(Bloomberg)—LVMH’s customers are curbing purchases of high-end fashion faster than the company can cut costs, and that’s hitting the Louis Vuitton owner’s profit. LVMH is No. 8 in the Digital Commerce 360 Europe 500.
With boutiques shut down worldwide and international tourism largely halted, revenue fell 38% on an organic basis in the three months through June, the company said in a statement on Monday. Chief Financial Officer Jean-Jacques Guiony said LVMH slashed operating costs by 29%.
“LVMH showed relative resilience at the revenue level in the first half of the year,” said Luca Solca, an analyst at Bernstein. “On the profit side, it’s obvious that it’s not been able to slash costs with the same pace as the revenue decline due to the fixed-cost base.”
LVMH follows Richemont (No. 18) and Burberry (No. 83) in reporting what analysts expect will be the industry’s worst quarter ever because of the pandemic. The company cited signs of recovery across several businesses in June and a particularly strong rebound in China, and said it expects further improvement in July.
The company reacted “swiftly to the adverse situation,” Guiony said on a call with analysts. “We expect to keep the cost base under control.”
Guiony said in an interview with Le Figaro that LVMH still expects to respect the contract signed for its planned purchase of jeweler Tiffany & Co.
“Tiffany’s results are clearly affected by the crisis,” the CFO told Le Figaro. “That said, we have signed a contract and we will respect it.”
Guiony told analysts on the call that LVMH is still waiting for about half a dozen antitrust approvals for the Tiffany deal, adding that “things are moving forward.”
Sales at LVMH’s fashion and leather goods unit, which includes top brand Louis Vuitton, fell 37% in the quarter. Analysts expected a 38% decline. Louis Vuitton management increased prices globally by 5% in late June and early this month, Guiony said.
While shoppers are increasingly turning to online purchases, the luxury industry has notoriously been slow to generate more revenue that way. LVMH noted a “significant acceleration” in online sales in the first half, which only partially offset the store closures.
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The owner of Men’s Wearhouse has “considered the projected impact of COVID-19 on our cash flows and analyzed our future compliance with the financial covenants under our ABL Facility, including an additional discretionary reserve imposed against our borrowing base, as described in Note 19, and based on such projections and analysis, we will not remain in compliance with the fixed charge coverage ratio covenant under the ABL Facility beginning in the fourth quarter of fiscal 2020.”
The company said it probably won’t make good on a missed interest payment of approximately $6.1 million due July 1 on its 2022 notes:
Management is exploring alternatives, “including seeking a restructuring, amendment or refinancing of our debt through a private restructuring or reorganization under applicable bankruptcy laws.”
“Although management’s projections indicate non-compliance with the fixed charge coverage ratio beginning in the fourth quarter of fiscal 2020, it is likely that we will pursue a reorganization under applicable bankruptcy laws prior to the occurrence of such non-compliance or well in advance of such date, possibly as soon as during the third quarter of fiscal 2020. Should we reorganize under applicable bankruptcy laws, there will likely not be any value distributed to our shareholders and our shares could be cancelled for no consideration.”