(BFM Bourse) – The luxury giant recorded lower-than-expected profitability in the second half and for the year as a whole. Nevertheless, the market does not really sanction this small gap, aware that this slight disappointment is due to marketing investments which will allow the group to be ready to better grasp the Chinese recovery.
With a capitalization of more than 400 billion euros, a jump in the action of more than 17% since the beginning of January and an excellent reputation to maintain on the operational side, LVMH had to make an immaculate copy to the market.
In the end, the record annual results of the world leader in luxury did not meet expectations 100%. Organic growth (at constant scope and exchange rates) lost some momentum in the fourth quarter but remained strong, with a 9% increase over one year. The group’s flagship division, “fashion and leather goods”, grew by 10%.
This performance is above expectations, Credit Suisse evoking a consensus of 7.5% for organic growth in the fourth quarter.
“This result is all the more impressive given that some of its peers recently reported much worse than expected disruptions in China in December. While LVMH was not spared these disruptions, they were offset by strong sales elsewhere. “, remarks the Swiss bank. LVMH does not publish its sales in China. But the Asia excluding Japan region posted an organic decline of 8% in the last quarter.
Profitability below expectations
However, there remains a slight oddity: the group’s current operating profit (ROC), its most important profitability indicator, stood for the whole of 2022 at 21.05 billion euros, i.e. 4% less. than expected by analysts. The corresponding margin was 26.6% compared to 26.7% in 2021 and 27.5% anticipated by the design offices. Credit Suisse evokes a “little wrinkle” on the pretty face presented by these results.
In the second half alone, the current operating margin was 26.6%, against 27.6% expected, note Royal Bank of Canada. “The market is likely to take a positive view of revenue momentum, and possibly question the outlook for profitability given the second-half margin miss,” she said.
The group’s financial director Jean-Jacques Guiony admitted that the current operating margin, after having improved in the first half, had fallen in the second. The leader nevertheless clearly detailed the reasons for this decline.
“This variation in margins is quite easily explained by the fact that we made the deliberate decision, in the second half, to maintain the marketing budget at approximately 30% growth compared to the previous year when we knew that we wouldn’t have quite the same rate of sales growth given the baseline phenomena. And we also didn’t fully forecast China’s air hole in December,” he said. developed the leader during a conference with analysts.
“Despite this strategic decision to maintain ambitious marketing budgets, we were able to maintain margins for the year at the announced levels,” he added.
China ready to take off
In the end, the LVMH title barely suffered profit taking, falling 0.6% to 796.30 euros around 3 p.m., almost as much as the CAC 40 (-0.4%). “We could have feared that the title would be more heckled, but it is holding up well. Investors have understood that this drop in margin is explained by one-offs (exceptional items)”, underlines an analyst based in Paris. “The slight worse than expected on the margin is explained both by the weakness of China and therefore marketing expenses. But this is not a bad thing in itself since it demonstrates the group’s desire to invest in growth to capture the recovery in China,” he continues.
For Credit Suisse, these expenses “should help LVMH well during 2023, particularly for the rebound in China and Asia”.
“The reasons for the margin miss are clearly positive for 2023, namely increased marketing spend (which should translate into stronger revenue growth this year) and a larger than planned in China (which should be compensated for this year)”, abounds Stifel.
“As a result, we believe investors may disregard LVMH’s lower margins as they may view increased marketing investment in the second half to gain further market share and further outperformance. in 2023 for the fashion and leather goods division”, details the financial intermediary.
LVMH said it is approaching 2023 “with confidence” and assured that the month of January had “started well”. “I am quite confident for 2023. If the start of the year is confirmed, if the opening of China is confirmed, (…) the start is extremely strong (…), it should be a very good year”, has declared for his part the CEO, Bernard Arnault, to analysts.
“I am quite confident that the Chinese leaders are using the period that is opening up to revitalize Chinese growth. If this is the case, we have every reason to be confident or even optimistic on the Chinese market. For example in Macau, where the Chinese can now surrender, the evolution is incredible, the stores are full, it’s back with a fairly sustained regime, “he then explained.
In a note published recently, Bank of America cited LVMH as one of the luxury groups best positioned to take advantage of the Chinese reopening thanks to the quality of its brands. It is even one of the bank’s favorite European stocks, across all sectors. Friday the American bank reiterated its advice to buy, with a target price of 1,000 euros or more than 25% potential at the current price.
Julien Marion – ©2023 BFM Bourse
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