European luxury groups hedge bets on predicting China comeback

Audio By Carbonatix

Enlarge

By Mimosa Spencer, Tassilo Hummel and Dominique Patton

PARIS (Reuters) -Europe’s luxury companies from LVMH to Hermes and L’Oreal are tentatively pointing to signs of a revival in China, but are also cautious about calling the turn on one of their biggest markets after a two-year slump.

The $400 billion luxury sector has been hit hard by the downturn in China, which accounts for around a third of global luxury sales as Chinese shoppers snapped up Louis Vuitton and Birkin bags in Shanghai malls as well as in New York and London.

Now there are glimmers of hope that the worst may be over even though China’s troubles continue, with economic growth that is likely to have slowed to a one-year low in the third quarter as a prolonged property downturn and trade tensions hit demand.

LVMH’s more upbeat sales report last week spurred an $80 billion rally in luxury shares on optimism about a China revival, but luxury companies reporting this week have painted a mixed picture.

“I’m always very careful about China because one quarter doesn’t make a trend. But overall the market has gone into positive territory,” L’Oreal chief executive Nicolas Hieronimus said after the company reported its first China growth in two years, though missed sales forecasts, sending its shares down around 6% on Wednesday.

Hieronimus said the key driver had been the beauty group’s luxury division, which includes high-end brands like Lancome and Helena Rubinstein skincare. He said investors should not get over-excited given China’s tough economic conditions. The big focus was the mega Singles Day shopping festival on November 11.

“Many times at the end of the year it’s between China’s 11/11 and the holiday season in America and Europe. So fingers crossed,” he said.

HERMES SEES ENCOURAGING SIGNS BUT REMAINS CAUTIOUS

French luxury goods group Hermes on Wednesday flagged a “very slight improvement” in China, but its third-quarter sales came in below expectations, hitting its shares which fell more than 4%.

Eric du Halgouet, Executive Vice-President Finance, told analysts that the important October Golden Week holiday in Mainland China had seen “more dynamic activity”.

“We can’t extrapolate to the entire quarter, but it’s an encouraging sign,” he said, adding there had been a marginal improvement in foot traffic helped by a focus on higher-value products from more expensive watches to jewelry.

“That said, we must remain cautious,” he added. “There are some positive signs, such as the evolution of stock markets and the stabilisation of the real estate market in certain major cities. These are elements that are encouraging us.”

The focus on high-end luxury could curb the benefits for more mainstream luxury and consumer product companies, which are under pressure in China as consumers shift to local brands and tighten their belts given general economic uncertainty.

Deutsche Bank said in a research note that companies like L’Oreal had limited upside in China with credit growth waning, and growth skewed towards certain provinces.

LVMH DRIVES A LUXURY SECTOR RALLY

LVMH has been the most bullish so far on China. The luxury group’s shares had their best day in over two decades last week after signs of improved demand in mainland China where sales turned positive for the first time this year.

Hermes, Gucci-owner Kering, Richemont, Burberry and Moncler all gained on hopes the industry’s two-year downturn was bottoming out.

Cecile Cabanis, LVMH Chief Financial Officer, said last week China was stabilising, with mid-to-high single-digit local growth. Chinese tourist spending was still sliding but less than before. There were signs of restocking of cognac brand VSOP.

She said Vuitton had seen a “very steep improvement” in China sales, while Dior and Sephora had seen a better performance.

“It’s very encouraging,” she said, though highlighted that the economic picture in China had not changed fundamentally.

“We still have the real estate market, which is complex. We still have a high unemployment,” Cabanis said. “So we consider it’s still going to take time until we have a rebound on China as a whole.”

(Reporting by Mimosa Spencer, Tassilo Hummel and Dominique Patton; Writing by Adam Jourdan. Editing by Jane Merriman)