESE consumers may not be snapping up iPhones, but LVMH sees no let-up in shoppers' thirst for luxury goods.

The French luxury giant gave a bullish outlook after quarterly earnings showed continuing demand for its handbags and Hennessy Cognac in the world's second-largest economy. Its report is the latest evidence that a boom fuelled by Chinese consumers persists, which may ease concerns for other European sellers of high-end goods.

"While I won't give any numbers, the year so far is going in a very good direction," LVMH chief executive officer Bernard Arnault said at a news conference.

LVMH's update contrasts with signs of weakness in China among companies ranging from Apple Inc to Caterpillar Inc to Nvidia Corp amid an economic slowdown and a trade war with the US. Even as shoppers in the world's biggest luxury market scale back on mundane purchases, they still have the means to splash out on the finer things.

LVMH on Tuesday reported fourth-quarter sales that beat analysts' expectations and raised its annual dividend by 20 per cent. The French company saw strong demand for wines and spirits in China, but its fashion and leather goods division was the standout performer in the quarter, with a sales gain of 17 per cent. That unit is considered a bellwether for luxury rivals such as Gucci owner Kering SA and Prada.

The global luxury industry has become increasingly reliant on China's wealthy to drive growth, as the country accounts for a third of the US$1 trillion global high-end market. With China's economy growing last year at the slowest pace since 1990, fears of a pull-back in spending have weighed on luxury shares in recent months.

Those concerns escalated after Apple earlier this year shook investors with a warning about weaker demand in China. The iPhone maker said late on Tuesday that sales fell 27 per cent in Greater China during the holiday quarter. Caterpillar added to the pressure earlier in the week, posting its biggest profit miss in a decade as the China slowdown hit demand for its equipment.

So far, luxury and consumer goods have been spared. Richemont, the maker of Cartier necklaces and Piaget watches, said in mid-January that shoppers in China are stepping up their purchases, after signalling in November slower growth in the region. Jeweller Tiffany & Co said that it enjoyed double-digit sales growth in China in the final two months of 2018.

Shares of Asian luxury goods makers were mixed in trading on Wednesday. Watch-seller Hengdeli Holdings Ltd jumped as much as 9.4 per cent in Hong Kong, and Emperor Watch & Jewellery Ltd climbed as much as 2.7 per cent. Prada SpA, however, fell as much as 2.5 per cent after erasing an earlier rally of 2.9 per cent.

In an interview with Bloomberg TV, Mr Arnault warned that the boom will not run on indefinitely, even for an industry that has gotten used to double-digit growth rates. Sounding a customary note of caution, he said that he foresees a recession in the next two to three years, though not in 2019. In the meantime, high asset prices are creating challenges for a company that has grown by making acquisitions as well as building sales of existing brands. Most recently, LVMH branched out in a new direction, agreeing to add high-end hotelier Belmond Ltd in a US$2.6 billion deal in December.

Now, the company is eyeing other avenues for growth - including a possible expansion of its collaboration with singer Rihanna, with whom LVMH already has a makeup venture. WWD has reported that they are considering launching a luxury house under her name, building on the Fenty Beauty by Rihanna makeup label.

"Rihanna is an exceptional singer," Mr Arnault said at the press conference. "I adore her. Surely we may have some ideas," he added, though there is nothing concrete to report at this stage.

LVMH shares rose 0.4 per cent to 259.75 euros (S$401) on Tuesday in Paris, before the report. They gained 5.2 per cent last year, compared with a decline of 13 per cent for the S&P Global Luxury Index.

Whether Chinese consumers remain keen on luxury purchases this year is key. While about half of affluent Chinese in a survey released this month said that they still plan to spend more on luxury goods this year, there is less momentum behind sentiment growth compared to previous years, according to market research firm CSG and public relations company Ruder Finn.

Of those who said that they plan to spend more this year on luxury purchases, premium clothing, cosmetics and beauty products and electronics were among the top choices. BLOOMBERG