EU CONSUMER CYCLICALS: LVMH; 1Q (to March) results (x2)

(MCFP; Aa3/AA-) (equities -7%)

As is the case for peers, balance sheet firmly in its control and we see it comfortably placed for ratings at g/n 1.5x/1.0x to end last year. Only caution remains in the long-end and is due to Bernard refusing to do a handover while he is alive (76yrs old). This can turn into a issue for credit (see Starbucks with Schultz for key man risk or for family drama Estee Lauder - both saw impact to earnings). On read-through main caution would be on Kering. Re. Beauty weakness L'Oréal is too firm to shake, Coty we will circle back on but fragrances was reported to be firmer (which Coty is more exposed to). We do not read too much into the wines & spirits weakness given it has been underperforming there for a while now. On RV Richemont & Walmart 29s look more interesting.

• Specific to LVMH;
  Costs (COGS & SG&A) will stay sticky as it believes in investing through the cycle. Specifically says 1H margins will be down yoy (last year EBIT margin was 25.6%)
• Pricing was slightly positive and product mix was flat - implies volumes were down more than the reported revenue falls.
• Louis Vuitton continues to perform slightly better than the average brand in Fashion & Leather (-5%) and Dior slightly worse. Reminder Fashion and Leather is the core (at 48% of sales) and though it does not disclose by brand sales, Louis Vuitton is known to contribute a significant portion - hence the health of it is important.
• We would not be surprised if we see a unfavourable WC swing this half - it is stocking inventory in the US ahead of tariffs.

Macro:

• Segments exposed to aspirational customer is being hit harder - points to wine and spirits and beauty.
• The Chinese consumer is sitting at a similar level to what it was in 4Q, only deceleration was in tourist spend in Japan.
• It was initially reporting more optimistic trading conditions when it reported FY earnings in Jan - it says that was a boost from Chinese New Year (29 Jan - 12 Feb) and saw a step down in Feb.
• Saw no change in US environment since tariff headlines begun. The weakness in 1Q was driven by Sephora who is 1) rolling double digit growth rates from last year and 2) facing more aspirational customer driving the beauty market lower.

Numbers from before:

• Group revenues down organic -3% (FX +1%, net -2%) within which;
  • Wines & spirits -9%, Fashion & Leather (core) -5%, Perfumes & Cosmetics -1%, Watches & Jewellery 0%
  • Asia ex. Japan -11%, US -3%, Japan -1%, Europe +2%