By Mimosa Spencer
PARIS (Reuters) -A record-breaking run in the shares of French luxury goods group LVMH halted briefly on Friday after the company's fourth quarter sales update prompted some disappointment over the impact of China disruption on its margins.
The company, which owns dozens of high-end labels including fashion houses Louis Vuitton and Dior, late on Thursday reported that its sales rose 9% in the fourth quarter as shoppers in Europe and the United States splurged over the holiday season, helping partly to offset COVID-19 disruptions in China.
But some analysts focused on the margins, taking some of the shine off the fourth-quarter sales boost.
"The slight wrinkle is on the margin, where the group delivered a flat operating margin year-on-year (versus consensus of +90 bps) – largely a reflection of maintaining/raising H2 marketing spend despite disrupted revenue growth," Credit Suisse analysts wrote in a note.
The shares fell initially on Friday but were up about 0.6% by 0956 GMT.
LVMH chief financial officer Jean Jacques Guiony said on Thursday the company had decided to maintain marketing investments in the second half at a level of 30% higher than the previous year despite lower revenue growth, but had not expected such a sharp decline in business in China in December.
High profile marketing events included Dior's takeover of London department store Harrods over the holidays as well as a fashion show in Egypt, with the pyramids serving as a backdrop.
Guiony also said that LVMH's strategy of curbing parallel channels for its perfumes and cosmetics division was "a costly decision" that drove down profitability, but that it was "the right decision" and would protect the appeal of its labels.
Parallel channels are where retailers sell branded products at a discount.
Guiony said that over the past two years, rivals had been shipping large quantities of perfumes and cosmetics to China where they were being sold at a discount.
"We think that, to preserve capital, this is not a good idea -- so we don't do this," he said.
The division's profit from recurring operations came to 660 million euros ($718.61 million) for the year, a fall of 3%.
Rogerio Fujimori, analyst with Stifel, said the reasons for the margin miss were "net positive" for the coming year, as the step-up in marketing spending should translate into stronger top line growth while the sales shortfall in China should be recovered.
The luxury industry took a hit in China at the end of the year due to lockdowns, followed by a surge in infections when they were lifted. Now, the luxury industry is expected to be one of the biggest winners from the loosening of restrictions that kept shoppers out of stores in China for months.
($1 = 0.9184 euros)