Capital Calls: LVMH’s US dip, Rolls-Royce revival

- LVMH

- Rolls-Royce

Luxury challenge. LVMH’s seemingly unstoppable progression is facing headwinds. Shares in the 413 billion euro luxury behemoth fell 4% on Wednesday after it failed to wow investors with its earnings, depressing Europe’s stock market. The owner of Dior, Tiffany and Givenchy reported a sound 17% organic sales growth to 42.2 billion euros in the first half of 2023, slightly better than expected. Yet investors balked at the 1% second quarter sales contraction in the United States – which represents about a quarter of total revenue – as inflation worries cooled shoppers’ appetite for expensive items. That’s a sharp reversal for a region which last year had been a major growth engine for Bernard Arnault’s group and for the entire bling segment.

LVMH’s conglomerate model, which spans over 70 brands, has so far proven resilient to crises. Despite a drop in 2020 due to global pandemic lockdowns, first-half sales have recovered and are up some 70% since 2019. Meanwhile operating profit for the same period has more than doubled to 11.6 billion euros. Yet, even LVMH may struggle to offset U.S. weakness if cracks appear elsewhere. The all-important Mainland China market, which made up a fifth of global personal luxury sales in 2021, is a potential worry. Sector analysts predict a bumper year after the Chinese high-end domestic market contracted by 10% in 2022. Yet, a recent Politburo meeting took a significantly dimmer view of China’s economic prospects, raising expectations of government stimulus. Slow demand both in the U.S. and China would test LVMH’s diversified model. (By Lisa Jucca)

Low expectations. Six months after calling Rolls-Royce a “burning platform”, Chief Executive Tufan Erginbilgic is giving Britain’s flagship engineering group a high five. The 15 billion pound aero-engine maker hiked its full-year operating profit forecast for 2023, citing a tangible impact from operational improvements, cost reduction measures and the turnaround of unprofitable contracts. Shares spiked 20% as investors celebrated the possibility of free cash flow hitting 1 billion pounds in 2023, 37% above consensus.

The recovery in long-haul travel has been a boon for Rolls-Royce, which makes most of its money from servicing and maintaining wide-body engines based on their flying hours. Having more engines in the sky is helping the 117-year-old company optimise costs. Erginbilgic’s turnaround plan, which is due to be unveiled this autumn, has also started boosting growth across its defence business, with the unit’s operating profit expected to hit 260 million pounds in the first six months of the year, up 37% from the same period last year.

Despite the rosy outlook, Erginbilgic has work to do. The company had nearly 3.3 billion pounds of net debt last year, and Barclays analysts are pencilling in an increase this year. Meanwhile, its valuation of 7 times expected EBITDA in 2023 is far behind the 15 times multiple of U.S. rival General Electric and 12 times multiple of France’s Safran. Erginbilgic can safely argue that Rolls-Royce is no longer a burning platform, but until he closes that gap he can expect heat from investors. (By Pamela Barbaglia)