LVMH’s operating profit dived 68 per cent in the first half of the year even as the world’s biggest luxury group slashed spending on store leases, hiring and advertising to cope with the pandemic.

The group, controlled by French billionaire Bernard Arnault, delivered weaker-than-expected operating profit of €1.67bn and an operating margin of 9 per cent as store closures and travel restrictions gored its business, which relies heavily on Chinese and US tourists shopping in Europe’s fashion capitals.

Analysts had forecast first-half operating profit of €2.7bn, according to FactSet consensus.

Sales of fashion and handbags, led by the group’s biggest brands Louis Vuitton and Dior, held up better than those of watches and jewellery from brands such as TAG Heuer and Bulgari. Second-quarter sales fell 38 per cent on a like-for-like basis to €7.8bn, worsening after a 17 per cent like-for-like decline in the first quarter.

“Our big brands have proven quite resilient, often more than the smaller ones, in terms of top and bottom line,” said chief financial officer Jean Jacques Guiony. “But travel restrictions have hit parts of our business, such as DFS, quite hard.”

The DFS business unit includes duty-free stores in airports and the beauty retailer Sephora.

“We cut costs by about 30 per cent in the second quarter but we do not want to cut too deeply so as to be ready for the recovery when it inevitably comes,” he said.

LVMH does not issue financial forecasts so has declined to give specifics on the prospects for the recovery. But it said there were “strong signs of an upturn in activity since June”, driven by places such as China and Japan where outbreaks have calmed, adding that it hoped the trends would be confirmed in the second half of the year.

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Analysts at Bain have forecast that sales of personal luxury goods will contract by 25 to 30 per cent this year, and that sales will not return to last year’s level of €281bn until 2022 or 2023.

Although the ultra-wealthy have continued to spend on everything from diamonds to art during the pandemic, the luxury sector depends on a much broader swath of aspirational customers tempted by the allure of a Louis Vuitton wallet or Bulgari perfume. Those were the consumers that often trade down or do not buy when an economic crisis hits, analysts said.

LVMH shares have held up better than some rivals this year, falling 4 per cent compared with a 15 per cent drop for Kering and 22 per cent for Richemont. Shares in Hermes, maker of the Birkin bag, have risen 11 per cent, although it has a more limited free float than competitors.

Separately on Monday, Italian luxury group Moncler reported second-quarter sales down 52 per cent to €93.2m. The maker of high-end puffy coats also swung to a loss of €31.6m in the first half compared with a €70m profit in the same period last year.

Via Financial Times