(News Bulletin 247) – The two banks took opposing decisions on Thursday. UBS moved from “neutral” to “buy”, encouraged by actions taken by management to reinvigorate its business. Berenberg, on the contrary, revised its recommendation to “hold” versus “buy” fearing that the weakness of the aspirational clientele would penalize its dynamics.

LVMH caused a shock wave with its figures published Tuesday evening. The number one luxury company took analysts’ expectations by surprise by returning to growth (on a comparable basis) in the third quarter.

Above all, its fashion and leather goods division, the most followed, fell by 2% over the period, half as much as expected by the research offices.

More broadly, all its divisions beat the consensus (the average forecast of analysts).

The group notably benefited from an improvement in its volumes and traffic in the United States as well as a recovery in local sales of luxury products in China.

The financial director, Cécile Cabanis, told analysts on Tuesday evening that she had noted a “mid to high single digit” increase (which can be translated as ranging from 4 to 9%) in this spending in China.

LVMH saw its price soar by 12.22% on Wednesday, its biggest increase since January 26, 2024 (+12.8%). The company with some 80 houses dragged in its wake other stocks in the sector, Kering taking 4.8% and Hermès 7.35%.

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Hopes confirmed

The group’s publication reinforced the hopes of analysts, several of whom had switched to buying the stock in recent weeks. These research offices judge that LVMH will be the big beneficiary of the sector’s recovery which should begin next year before strengthening in 2027. Over this last year, Morgan Stanley believes that the group should return to like-for-like growth of close to 10%.

More broadly, LVMH’s figures have aroused enthusiasm across the luxury sector. “Investors are hoping that LVMH, and potentially the entire luxury sector, has turned a corner in foreign currency sales growth over two years, thanks to a strengthening in mainland China,” Deutsche Bank said.

After the stock’s strong rise, can the stock climb further? Two banks provided opposing responses. UBS raised its buy advice from “neutral” on Wednesday evening. Berenberg, for his part, went from buy to “hold” on Wednesday. Or exactly the opposite decision.

For the record, LVMH shares do not seem to have reacted more to one of the two board changes. The stock ended up 1%.

Berenberg sees structural problems for luxury

In his note, Berenberg attempts somewhat to temper the market’s enthusiasm for luxury.

Unlike several other research firms, the German bank believes that luxury is facing long-term difficulties.

“Luxury is at a turning point. Industry optimists and executives say that the industry’s problems are mainly supply-side (notably a lack of creativity and poor value for money) and that demand, i.e. income, will rebound – it is well known – in six months,” writes the German establishment.

“On the other hand, we believe that the industry is facing a structural demand problem and that after three decades, the luxury super cycle is over,” says Berenberg.

The bank conducted analyzes of household income based on nationalities and age categories. Its results suggest that medium-term growth in demand for luxury goods will be between 2 and 3% per year in the medium term, compared to a historical average of around 6%.

Faced with this observation, Berenberg reinforced its conviction on the most defensive stocks in the sector, that is to say the groups with the most elastic (and wealthy) clientele: Ferrari, Brunello Cucinelli and Hermès. Conversely, the bank has switched to selling Kering.

To return to LVMH, the German bank highlights the group’s strengths. “LVMH’s unique assets, notably its size, the strength of its brand”, and its cash generation, “place the group in a good position to weather the slowdown in the luxury sector and gain market share”, recognizes Berenberg.

But the German bank anticipates a greater evaporation than in its previous projections of so-called “aspirational” customers. This clientele is younger and less wealthy than traditional buyers of luxury products. In search of a signal, it sets its sights on entry-level items and is inherently more sensitive to the economic situation.

“As the pressure on aspirational customers is greater than we had initially anticipated, LVMH’s revenue growth should be limited in the short term and disappoint,” writes Berenberg. The establishment also fears that the company will suffer from a weakness in the Chinese market which, consequently, will slow down the improvement of its margins.

UBS tables on “self-help”

UBS, for its part, has therefore raised its buy advice on the stock, a first in two years for the Swiss bank.

“Over the past two years, we have remained on the sidelines on LVMH, awaiting signs of a return to positive dynamics in earnings per share, which we believe is now back,” explains the Swiss bank.

“Although the sectoral context remains undeniably complex, we believe that the third quarter results show that the measures taken by the company to get its brands back on track within the crucial ‘fashion and leather goods’ division are bearing fruit,” explains the Swiss establishment.

Improving the company’s sales will ultimately improve margins and trigger good earnings per share dynamics, judges UBS.

In fashion and leather goods, which according to the bank accounts for 80% of LVMH’s operating profit, UBS believes that “self-help” measures (internal performance levers), combined with strict cost controls, will make it possible to stabilize the division’s margins at around 34% in 2025-2026 before a recovery in 2027 towards a rate which would be higher than 36% in 2030.

Tuesday evening, Cécile Cabanis explained that these “self-help” measures took the form of collection renewals which will gradually arrive in stores in the coming months or even initiatives in its stores, such as the boat-shaped boutique “The Louis” in Shanghai, or flagships in New York, Macau or Seoul (Café Louis Vuitton).

“Creative renewal”

UBS believes that the increase in volumes reported by management in this division in the third quarter constitutes “confirmation of a gradual return to momentum” in this division.

“The increased level of creativity and product innovation thanks to the multiple creative changes made to all brands should once again arouse consumer enthusiasm,” hopes the Swiss bank.

LVMH has experienced numerous changes in artistic direction, notably at Dior, where Jonathan William Anderson’s new collections were well received. This has led several design offices (Bernstein, Morgan Stanley) to hope that the designer will breathe new life into the brand and therefore its sales.

“The combination of ‘self-help’ measures implemented by the group, as well as improving trends among key consumer nationalities, give us reason to believe that the division could return to more normalized sales growth, thus ending the last two years of underperformance and lower analyst forecasts (the consensus on earnings per share for 2025 has been revised by 40% since October 2023),” continues UBS.

Beyond UBS and Berenberg, the majority of analysts are buying LVMH shares, according to data from investing.com. Fourteen recommend buying it, 9 recommend keeping it and only one design office advises selling it.