The U.S. Census retail sales report for March (discussed below) showed improved spending trends; that are also evident for the aspirational luxury and the more affluent consumer, which have historically driven department stores. Additionally, prestige beauty (the outperforming category over the past two years), is still growing healthily, but its level of outperformance is narrowing.
LVMH reported Q1 sales results and CFO Jean-Jacques Guiony said, “What we said about the U.S. market is, actually, you have two U.S. markets. One is the market for aspirational customers...where we see these customers being--depending on the brands and the categories--but a sizable portion of the business, due to inflation, are certainly under some form of pressure. And we register disappointing numbers there, and it's been going on for a while. The only thing I would say about that is that when you look, for instance, at Fashion & Leather, we've been experiencing a slight improvement in the numbers over the last three quarters...I'm just saying that there is a gradual improvement in the situation, which obviously comes from a less-impactful aspirational customer in the total of the business. So our scenario would be a continuous strength from the top-end customers and a gradual, a very gradual improvement, from the aspirational customer.“ These comments were reassuring after Kering’s negative softer-than-expected Q1 2024 update a few weeks back. Below, we show our luxury index (mainly districts and malls that contain a Louis Vuitton location) and the improved trend is evident. (Recall that the Q4 holidays were very strong for nearly all retailers.)
As it relates to the cosmetics category and Ulta's comments from two weeks ago about softer trends and encroachment from Sephora (owned by LVMH, who also has a large prestige cosmetics business led by Dior), Guiony said, “As far as the U.S. beauty market is concerned, we don't see a major source of concern. The business has been pretty strong with Sephora and with our Perfumes & Cosmetic division during the quarter. The Prestige business is doing well. So we have no particular signs of slowing down. Obviously, we were growing very strong double digit last year. It will not last forever, and it will normalize at some point. But the various categories we are operating in, particularly makeup, haircare at Sephora, are doing very well. You've seen the numbers, I mean, they are pretty strong. And Sephora's numbers are higher than the selective distribution average numbers. We have no particular fear for the quarters to come. This being said, this type of growth does not last forever. It happened in the past. And at some point, there is a slowdown or normalization in the market. We don't hear that particularly. But for the time being, we have no source of alarm as we speak...Some competitors are more exposed to suburban malls [i.e., Ulta], which were favored by the client base during the pandemic. So we had a tough time during the pandemic, and exiting the pandemic is playing the other way around. We benefit from that. People are back in the center of towns. They're also back in the shopping malls, and we benefit from that where the bulk of our stores are present. The second thing I would mention is that we have always, particularly in the U.S., put the emphasis on merchandising, which has always been the key strengths of Sephora in the U.S. And we never gave up on that. We are still at the forefront of innovation in terms of brands, in terms of product and that's the main reason why people are coming to Sephora. Sephora is not just engaging into a transactional relationship with his or her customers, it is also a place where people discover, try and do other things than they would do in a traditional store. We have always put a lot of emphasis on that.”
L’Oréal also reported results this week and the company's Global Head of Corporate Finance and Financial Communication Laurent Schmitt shared, “The North American market globally remains dynamic, even though it has slowed down over the previous quarters, but probably not to the extent that you may have feared hearing some of the publications because in reality, first of all, there are readings to the U.S. market. If you look at the Circana and the Nielsen [data], they only covered part of the market. So you have a very strong dynamism of the e-commerce market. And for us, for example, being on Amazon is a great booster. And also the other fact of the American market is that the one category that has really slowed down the most is makeup which, of course, is more important for certain retailers than others. On the other hand, you see that fragrance is doing great, that hair care continues to be strong on the premium part of the market. So yes, the North American market is slower than in 2023, but we continue to see lots of opportunities in this part of the world, where we have good performance…”
These comments jive with our takeaway from Ulta’s comments. The figures below are just stand-alone Sephora door sales volume plus the performance fee from Kohl’s for the Sephora at Kohl’s locations. As such, there is an apples-and-orange difference between visits and revenue. However, with both decelerating, that demonstrates that the category, as well as Sephora, have entered into a lower gear of growth. As such, it will be interesting to watch what that leaves ahead for Ulta.
