When it comes to market-beating returns, sectors such as technology and software tend to come to mind. However, one of the more under-the-radar industries that has historically been generous to shareholders is luxury goods. One of the most recognizable luxury companies in the world is LVMH Moët Hennessy Louis Vuitton (LVMHF -0.04%), home to iconic brands such as Fendi, Tiffany & Co., and Tag Heuer.
LVMH just published revenue results through the first nine months of the year. While an initial glance might present the notion that everything is progressing smoothly, a look underneath the hood may tell a different story. Let's dig into the company's financial data and assess if now is a buying opportunity for the stock, or if luxury retail may be in trouble.
A close look at the financials
The table below illustrates LVMH's revenue by product segment for the first nine months of 2023 and compared to the same period last year.
| Category ($ in millions of euros) | Year to Date 2023 | Year to Date 2022 | % Change |
|---|---|---|---|
| Wines and spirits | 4,689 | 5,226 | (10%) |
| Fashion and leather goods | 30,912 | 27,823 | 11% |
| Perfumes and cosmetics | 6,021 | 5,577 | 8% |
| Watches and jewelry | 7,951 | 7,575 | 5% |
| Selective retailing | 12,431 | 10,095 | 23% |
| Other activities and eliminations | 201 | 189 | N/A |
| Total LVMH | 62,205 | 56,485 | 10% |
Data source: Company investor presentation.
At first glance, these results look respectable. Wines and Spirits is the only product group that is declining year over year, and fashion and retail are both achieving double-digit growth. Considering the impacts that inflation and high borrowing costs are having on the average consumer, these results are encouraging.
But as I wrote about previously, the products that LVMH sells are not necessarily marketed for most consumer cohorts. For this reason, the company's high-end buyers may be more immune to hefty price tags regardless of macroeconomic conditions.
With this said, looking at these results on a deeper level may shed some light on broader consumer buying patterns. According to the company's investor presentation, revenue growth decelerated in key geographic areas such as the U.S. and Europe. Moreover, concerns over reopening efforts in China due to COVID-19 appear to linger.
Investors can see in the chart above that the results from LVMH caused a brief sell-off. The stock is now trading about 29% off highs from earlier this year. Given the slowdown and waning consumer slowdown, some investors may be wondering if the party is over for luxury goods. In the following section, I'll outline some interesting trends in the luxury market and make a case for why it may simply be experiencing a new beginning.
Image source: Getty Images.
The advent of luxury resale
On the surface, the results above provide good reason for investors to believe that luxury retail is taking a breather. But with that said, there are some new trends emerging that Wall Street may not be fully considering.
According to a recent study by management consulting firm McKinsey, well over 50% of younger demographics such as Gen Z and Millennials expressed an "intent to splurge" in 2023. McKinsey's survey also found that areas such as apparel, beauty and personal care, footwear, and jewelry ranked in the top 10 of all categories among the entire study group, which included Gen X and Baby Boomers as well.
There are a couple of undercurrents when digesting the data above. First, it's interesting to see that so many Gen Zers and Millennials are willing to spend even during times of uncertain macroeconomic conditions. However, it's important to keep in mind that younger age groups likely do not have the same spending power as older generations do, given they have not had as much time to save.
Another thing to consider is why younger demographics may be so attracted to high-end brands. One of the easier conclusions to make is that younger age groups are big users of social media platforms. While posting pictures of yourself wearing nice clothes may give off the appearance of building a luxury lifestyle, I think there is more to the picture.
Another study by McKinsey estimated that the luxury resale market was worth up to $30 billion in 2020 and expected to grow by at least 10% per annum over the next decade. Given these parameters, the luxury resale market is likely worth significantly more today than it was just three years ago. Perhaps unsurprisingly, McKinsey attributed a significant portion of the boom in luxury resale to Gen Z and Millennials. Platforms such as Poshmark, The RealReal, Farfetch, and StockX have essentially democratized access to luxury goods.
Keep long-term investing in mind
Given the size and pace of growth for secondhand luxury goods, some investors may be concerned about the impacts this will have for LVMH. In years past, competition was seen in the form of new fashion trends or shifts in consumer preferences. But now, high-end brands are seeing an entirely new channel by which their products are sold. In turn, simply showing off new items in eye-catching window displays may not be enough to reach consumers quickly.
LVMHF Total Return Level data by YCharts
While the threat of resale markets appears to be very real, it's too early to know for certain just how much it's impacting luxury retailers. It's important to keep in mind that consolidation in the space is very much an ongoing theme, as smaller fashion houses look to compete with the behemoths. Moreover, the total return over the last decade for LVMH stock speaks for itself.
Although the shopping patterns from younger consumers in particular may be contributing to some reshaping of broader trends, LVMH's reputation and brand identity were built from fierce customer loyalty over generations. I think it's short-sighted to believe the company will continue to experience shrinking growth in the long run.
Given the heavy sell-off in the stock, now looks like a terrific opportunity to lower your cost basis and hold for the long term.
