LVMH shares jump as Louis Vuitton calms worries

PARIS Fri Jul 26, 2013 9:25am EDT

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PARIS (Reuters) - Shares in LVMH (LVMH.PA) soared on Friday after the luxury group reassured investors about margins and sales growth at its star brand Louis Vuitton and joined rival Kering (PRTP.PA) in pointing to an uptick in sales in the second quarter.

The latest figures added to evidence of a rebound in the luxury sector as solid demand in Japan and the United States combined with recovery in Europe to offset China's slowdown.

Investors were concerned that Louis Vuitton's growth was running out of steam after enjoying more than two decades of annual increases above 10 percent, driven by a rapid expansion around the globe.

The stock in industry leader LVMH (LVMH.PA) rose as much as 5.7 percent - their biggest one-day gain in more than three years.

LVMH Chief Executive Bernard Arnault, France's richest man, said in January that Louis Vuitton's slowdown was voluntary and the brand had put the brakes on opening new shops to preserve its exclusivity.

At that time, Arnault publicly admitted for the first time that Louis Vuitton, LVMH's biggest contributor to profits, was at risk of being too ubiquitous.

To counter that perception, Arnault said the brand would move upscale and expand its leather bag offering while pruning its portfolio of LV-embossed canvas bags which make up two third of its business and generate gross margins of around 90 percent.

LVMH Finance Director Jean-Jacques Guiony on Friday said Louis Vuitton's margins rose in the first half, both at the operating and gross level, reversing a decline which analysts estimate started two or three years ago.

"People feared that less canvas and more leather could impact Louis Vuitton's margins," said Exane BNP Paribas analyst Luca Solca.

HSBC calculated that Louis Vuitton's operating margin fell to 42 percent from 44 percent between 2011 and 2012.

RELIEF

Sales growth at LVMH's fashion and leather goods division, of which Louis Vuitton makes up 75 percent of sales, doubled in the second quarter to 6 percent from 3 percent in the previous three months on a like-for-like basis.

"It is a relief that there is an improvement in the second quarter and that the margin (at LV) stopped deteriorating," said Zurich-based Andrea Gerst, who helps run the Julius Baer Luxury Brands fund with 417 million euros ($551.92 million)under management.

Referring to Louis Vuitton's performance regionally, Guiony said trading in Asia was "flattish," in the United States "in the mid-single digits" while in Japan and Europe, it was "a bit higher or a bit lower than double digit."

Guiony added that the bulk of Chinese demand today was from tourists and estimated overall Chinese demand for the brand to be in "mid-single digits" terms.

Analysts estimate that growth in the global luxury goods industry will slow down to around 6-8 percent in 2012, or about twice the level of global GDP growth depending on estimates, compared with 10 percent growth last year.

Luxury investors and analysts said they expected trading to continue to improve in the second half of the year, partly thanks to the return of Chinese customers, the world's biggest buyers of luxury goods.

"We expect a slow but steady recovery of Chinese luxury demand because of the underlying appetite for luxury and wealth creation continuing," Gerst said.

In the past year, China's luxury market, which had been the industry main growth driver, was hit by a slower economy and the government's crackdown on the country's tradition of gift-giving to facilitate transactions and deals.

LVMH rival Kering on said on Thursday the slowdown continued in China but earlier this week Swatch Group (UHR.VX), the world's biggest watch maker, said it expected Chinese demand to improve in the second half.

Before Friday's rise, shares in LVMH were down 6 percent since January, making them the second-worst performers on the Paris CAC 40 index .FCHI of blue-chips and the worst performing European luxury stock overall.

By comparison, shares in peers such as Kering (PRTP.PA), previously known as PPR, have gained 28 percent since January while shares in Bruno Cucinelli (BCU.MI) and Salvatore Ferragamo (SFER.MI) have risen more than 50 percent.

On Friday alone, Kering shares jumped 4.5 percent.

Since January, UBS had estimated that LVMH underperformed luxury peers by over 30 percent and traded on a 2014 enterprise value to earnings before interest, tax, depreciation and amortisation (Ebitda) of 8.1 times, below the sector average of 9.7 times, excluding the very highly valued Hermes (HRMS.PA).

(Reporting by Astrid Wendlandt, additional reporting by Blaise Robinson,; Editing by James Regan and David Cowell)

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