By Matthew Dalton 

PARIS -- French luxury conglomerate LVMH Moët Hennessy Louis Vuitton SE said net profit plunged in the first half, as the company struggled to cut costs in the face of sweeping boutique closures during the coronavirus pandemic.

Revenue was relatively resilient, falling 27% in the half ended June 30 to EUR18.4 billion ($21.6 billion), LVMH said Monday. The results were buoyed by Louis Vuitton and Dior -- LVMH's biggest fashion brands -- and its wines and spirits division, which includes Hennessy cognac and Moët & Chandon champagne.

But profit fell 84% to EUR522 million, as the company couldn't cut costs quickly enough to avoid a sharp decline in profit margins. That was well below analysts' expectations.

The results show some of the challenges facing the luxury industry as it struggles through lockdowns imposed by governments around the world to fight the pandemic. Boutiques were closed first in China, then in the West. While they have mostly reopened in China and Europe, some in the U.S. are still shut as the country faces surging coronavirus cases. Tourists are stuck at home, depriving boutiques in luxury shopping destinations of their top-spending customers.

LVMH is the world's biggest luxury company, and it normally outperforms the broader industry.

The conglomerate, however, has a harder time cutting costs than its competitors. LVMH brands produce most of their products in-house and often directly operate the boutiques where their handbags, high-fashion lines, perfumes, watches and jewelry are sold. It is a strategy favored by French billionaire Bernard Arnault, LVMH's chief executive and controlling shareholder, to maintain meticulous control over the image of LVMH's brands.

But it also means LVMH can't cut costs by canceling orders to third-party manufacturers, and it bears much of the cost of shutting boutiques.

"We do manufacture inside, and so we suffered some lack of absorption of fixed costs," said Jean-Jacques Guiony, LVMH's chief financial officer. "It's particularly true at Vuitton, wines and spirits and some other businesses."

"Doing the right thing sometimes costs in the short term, but pays in the long term," said Bernstein analyst Luca Solca.

The company also had to write down products that it determined wouldn't last beyond the current fashion season, hitting profits.

Complicating matters for LVMH is the $16 billion deal it struck late last year to buy U.S. jeweler Tiffany & Co. Mr. Arnault has since questioned the deal, given the huge blow dealt by the pandemic to the global luxury business. LVMH executives Monday gave no sign they were backing away from the deal and said they were still waiting for antitrust authorities to approve it.

Mr. Guiony said that business improved in June as more boutiques around the world reopened. In the U.S. and Japan, two of LVMH's hardest-hit markets in the second quarter, sales in June were flat at Louis Vuitton and up slightly at Dior.

"And July will certainly see some improvement compared to June," Mr. Guiony said.

Write to Matthew Dalton at Matthew.Dalton@wsj.com

 

(END) Dow Jones Newswires

July 27, 2020 15:52 ET (19:52 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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