LVMH Eases Fears of a Luxury Slowdown in China

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

The French luxury giant's shares jumped after quarterly earnings showed continuing demand for its handbags and Hennessy Cognac in the world's second-largest economy. The company also gave a bullish outlook, the latest evidence that a boom fueled by Chinese consumers persists.

LVMH rose as much as 5.4 percent in Paris early Wednesday, lifting Gucci owner Kering SA by 2.8 percent. Even Italy's Salvatore Ferragamo SpA, which posted overall weak sales mitigated by resilience in China, was up as much as 2.8 percent.

The Louis Vuitton owner's update late Tuesday contrasted 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 U.S. 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.

The French conglomerate reported fourth-quarter sales that beat analysts' expectations and raised its annual dividend by 20 percent. It said it saw strong demand for wines and spirits in China, but its fashion and leather-goods division was the standout performer, with a sales gain of 17 percent. That unit is considered a bellwether for luxury rivals such as Kering and Prada.

“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.

China Fears

The global luxury industry has become increasingly reliant on China's wealthy to drive growth, as the country accounts for a third of the $1 trillion global high-end market. With China's economy growing last year at the slowest pace since 1990, fears of a pullback 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 Tuesday that sales fell 27 percent 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 signaling in November slower growth in the region. Jeweler Tiffany & Co. said 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 Wednesday. Watch-seller Hengdeli Holdings Ltd. jumped as much as 9.4 percent in Hong Kong, and Emperor Watch & Jewellery Ltd. climbed as much as 2.7 percent. Prada SpA, however, fell as much as 2.5 percent after erasing an earlier rally of 2.9 percent.

While China's slowdown may be affecting major investments like autos, the impact hasn't yet trickled through to smaller-ticket luxury goods such as LVMH handbags. Beijing has been campaigning to boost domestic spending to outweigh the effects of the trade war, prompting global companies to sharpen their focus on sales in mainland China.

Less Momentum

About half of affluent Chinese in a survey released this month said they still plan to spend more on luxury goods this year, there's 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 they plan to spend more this year on luxury purchases, premium clothing, cosmetics and beauty products and electronics were among the top choices.

In an interview with Bloomberg TV, Arnault warned that the industry's boom won't run on indefinitely. Sounding a customary note of caution, he said 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's 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 $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're considering launching a luxury house under her name, building on the Fenty Beauty by Rihanna makeup label.

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

--With assistance from Annmarie Hordern and Allegra Catelli.

To contact the reporters on this story: Robert Williams in Paris at rwilliams323@bloomberg.net;Rachel Chang in Shanghai at wchang98@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Mark Schoifet

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