The rich live in a different economic world

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“Luxury is not an indicator of the general economy,” said Jean-Jacques Guiony, chief financial officer of LVMH Moët Hennessy Louis Vuitton SE, on Tuesday.

He couldn’t have been more right. Scrolling through LVMH’s third quarter business update, you’d be forgiven for thinking the world wasn’t facing geopolitical turmoil, soaring inflation and falling stock markets.

The bling giant posted a 19% increase in sales, excluding mergers and acquisitions and currency movements, in the three months to September 30. Fashion and Leather Goods organic revenue grew 22%. Both results exceeded analysts’ expectations.

Investors should still remain cautious. The third quarter was always going to be a blockbuster with an easing of travel restrictions and many Americans returning to Europe with a strong dollar to make the most of it. And now LVMH has set the bar very high for the next reporting season – at a time when risks are rising even for industry giants.

Although Europe has shone, the most important drivers of high-end demand are American and Chinese consumers. And there are considerable uncertainties surrounding both.

America’s big spenders are more vulnerable to shocks than to slowing economic growth, so recent stock market swings are cause for concern. U.S. customer demand was “more or less” in line with the second quarter, LVMH said. But a slowdown at Tiffany is worth watching. The company said the weakness in silver activity was due to an inflationary environment, where customers prefer gold. But it’s also possible that some fringe luxury buyers are more budget-conscious.

LVMH sales to mainland China customers remained flat amid Covid-19 restrictions. This is an improvement over the second quarter but far from a recovery. Demand in the country remains clouded by pandemic shutdowns and a darkening economic outlook. Even when life returns to normal, after two years of yo-yoing between lockdowns and freedom, there is no guarantee that consumers will spend with the same enthusiasm as they did when China reopened after the first wave of Covid in 2020.

A wildcard is travel. The strong dollar could be a tailwind to more US spending as European travel continues in the final quarter. Any significant easing of restrictions in China could lead to increased Chinese tourism in Europe – and more lavish spending in Paris or Milan – although that still seems a long way off at the moment.

In this context, LVMH appears to be the best placed among luxury companies. It’s the biggest and it has a muscular balance sheet that’s heading for net cash in early 2024, according to Bloomberg Intelligence. This gives him the power to invest in marketing while others cut spending and possibly make acquisitions. It is well diversified across beverages and beauty, and owns two of the industry’s most successful brands, Louis Vuitton and Christian Dior.

If the luxury shopper is cutting back on spending — say buying one handbag a year instead of two — they’ll likely focus on the brands that have the most cachet. They may even spend more on that single item. LVMH and its competitor Hermes International should benefit from it.

The biggest concern will be for less prominent names. The exception here is Prada SpA. It’s experiencing a Gen Z revival, with younger shoppers snapping up its bucket hats and logo loafers. If the Italian company can translate that into lucrative handbag sales, it could surprise on the upside.

The macro environment is more challenging for Kering SA, which manages Gucci’s transition to classic from the avant-garde. The luxury conglomerate should benefit from the strength of its other houses, such as Yves Saint Laurent and Balenciaga, but reorienting its biggest brand through an industry downturn will be hard work.

Burberry Group Plc is also recovering and vulnerable. That said, if new designer Daniel Lee can create the sorts of winning bags and shoes he delivered to Kering’s Bottega Veneta, Burberry may be able to navigate the choppy waters ahead.

Shares of luxury goods makers rose on Wednesday, after rising in recent weeks. Even with LVMH’s stellar performance, that seems optimistic given the perils facing bling suppliers.

“Everyone is talking about the recession, but no one has seen it before,” said Guiony of LVMH. If and when it arrives, the giant should be the toughest. But if luxonomics goes in the wrong direction, even it won’t be immune.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

More stories like this are available at bloomberg.com/opinion

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