CONSUMER CYCLICALS: LVMH (MCFP; Aa3/AA-) 3Q earnings call and final remarks

So the headline take is the world's largest luxury house has finally given into weak macro; in its core Fashion and Leather goods segment (50% of group) it reported a -5% LFL fall - excluding Covid/2020 that is the first fall since Q2 2009. Some asides worth noting;

• It is rolling tough comp's from last year; +9%yoy growth to be exact. We flag this because it is not the case for many of our local issuers; Gucci is rolling over -7% growth in Q3 last year and Burberry is rolling +1%. This impacts the magnitude of earnings (and hence credit metrics like leverage); QoQ it still fell 11% (Q2 was impressive). We have normalised LVMH F&L, Gucci (50% of Kering) and Burberry earnings since 2019 and put it below for reference.
  • -5% fall in F&L was on volumes; mix was flattish while prices were slightly up
• We have mentioned this in the past but LVMH tracks clusters - this is estimated spend by nationality NOT by country of transaction. It is a more useful read into macro given it estimates the Chinese spend that occurs overseas. It now sees that at ~40-45% up from 30-35%. For reference among other nationalities it sees 90-95% of spending happening in their home country.
  • The trends here reiterate the headline numbers; sequentially within Fashion and Leather it saw a slight improvement in Americans, slight improvement in Europeans, still down without improvement for Japanese and importantly "marked deterioration" in Chinese.
  • Re. impact of announced stimulus on above - it doesn't comment on expectations but separately notes National Holidays at the start of the month "were neither a good or a bad surprise...as expected".
  • It was asked about online sites like Dewu (the 'grey market'). It clarifies these are not second hand selling but first-hand parallel product channelling (as we have mentioned before effectively facilitates the Japanese arb. for Chinese consumers without the need to book a plane ticket). It adds "When a brand is less strict on the way their products are being distributed, obviously, they end up being spread out all over the world on platforms at a discount".
• For those wondering how French LVMH really is - this should clear up any doubts; "7% of sales, one-third of pre-tax income and 40% of taxes. The impact of additional corporation taxes in France should range in between €700 million and €800 million...we contribute to 0.7% of GDP in France. We pay 4.5% of global corporation tax in France, and we shall be paying about 10% of the additional corporation tax."
• Final point it's interesting to contrast how LVMH reacts to the first signs of weakness vs. Burberry. It will focus on 1) creative which it points out is capital light 2) pulling back on costs to some extent - notes demand is in the driver seat for now so pushing aggressive growth doesn't make sense and 3) sees introducing cheaper product lines to target weaker aspirational customers as a mistake. Last point might be in contradiction with Burberry's new CEO - though we will have to wait a month to see what his plans are.

Unless Hermes decides to issue public bonds, LVMH will remain credit's lowest beta in lux. Yes equities are disappointed - partly because it was extrapolating continued growth in F&L which has now come to an end. It was a Q3 trading update so we didn't get a look at margins - but indications are for contraction/costs won't keep up. We may also see lower FCF on a inventory build-up.