By Jason Chow
The low euro is boosting revenue at LVMH Moët Hennessy Louis
Vuitton and Kering SA, France's two luxury juggernauts. But under
the veneer of growth lie lingering problems--uncertainty about
flagship brands and an even greater slowdown in demand from their
all-important Chinese customers.
Both companies will report their half-year results this week,
and the weak euro is expected to make sales figures glitter with
double-digit growth.
That is a feat in today's tough economic time, with a sluggish
Europe still reeling from the Greek debt crisis and stalling
economies in China, Russia and Brazil, countries whose newly minted
rich were huge drivers for growth in past years.
Still, France's two leading luxury names, which each own a
multitude of labels that sell expensive handbags, jewelry, fashion
and liquor, are facing some major hurdles. Their large
megabrands--Louis Vuitton, in the case of LVMH, and Gucci over at
Kering--are each in the process of revamping after having lost
their luster in recent years as overexpansion and a reliance on
logo-driven products turned off consumers. And some industry
experts warn that Chinese customers--a major portion of the brands'
clientele--will scale back their purchases as the stock market
crash of the past month curbs their spending.
The euro, for now, can hide some of these risks. Kering, which
owns Gucci, Bottega Veneta and Yves Saint Laurent, is forecast to
post revenue growth of 12% when it reports its results on Monday,
according to a FactSet poll of 30 analysts. LVMH, which holds a
portfolio that includes Louis Vuitton, Moët et Chandon and Bulgari,
is expected to show a 16% increase in sales when it announces its
results on Tuesday, according to 34 analysts surveyed by
FactSet.
The low euro helps in two ways. Sales of diamond-crusted watches
and crocodile-skin bags that were rung at registers in countries
outside of Europe count for even more when translated into euros.
Also, the low currency boosts sales in Europe as tourist
shoppers--particularly those from China--make the voyage to take
advantage of better deals. Due to currency fluctuations, import
duties and sales taxes, some luxury items cost almost twice as much
in China than they do in Europe.
Neither LVMH or Kering would comment on the foreign-exchange
effects on their businesses.
Last week, Hermès International SCA, the French maker of the
coveted Birkin and Kelly bags, illustrated the powerful effect of
the low euro: Its sales were up 21% over the first six months of
the year, but once the effect of currency was stripped away, growth
was a more modest 9%.
Industry experts and investors will be listening closely this
week for clues on the progress at Gucci and Louis Vuitton, and
whether recent changes in leadership are translating to higher
sales.
Kering's Gucci replaced its chief executive and its chief
designer last winter in a bid to reinspire the struggling brand,
which has seen its sales dip since 2013. But analysts say it will
take at least a few more months before the new management can build
buzz among fashionistas. Antoine Belge, a luxury analyst at HSBC,
said in a recent note he is expecting Gucci sales to return to
growth only in the fourth quarter of this year.
Meanwhile, LVMH's Louis Vuitton, the world's largest luxury
fashion label, is further ahead in its own revamp. The brand hired
Nicolas Ghesquière in November 2013 to succeed Marc Jacobs as
creative director. Mr. Ghesquière's designs, along with investments
in marketing and stores, are making an impact, says Luca Solca at
Exane BNP Paribas.
"Louis Vuitton results will probably be better than most were
expecting, " he predicted. "The brand has been updated and the
consumer appeal has improved."
Still, luxury-brand revamps won't help if the industry's top
customers--China's rising wealthy class--stop buying. They already
have in their home country because of the continuing Chinese
government crackdown on gift-giving and corruption, says Philip
Guarino at China Luxury Advisors, a retail consultancy firm.
Moreover, the recent stock market crash in China is causing a
"big-time shock in consumer confidence," he said. While the
traveling Chinese will continue to make their purchases abroad,
enticed by lower prices in Europe and elsewhere, he predicts
high-end brands to see even fewer sales within mainland China.
Louis Vuitton has 50 stores in China while Gucci has 70, according
to their websites.
"The big luxury brands are way overexposed in China, with too
many stores and too much in fixed costs," he said. "They need to
downsize in China."
Write to Jason Chow at jason.chow@wsj.com
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