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Shares of the big French luxury houses tanked on Monday on news that the coronavirus from China was spreading. The Chinese market has long supplied an increasing part of these companies’ revenues, but the changing nature of the Chinese economy also explains luxury groups’ particular vulnerability.
Shares in LVMH LVMH, -3.26%, the fashion-and-drinks conglomerate that houses brands such as Louis Vuitton, Christian Dior and champagne maker Moët Hennessy, were down more than 4% in early trading, as were those of Kering KER, -3.54%, the parent company of Gucci. Luxury leather goods and silk scarfs maker Hermès RMS, -4.81% was down more than 5% at midday.
LVMH is due to publish its full-year results on Tuesday, which could go some way in reassuring markets that the company remains the growth and profit-generating machine it has been for years. And Monday’s fall only took the stock back to its mid-December level. But LVMH shares rose 65% in 2019, and it may have taken a virus to bring some form of correction.
Shares in Kering meanwhile only (so to speak) rose 49% in 2019, while Hermès was up 41% over the same period.
LVMH doesn’t break its revenues down by country, but sales in Asia, excluding Japan, account for 30% of the total. That’s mostly due to Chinese customers, who didn’t flinch last year when their economy slowed down as they kept buying champagne, cognac and expensive handbags.
Markets have good reasons to fear that the coronavirus may finally bring some sense of reality to valuations that were reaching absurd levels: Kering and LVMH are trading at more than 30 times profit, Hermès at more than 50, according to Bloomberg data.
Luxury groups have noticed in the past two years that what Chinese customers used to buy abroad on vacation is now purchased at home, in stores that have multiplied on what is not yet called the Chinese high street. A disruption such as the latest coronavirus is bound to seriously impact sales in the coming weeks, as they mostly take place in the big urban centers that are most vulnerable to a spreading disease.
