FSW Briefing: Q3 Luxury Earnings Launch Amid Low Expectations
FSW reviews this week's earnings reports and previews the rest of the season.
The luxury industry, with a few individual brand exceptions, is experiencing a cyclical downturn from its unprecedented post-pandemic super cycle, as Q3 earnings reflect and as we have previously explored. This situation has been driven, in part, by the recent poor performance of luxury brands in China and, for Europe-based firms, adverse currency effects as the Euro has weakened by about 5% against the U.S. dollar since July 1.
The Q3 GDP report issued by China may give luxury industry watchers some hope. China’s economy expanded slightly faster than expectations at 4.6%. Most importantly, higher-than-expected retail sales helped power this growth.
Yet, with this pause in general industry growth, luxury brands need to focus on brass-tacks strategic planning to stay strong and differentiate themselves. Brands should focus on robust content strategies to navigate the slowing market and power future growth by ensuring that brand storytelling meets a diverse and changing group of consumers at every touchpoint.
As growth rates return to the single digits for most brands across most product verticals, the wild ride of tactical actions that the industry engaged in over the past few years needs to evolve into the steadier tiller of strategy.
Q3 Earnings for LVMH and Swatch Were Worse than Expected While Cucinelli Continues to Deliver
Analysts expect weak H2 results from luxury so forecasts for the Q3 earnings season, which kicked off this week, were low. The exception remains purveyors of “quiet luxury” which have continued to report strong sales all year given their lower reliance on lower priced/high volume products.
First, the industry’s giant, LVMH, which has a market capitalization greater than its six largest competitors combined, reported Q3 revenue of €19.1 billion, which fell short of analyst expectations. The company posted a 3% organic decline in sales, whereas analysts had predicted 2% growth. This disappointing performance was primarily driven by a 16% revenue drop in Asia (excluding Japan), particularly in China, where consumer demand softened and which comprises about a third of LVMH’s sales. Growth in Japan was the only bright spot (up 20%) yet Japan contributes to less than 10% of group revenue. Sales growth in the U.S. was flat, but the U.S. continues to become a more important market for LVMH given the protracted slump in Asian sales.
Revenues were negative across all LVMH business groups apart from Perfumes and Cosmetics (3%) and Selective Retailing, principally SEPHORA (2%). One of the most impacted sectors was fashion and leather goods, which fell by 5% when a slight 0.5% growth had been anticipated. This is especially bad news as this segment comprises almost half of LVMH’s revenues.
Similarly, the Swatch Group reported weaker-than-expected results for Q3 2024, as its recovery from earlier pandemic-driven slowdowns remains sluggish. The company announced total sales of CHF 3.45 billion for the quarter, a drop of 14.3% compared to Q3 2023, largely due to weaker demand in Asia, particularly China, which has been slow to rebound from pandemic-related disruptions. Operating profit for the quarter was CHF 204 million, down sharply from CHF 686 million a year earlier.
By segment, Swatch Group’s luxury watch brands, including Omega and Longines, performed better than its mass-market brands like Swatch. However, overall sales across regions were hampered by unfavorable currency fluctuations, especially in Europe and Asia.
Analysts had expected the company to deliver better results, but the actual earnings fell short of those forecasts, citing currency headwinds and lower-than-anticipated demand from China. Despite this, the Swatch Group remains optimistic about long-term growth, particularly with hopes of a stronger holiday season ahead.
Finally, Brunello Cucinelli continued to report robust growth for the third quarter of 2024, with a total revenue increase of 10.5% compared to the same period last year. This growth aligns with the company's guidance for the full year, which anticipated high single-digit to low double-digit expansion. Total revenue reached approximately €830 million for the first nine months, driven by strong sales in Europe and North America. The company continues to experience high demand for its luxury clothing, with double-digit growth in accessories and stable growth in ready-to-wear collections.
In terms of profitability, Cucinelli noted a slight dip in net income by 7.1%, attributed to higher costs related to expansion and marketing, but this was still in line with analyst expectations, who had forecast a challenging quarter due to inflationary pressures.
Luxury Stocks Remain Subdued but Valuations are Improving
LVMH’s share price closed down almost 7% after its earnings release, which drove down the FSW Markets All Luxury Index by over 5% on a day when the benchmark S&P 500 was flat. Investors have shown some appetite for LVMH since its mid-week earnings release as its share price rose almost 2% on Thursday and Friday. LVMH’s valuation has turned more attractive over the year with its P/E ratio declining from over 25x in March to around 21x now.
Despite positive revenue growth, Brunello Cucinelli's stock fell after the earnings release. Investors appeared concerned about the company's valuation, particularly as the stock's P/E ratio has risen sharply throughout 2024, reaching an extremely high 47.5x this week. Historically, the company's P/E ratio was below 40 in the earlier part of the decade. The company has been trading at high multiples due to its luxury positioning and strong growth prospects, but analysts now express concern over whether it can maintain these lofty valuations.
Swatch's stock price saw a more muted reaction, gaining marginally as analysts viewed the results as in line with expectations. The company's P/E ratio has remained relatively stable through 2024, sitting around 16x, reflecting a more grounded valuation compared to Brunello Cucinelli. Swatch’s ability to navigate a challenging retail environment has been praised, though there is caution about softer demand in the lower-end segments
Over the second half of the year, the FSW Index and the S&P 500 have moved in almost completely opposite directions as per the below figure. Our index is now down about 13 percent year YTD while the S&P is up about 23%.
The Q3 Earnings Season Will Feature More Big Names Next Week
The Q3 2024 earnings release for Kering is scheduled for October 22, 2024, with a conference call to follow on October 23, 2024.For Kering, analysts are expecting a modest improvement in revenue, driven by some recovery across its key brands like Gucci and Bottega Veneta, though challenges remain due to weak demand in the U.S. and some slowdown in China. Analysts are particularly focused on the performance of Gucci, which has struggled recently, and any signs of stabilization or growth will be crucial. Any modest gains will, in part, be the result of base effects but everyone is keen to see whether the run of recently poor sales growth may have hit a trough.
Hermès will release its Q3 2024 earnings on October 24, 2024. Analysts have high expectations for continued strong growth across key categories such as Leather Goods and Saddlery, Ready-to-Wear, and Accessories, driven by resilient demand in both Europe and Asia. Hermès’ performance in Asia, especially in China and Japan, is anticipated to remain robust. The brand's ability to attract luxury buyers amidst global economic uncertainty will be closely watched, with its unique craftsmanship and high brand loyalty expected to underpin its strong performance.