We left our price target on LVMH unchanged at €167/share post Q116 sales and revenue release. This represents a 10 per cent upside to the current price.

Sales came in line with our expectations but one per cent below market expectations. We believe the obstacles encountered in the first quarter are one off events. Going forward the Group should continue moving the right direction. 

Organic growth in fashion and leather goods was reported below expectations for Q116 mainly due to the following two reasons:

  • DKNY - Donna Karan, the founder and chief designer of Donna Karan International retired. LVMH decided to suspend the Donna Karen collection. LVMH will reorganize its teams and structure to “substantially increase its focus on the DKNY brand,” the company’s more accessible line, which is currently responsible for 80 percent of Donna Karan International revenue. It will also maintain its license business.
  • Marc Jacobs – Transition of collections

The company also saw a small deceleration in demand for Louis Vuitton products mainly due to the terror attacks in Paris which resulted in lower tourists. We expect this to be a one off and consumption and tourism to resume to normal levels.

However, if you have to eliminate the discontinued items from the top line figure, revenue in fashion and leather goods actually increased by two per cent. We expect this weakness to be a one-off as LVMH works on the new team to focus on the DKNY brand.

Sales in wines and spirits were up six per cent for the quarter. We are seeing a strong pick up in China and also the fact that the Company is no longer going through a destocking exercise is helping the business grow.

We are also seeing a strong pick up in the watch and jewellery business. The Company expect strong growth in Tag Heuer as management got strong orders from the Basel Fair orders. 

Bulgari also rebounded after a weak Q415, mainly due to a lower than expected Christmas period due to the terrorist attacks in Paris.

Despite global growth concerns, management reassured investors that demand worldwide remains ‘healthy’. Demand from China was flat in Q116 quarter-on-quarter though this is mainly due to the fact that Q415 was a very strong quarter and Q116 is now in line with historical performance.

Concerns

  • Global economy does not continue to recover
  • The reorganisation of the team at DKNY takes longer than expected and continues to impact the top line negatively
  • Euro continues to strengthen being a burden on financials
  • Demand from China slows down

Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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