Luxury’s Q3 and Vogue World Takes Hollywood

0:04Hello and welcome to Fashion People. I'm Lauren Sherman, writer of Puck's Fashion and Beauty Memo memo, line sheet. And today with me on the show is Bernstein analyst, Luca Solka, to discuss Q3 earnings from LVMH and Caring to Xenia and Prada. Luca even reviews Jonathan Anderson's first Dior show.

0:28Happy Tuesday, everyone. Hope you had a good weekend. This week on Line Sheet, we're talking Vogue World. We're talking the future of McQueen. We're talking guests in residence, that little Gigi Hadid fronted cashmere line that could. It's a really interesting business. Sarah Shapiro checks it out. A lot of you have reached out and asked me what I thought about Vogue World, which ended up being the subject of Monday's email. So you got to read it to get all the little bits of reporting, etc. But basically, the big question I keep getting, before and after the show, every person is like, what is the point of Vogue World?

1:03What is the point. And so from my view, I think it has a point. The point is to make top line revenue and show everyone involved, all the sponsors, the fashion industry, in this case, Hollywood, that Vogue still matters, like especially advertisers. Obviously, this is important to, but also to consumers who are watching it online or whatever. Did Vogue achieve that this time? I think yes and no. Everyone who went to the show had a great time. They were proud to be involved because a lot of them were. They were entertained. A very curmudgeonly guest who I said, well, what did you think, said, it was kind of great.

1:45Lots of energy, really fun. The crowd was into it. But here is the thing. I think a lot of the credit here goes to obviously everyone involved, including Mark Waducci, who is now the editor or whatever his title is of Vanity Fair, but was still involved with Vogue World. And this was a big project of his at Vogue World the last few years. But this one and the New York one were both Lisa Love, who used to be the West Coast editor of Vogue. She was heavily involved. She's a really great producer of stuff. Like she's done a lot of CFDA Vogue fashion fun stuff. And anytime she does it, you can just like tell there's a lightness to it.

2:21And so I think a lot of what people loved was like the Lisa Love energy that was coming into it. And also, look, there's Nicole Kidman is walking on a runway that's fun online. And everyone in New York was like, this was hokey. It's a little weird. the one person said to me if you think the purpose was to build vogue's credibility as a media partner this person said they thought it accomplished the opposite it looks silly and dated it felt like a waste of money look i'm trying to be balanced here i think it's interesting i do think they're a little weird but also fun and i think they should do stuff like this the reality is this is a declining business they have to manage it i don't know what solves vogue's big problem.

3:08Like, I don't know what vote should actually be. Maybe this is the future of that. I don't think this is necessarily scalable. The Wall Street Journal reported that it made close to$30 million in top line revenue. That's a lot of money. So if they do like one of these a year or three, two of these a year in a different way, that's that's pretty good. And at least it really seemed like they're having fun. So I hope there's another I heard that maybe it's going to be New York next year. I assume Milan is in the works, but maybe they'll wait until the Olympics in Milan or whatever. It would be very funny if they had it in a factory that makes luxury handbags or something, because every single Vogue world is kind of connected to the industry of the city or whatever.

3:55At least the last couple have been, or the arts in the city. So I don't know what they would do in Milan. Maybe you guys have some ideas, but I have a feeling it might be in New York next year. The point is, I think they should keep doing it. I think it's interesting. And it's something to talk about. Like, I got so many messages about it. It's crazy. So anyway, let's move on. Let's get going with Luca. I know you're excited to hear his opinion on the Jonathan Anderson show.

4:24Luca Soka, welcome back to Fashion People. Thank you very much indeed, Lauren. Thank you for having me. It's a pleasure. It's so clear. Your connection is so good this time. Everyone's going to be thrilled. Yes, absolutely. I've been upgrading quite a few connections lately, so we should be fine in the future. Well, thank you for being here. So I want to go through the different businesses, and I have a couple questions for you on each of them. But big picture, what did you think about Q3? I think it was a step forward relative to what we had seen in the second quarter. Overall, the impression was that Chinese demand was incrementally improving, not improving a lot, but a little.

5:13And that was on the background of continuing strength in American demand and very decent European demand and strong Middle Eastern demand. So all in all, this was a better backdrop, and we've seen companies improving on that front. They've all been improving, I think, except maybe those who had already been doing very well, like Hermès, that has moved from 9 % to 10%. But they were never the problem, and they're not the problem now. So what do you think of this improvement? Do you think that this is a steady sort of build to a period of growth again overall, or do you think that this is more just a stabilization?

6:06I think that there were two factors that had been weighing heavy on luxury demand in the past two years. On the one hand, there was a period of overconsumption during the post-COVID years, between 21 and 23, especially in the West. People had spent a lot more. We all celebrated surviving the pandemic. And for a while, it was seen as appropriate to spend rather than die rich. I think we've been sobering up from that. And in the past two years, we've been probably going back to the trend line. The other factor is the Chinese and how they've been reacting to the collapse in their real estate market, which has caused quite a significant amount of consumer depression.

6:57And consumer confidence has been at a low for a long while. Whether that will continue to improve or not, I think, is the central question here. If we could see Chinese consumer confidence rebuild, albeit according to a U-shaped path, I think this would create a quite significantly better environment for 26. At the moment, I think we have contrasting signals. On the one hand, the stock market has been strong. The rich Chinese consumers have been more confident and more willing to spend money. But the bulk of the issues have yet to clear on the real estate front. We haven't seen a material sort of rebound in real estate prices.

7:55Transaction volumes have gone up. But I think that there was just an uptick for the moment in terms of real estate prices. So consumer confidence is still muted and we'll have to continue to watch that. If there was an improvement, then I think 26 could look better, and quite significantly so if indeed the Chinese started to spend some of the huge savings they've been accumulating. But at the moment, we're not expecting any V-shaped recovery. We're expecting rather sort of an incremental U-shaped recovery, which would already be better than what we've seen in the first half of this year. How worried are you about what's happening in the U.S.?

8:47We did a piece last week about this psychological recession. And I got a note from a friend who works adjacent to the industry. like I think like a 2000 word note being like I don't think this is I think everybody fundamentally changed and I you know here in LA there have been a lot of events around uh the high net worth customer in the in the last couple weeks and they seem they're still seeing growth everyone's still seeing a lot of growth in the US um if you have a decent product but what do you think about that Are you worried about where the U.S. economy is moving, or is it just too unpredictable given our political situation?

9:31I think that there's two or three things we need to keep on our radar screen. On the one hand, there's a buoyant consumer confidence that is supported by the stock market and the crypto market. If those were to change, there was talk about an artificial intelligence bubble. If there was an adjustment in the stock market, this would definitely create a more difficult discretionary spend environment. And this would create a more difficult luxury environment as well. the other thing we need to watch out for is inflation and how this could potentially be affecting the aspirational consumers we've seen an uptick in inflation to three percent recently if i'm not mistaken and cost of living would naturally go up with a weaker us dollar and And with import duties sort of pushing prices up, this would be difficult, I think, for the lower end of the consumer permit to keep spending as cost of living would necessarily go up.

10:50How serious an issue is yet to be ascertained, but I guess this is another thing that we'll have to watch out for in 26. And then I believe the US, of all places, I think that the same is happening in a lot of other regions, is experiencing what I would call the key factor. You have the rich getting richer and the poor getting poorer, which is, I think, also at the root cause of the most recent political and social developments we've seen. Certainly. Yes, indeed. Certainly. In the US and in Europe as well, the right is winning because I think that a lot of people in the working class have seen the left not doing much for them, and they're hoping that by voting an alternative, they will get better.

11:52Whether that is going to be the case or not is a very different debate. But I think that's more or less where we are at the moment. Yes, voting for Trump may not afford you a Louis Vuitton wallet. Who knows? This is not a political podcast. Definitely check out the powers that be daily, which is. Okay, so Luca, let's go through the different brands because I want to talk or the different companies, because 100 % all this is right? I think all the other thing it comes down to is there wasn't a lot of innovation. It went well, while people were spending like crazy, the brands sort of a lot of the brands kind of became complacent.

12:37Now there are all these new designers, new innovation. Let's start with LVMH. And first off, what did you think of Dior? Because we have not discussed it. Did you like it? did you think it would sell to Chinese people? Or and Americans? I think that Anderson picked up a lot. Jonathan Anderson, not that anyone listening to this doesn't know that, but that's who you're referring to. Exactly. It picked up a lot of praise. I appreciated the commerciality, and I think that the footwear products and the leather goods in general looked very commercial, very desirable. I don't know that when we discussed recently the feedback on the two fashion weeks in Paris and in Milan that the duo would necessarily be at the very top of the list.

13:39I think that Chanel was, for sure, with Blasie meeting an unprecedented level of praise. But Dior, I thought, was... I loved it. Did you love it, Luca? Indeed, indeed. Everyone loved it, absolutely. But I think that Dior was towards the top end of the ranking. So my impression is that LVM8 is doing a lot of things to improve its predicament. I believe that in a market like the one we had with fewer new consumers coming into luxury, Vudan was confronting a very difficult market because it's the newly rich people that would typically flock to mega brands. And I think that management has been capable of going out to recruit with the NBA, with Formula One, with the Olympic Games sponsorships, has also been able to possibly increase the profile and differentiation.

14:47It's not just a matter of differentiation, creativity in product, but also in terms of events. For a while, we had the impression that Vuitton was very much committed to more of the same except bigger. But with the Lewis, they surprised everyone. And that includes the Chinese who reacted very well to this new story in the shape of a ship that has been attracting a lot of buzz. And I think that Vuitton was also very clever in coming up with limited editions to appeal to consumers who already have a Vuitton product in their wardrobes, but don't have the Takashi Murakami or don't have the Coddington that they just launched.

15:32So all in all, I think LVMH is in an interesting position because if we look at the stock market reaction, my impression is that investors have prioritized idiosyncratic self-help stories. We've seen Caring react very positively. We've seen Burberry over the past few months also do very well. we've seen plain vanilla quality names lag like Hermès like Cuccinelli for example and LVMH at this stage is somewhere in between, it hasn't done badly recently and I think because it is sort of somewhere between a film story and a plain vanilla play. So there's quite a bit to like when it comes to things that they've been doing in order to improve their situation.

16:38Well, what do you think about the French obsession with Arnaud and engagement and relationship with the French people and how that's come up in the press recently? I'm sure you've seen all this news about this potential billionaire tax, which will like not really make a difference in the country, and yet at the same time not cost him that much, but he's freaking out about it. Do you think any of that plays into the way the market reacts to LVMH? Because it does make him seem larger than life in some ways, and the company is obviously much larger than any of the other players in this space. I think that when investors consider LVMH, one of the concerns they have in the back of their minds is succession and how this is going to be organized.

17:34clearly Bernard being the sort of prominent entrepreneur that he is he is a bit like Jeff Bezos or Elon Musk he's the European equivalent to those American high profile entrepreneurs he's sort of looked up by many and so I think that that is not too much of a as far as investors are looking at LVMAT. I think that the more important concern is as many of these luxury goods companies are coming to a succession, we will have to see how this succession plays out and whether it is successful. we've seen Kering and Richemont take steps in this I think that Richemont has moved for the first time to a senior management organization where they have a highly credible, highly capable CEO, Nicolas Bass this is a setup that could well sort of bring Richemont forward 10 or or 15 years for that matter, if at one point Johan Rupert wanted to retire.

19:06I believe that the appointment of Luca De Meo has been equally constructive. I think the market has reacted very well, but Luca has done extremely well with all of these initiatives aimed at shoring up the balance sheet, at streamlining the senior management organization. I think LVMH has gone through quite a significant amount of transition because there's been a few high-profile executives who had reached retirement age and had to move on or wanted to move on. Well, many of them were to move on and have suddenly been reabsorbed into the organization, which look like you know who you know and you feel comfortable who you're comfortable with.

20:02But it's an interesting element of this, of these people who retire and then suddenly they're in the second most important role in the business again. Because I presume they're so good that, you know, you were really missing them. So, yes, I think that as far as this side of the equation is considered, LVMH is possibly still a bit more in flux and not yet in a sort of succession mode. they're still going through this succession transition. And I presume that this is going to last a while more. I agree. I don't think we're going to have any answers on that front for maybe not even a decade. I do think it's interesting the Michael Burke insertion into the U.S.

21:00market and kind of managing that market because he is making big changes there. And it is such an important market. And as many of you know, Michael Burke was the CEO of Louis Vuitton and before that Fendi. And then he ran the LVMH fashion group for a while and then sort of disappeared into the ether and reemerged in the U.S. where, you know, he's half American. So it'll be interesting to see what big changes he makes there. He just started, I think, about a month ago, really interviewing people and seeing what's happening.

22:02One person who has sort of emerged as a new and we can, this is another LVMH question I have. So as the CFO Jean-Jacques, is that the guy's name that's now the co-CEO of the fragrance group? Yeah. I mean, not the fragrance group, the alcohol, wine and spirits. Yes, Jean-Jacques. Sure, Jean-Jacques Yerny, yes. Yes, he moved into, he's the co-CEO of wine and spirits. he's managing that business Luca I don't think they're ever going to spin that business off I'm sorry I know you want them to but I don't I've been told that that's never happening okay fair enough I told them that it's a good idea the people that I talked to there the point being that he was moved into that co-CEO role that to me was like a step towards retirement he'll do this and then he may retire they they moved up this person named cecile cecile cabanis who is now the cfo and i have to say i really enjoy her on the earnings calls i think she does a good job she's very clear and she is engaging and i have enjoyed listening to her explain away their problems and also their situations they don't want to talk about she's very good at it.

23:31But I'm curious on that front. She's been asked many times on the earnings calls about these M &A stuff. Like, are they going to buy Armani? Are they going to get rid of things? I had a report last week, which I assume they're going to announce in the coming week. I don't know if it's actually like the it has actually closed, but it's a done deal that Marc Jacobs is going to be acquired by this brand management group, ABG. I'm curious on your end, let's talk Armani, let's talk just what is in their portfolio. What would you suggest that they do other than spin off the wine and alcohol division?

24:13I think that they are probably in cleanup mode and the potential divestiture of Mike Jacobs, which has been reported by media make sense. I think that more divestitures could also make sense. Businesses that have produced significant losses without having so much of a promise. I'm thinking DFS as well, which had also been reported by media. I don't think that when it comes to acquisitions, they will likely be very active, especially on the fashion and the good side. You mentioned Armani. In my view, the most likely bidders for the brand would be the companies engaged with the brand today, who have a big license, L 'Oreal and Essilo Luxottica, who have respectively the beauty and eyewear license.

25:19consider that L 'Oréal has the Armani license up to 2050. So another 25 years of business with the brand. It's clear that their interest and the interest of the owners of the brand are aligned. We could see something similar to what Estée Lauder has done with Tom Ford. They bought the brand and then licensed out the portions of the business they're not specialized in, Tudzenia in particular when it comes to Tom Ford for 30 years. I wonder if this could potentially be an option with a licensee for the apparel and leather goods business that could be, I don't know, one of the American companies that know how to run a business like that, like Ralph Lauren or Tapestry or even Caring.

26:20I think Caring has just entered a major deal with L 'Oréal with 50-year licenses for beauty, for Gucci, and the other brands in their portfolio. They have worked for decades very effectively with L 'Oréal on Saint Laurent. so I think that this overall scenario that I described not just the engagement occurring but the overall scenario where L 'Oréal and Estée L 'Oxantique are the prime movers on the Armani is a far more likely scenario than a scenario where you have LVMH on the front foot I don't think the Armani business dovetails with what LVMH is specialized in doing, high-end, direct retail, full price.

27:21Armani, you could argue, is a lot more similar to Ralph Lauren with a significant exposure to the aspirational middle-class consumers with a significant exposure to wholesale, to some extent factory outlets. So I think that there's big differences there that are very difficult to bridge. Totally. I 100 % agree. And the conversations I've had within the LVMH universe is like, look, yeah, we hired, I mean, they don't, there was a report that they hired a bank. They hired Rothschild to look into it. They have a 70 person M &A team. They're going to look into every deal. This was obviously they had a relationship with Mr.

28:07Armani. They're not going to not evaluate it, but I think it was really overblown. And from what I know from very top tier situations over there is that look like most people don't think this is a good idea and it probably isn't going to happen, but we have to do our jobs and look into it. I think I also talked to someone this week who is in the Armani diaspora and they were like, look, in the late years, Armani's, and I mean, I didn't talk to Mr. Armani about this, so I don't know, but he thought it would be L 'Oreal probably because it just is the natural thing. I think Essilor, Luxottica, that you make a really good point.

28:52And they have also, you know, they acquired Supreme. They've gotten a little more into fashion. I think the caring bit, and let's talk about caring next, is an interesting idea because you're right that this is not, people think this is like a high end, and yes, they have couture and they have a high end line, but this is mostly Armani Exchange that's sold at like licensed companies in random places, not even owned stores. So I wrote a couple days ago, if I were Alvy & Machen, I was going to buy a brand like this. I buy Ralph Lauren. Like, it's just so well managed. Armani is going to have to be like completely overhauled.

29:34And I was talking to another executive this weekend about Armani and they said, look, like it would be so easy to clean that up. And there's probably so many layers that you could just go in and cut costs very quickly. But like the operating margin is is not big. And so that's the question for me on caring is like, I understand why it would be interesting to them. But given the way they're operating right now, which seems to be like, let's get rid of anything that's not going to be super profitable fast. I wonder if that is a possibility. And so that goes into caring. And I am just curious, like, as you said, the market has reacted extremely favorably to Luca DeMeo, who has been really public in the press.

30:26Someone sent me, he's like doing TV in Italy. He's been really open. Like he talked to all of us at the shows. He was, he's very kind of relaxed and comfortable with being public facing. And he's also made several decisions already. He put Francesca Bellatini in the Gucci role or they did as a board. He did this strategic deal to sell off the beauty unit, which they just started building out. What do you think of his performance so far? And what do you think he's going to do in the next year? I think Luca has been brilliant. I'm postponing the deal with Dicataris on Valentino. Then this U-turn on beauty, which is very appropriate on both cash generation viewpoint short-term and business development long-term.

31:27I think that developing a beauty in-house was overambitious. I also think that it did very well to eliminate the role of co-CEO brand coordinator because that was creating a number of potential confusions on who was in charge and who was calling the shots. Bellettini at the helm of Gucci is also a step forward relative to the situation before. So I think that Luca has been hitting the ground running. Now, in a way, the difficult part comes, which is reigniting consumer interest for the brands, which will have to be carried out in conjunction with the brand CEOs and with the creative directors and chief merchandising officers.

32:27So a very fast-paced beginning. And now I think, you know, in the absence of any other major development, this phase is going to take a little bit more time than the stock market seems to expect. I also agree, by the way, that given the amount of fish to fry that Kering has at the moment, Gucci has to be reconited, Saint Laurent has to be reconited, Balenciaga has to be reconited, down the road Valentino will need to be reconited as well. being involved with Omani would be a very low probability scenario relative to an American company, in fact, being at the forefront of that. In my view, if there was a long-term license to be assigned, this would be a more likely scenario and probably a more likely partner for the likes of L 'Oreal.

33:40Got it. So on carrying one other thing, and I did a little item on this for Monday. A lot of people on Friday, there was a report about McQueen in Women's Wear Daily having a strategic review and they're going to cut 20 % of the staff in London, blah, blah, blah. McQueen came up on the earnings call in July and the then co-CEO, co-deputy CEO who is now, I think the COO, Jean-Marc Duplex, is that how you say it? Jean-Marc Duplex. Duplex. he said that you know we're not selling anything because someone said are you going to sell McQueen and he said we're not selling anything but obviously that was pre-Luca and a lot of people have reached out to me and said they're doing this strategic business review of this company are they going to sell it and look like I think that there are a lot of potential buyers for McQueen It's a good brand that seems relatively able to scale.

34:51There's some like brand codes, the skull, all that stuff that could be scaled. And you could do like I could see. I mean, I know Richemont is not acquisitive, but like Richemont has had success in recent years with brands of that sort of range with Chloe and Alaya in particular. or an OTB, which is very acquisitive and is trying to buy more brands that sell clothing and accessories and aren't just selling really high-end handbags, that sort of thing. So I'm just curious, do you think you could see them, especially because it seems like they do want to move forward with Valentino, that they would sell off McQueen and focus on the three main ones and then start to build back up as the years go on.

35:43They also obviously own the Brioni, the suiting brand. They own Boucheron, which is doing really, really well. They do have other businesses, but it's just an interesting couple people reached out to me about it on Friday in particular, and then I remembered that Duplex mentioned it in the earnings call, or someone asked him about it in the earnings call back in July. I think that they have, in fashion and leather goods, they have four core brands, Gucci, Saint Laurent, Bottica Veneta, and Balenciaga. Those, I believe, are at the core of what carrying is. Brioni and Alexander McQueen, I think, could be up for debate.