LVMH Moet Hennessy Louis Vuitton SE

PAR:MC

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the LVMH 2020 Third Quarter Revenue Conference Call.I will now hand over to Mr. Chris Hollis. Sir, please go ahead.

[Chris Hollis, Director of Financial Communications]

Hello. I am Chris Hollis, Director of Financial Communications at LVMH. And with me is Jean-Jacques Guiony, our Chief Financial Officer. Thank you for joining us, and we hope that you and your loved ones have been healthy and well.We have some remarks to make about LVMH's revenue for the third quarter and first 9 months of 2020. As in previous periods, these revenue figures are reported in accordance with International Financial Reporting Standards. After these remarks, Jean-Jacques and I will be happy to take your questions.As a reminder, certain information to be discussed on today's call is forward-looking and is subject to important risks and uncertainties that could cause actual results to differ materially. For these, I refer you to the safe harbor statement included in our press release and on Slide 2 of our presentation.Turning now to our announcement today. Hopefully, you've all had the chance to read our release, which was issued a short while ago, both in French and English. As always, the release is available on LVMH's website, www.lvmh.com, as are the slides that we are using to guide today's call.Looking at the first 9 months of this most unusual and challenging year, we are pleased to report that LVMH has shown good resilience, especially the major brands. This was most evident in Q3 across each of the business groups, with better performance across the board and a return to growth in both Cognac and the Fashion & Leather Goods group. Also of importance, the third quarter brought improvements in trends in all regions with Asia as a standout, recording double-digit organic growth as activities resumed there.Throughout the 9 months, across our Maisons, we saw solid growth of online sales, a true credit to our digital teams. This partially offset the impact of several months of store closures around the world. Finally, our performance in the 9 months does reflect the suspension of almost all international travel, which has deeply impacted the entire travel retail and hotel sectors.Turning now to Slide 4, the revenue figures by quarter, year-to-date. You can see the encouraging progression. In the third quarter, revenue was nearly EUR 12 billion, down 10%, or 7% on an organic basis, compared to being down 38% in the second quarter. For the 9-month period, revenue was EUR 30.3 billion, down 21%.Looking at the 9-month period now, our revenue mix, this is Slide 5, in euros is relatively balanced across geographies. You can see reflected here the strength of the recovery in Asia. Compared to last year's 9-month period, Asia gained 3 points to 34%, reflecting the strength in this area. The U.S. gained 1% to 24% despite the relative strength of the euro against the dollar and while Europe lost 4 points to 23%, reflecting the suspension of intercontinental travel. Japan and other markets remained stable, contributing 7% and 12% of revenue, respectively.In the chart on Slide 6, you'll note the 13% increase in organic revenue in Asia in the third quarter, making this the strongest performing region year-to-date, with revenue down just 12% compared to the 9-month period last year. But in all regions, there has been a marked improvement in Q3 compared to the first half. The U.S. saw organic revenue down only 4%. Japan, after a tough comparison base following last year's rise in VAT, was down 17%. Finally, Europe suffering from the continued suspension of intercontinental travel was down 24% compared to the 33% in the first half.Now turning to revenue change by business group, this is Slide 7. We have seen the most resilience in the Fashion & Leather Goods and Wines & Spirits business groups. As I mentioned earlier, Fashion & Leather Goods saw a return to growth, with 12% organic revenue growth in the third quarter. This is a strong turnaround from the first half. In the first 9 months of this year, the revenue is down 11% for this group.In Wines & Spirits, strong performance in Cognac led to this business group reporting just a 3% decline in revenue in the quarter, a strong rebound from the decline of 23% in the first half. In the first 9 months, revenue in this business was down 15%.Perfumes & Cosmetics and Watches & Jewelry saw revenue down in the teens in the third quarter. This was a good rebound for Watches & Jewelry in particular as the group has been down sharply in the first half. In the 9 months, it is down 30%, while Perfumes & Cosmetics is down 25% for the period, 9-month period.Finally, given the sharp and lasting decline in international travel, revenue in Selective Retailing has stayed fairly consistently down with a decline of 31% in the first 9 months, reflecting primarily the impact on DFS.Turning now to revenue by business group. We'll start with Wines & Spirits. You have the 9-month variations on the chart on Slide 8, so I'll comment on the third quarter variations for this group. Organic revenue for the third quarter was down 3% compared to the same period last year. In addition, there was a 4% negative currency impact and a 1% positive structural impact relating to the acquisitions of Château d'Esclans and Château du Galoupet, leading to reported revenue of EUR 1.36 billion for the third quarter.By category, once again in the third quarter, champagne and wines organic revenue was down 7%. And together with the 3% positive structural impact relating to the rosé wines and a 4% negative currency impact, reported revenue saw a decline, 8% decline compared to last year's third quarter. For Cognac & Spirits in the third quarter, organic revenue grew by 1%, while after a negative 4% currency impact reported a 3% decline compared to the same period last year.This is now Slide 9. For first 9 months, we saw champagne volumes decrease 23%. In the first half, consumption was down largely due to the pandemic's impact on restaurants and night clubs, but we've seen a gradual recovery since June. This is particularly true in Europe. The U.S. and Japan continue to be challenging markets.In terms of products, our commitment to innovation remains in full force. Some highlights, at Ruinart, they launched a new 100% recyclable packaging and Veuve Clicquot collaborated with Yayoi Kusama on a limited edition bottle design for the new vintage La Grande Dame 2012. Lastly, with respect to champagnes and wines, we've integrated our 2 exceptional rosé acquisitions, Château d'Esclans and Château du Galoupet.And finally, on wines, totally different, our thoughts are with the people of California who have suffered from the devastating fires there, including our own friends and colleagues.For Cognac & Spirits, Hennessy volumes were down 5% in the 9-month period, with the previously discussed return to growth in the third quarter driven by the VS qualities and helped by the U.S. stimulus that supported consumer spending in that region. Recovery in China in this business group continues with sales to on-trade venues like restaurants and night clubs progressively returning to normal levels. And we are proud to share that we have introduced a new high-end rum, Eminente.Looking now at Fashion & Leather Goods, Slide 10. In the third quarter, again, organic revenue grew 12% and included a negative 3% currency impact. This business group reported revenue reached EUR 5.9 billion or 9% compared to the third quarter, a very strong turnaround from earlier in the year. In the 9 months, revenue was EUR 13.9 billion, down 12% year-over-year or 11% on an organic basis.As I said earlier, our major brands have shown good resilience in spite of closures of stores and production sites around the world. And the business group recorded double-digit organic revenue growth in Q3. Starting with Louis Vuitton, once again the combination of heritage and innovation has driven strong revenue growth. The Maison has continued to introduce reinterpretations of its iconic lines as well as new lines, such as the jacquard pattern since 1854, celebrating the birth of the brand. That line is off to a running start. There has also been a strong reception to the interpretation of Capucine bags by 6 contemporary artists, including Beatriz Milhazes, Zhao and Henry Taylor, among others, continuing Louis Vuitton's long history of successful collaborations with the art community.Additionally, Louis Vuitton remains deeply committed to its sustainability initiatives. And over the course of 2020 has strengthened its customer relationships through new digital capabilities. Finally, it opened its new workshop in Vendôme in France.Christian Dior Couture has seen market share gains in all regions after the success of the first post-lockdown runway show, a sneaker collaboration, and the opening of the flagship store on rue Saint-Honoré. Exceptional new products were launched using the Maison's heritage and foundation such as the Dior Bobby bag and the knitted Bar jacket.In other Dior news, the wonderful Christian Dior, Designer of Dreams exhibition was a great success in both Paris and London. It's now headed to Shanghai. And Dior is also supporting UNESCO's Global Education Coalition focused on mitigating the impact of the pandemic on education for young people.Moving along, we have had some designer news in recent months, including Kim Jones, who adds Fendi's women's business to his current responsibilities at Dior, and Matthew Williams who has joined Givenchy. Both of these moves have been well received by the fashion community.Loewe's most original Show-on-the-Wall by J.W. Anderson was very well received. And other brands too saw a significant improvement in Q3, notably Fendi, Loewe and Celine.On to our Perfumes & Cosmetics business group, organic revenue was down 16% in the third quarter, and after taking into account a 3% negative currency impact, reached a reported EUR 1.37 billion. For the 9-month period, revenue was EUR 3.7 billion, down 25% from the same period last year.Looking at the highlights of this business group, on an overarching basis, we are pleased with the resilience of the brands despite the pressure on the makeup sector and decline of international travel, which was only partially compensated by the skin care momentum. Once again, our team's innovation can claim the credit. Parfums Christian Dior launched J'adore Eau de Parfum Infinissime, an extension of the world-leading fragrance. There was also ongoing development of Capture Totale and relaunch of the Prestige Huile de Rose serum.Miss Dior and Sauvage continue to be strong performers in Q3. And across the brand, we saw solid online revenue growth. At Guerlain, our skin care products continue to perform well, and this brand too saw good success online.Other launches in the period include Parfums Givenchy's rollout of Irresistible Givenchy and the Le Rouge Deep Velvet lipstick. Also on the lipstick front, Make Up For Ever launched an ultra-precise product called Rouge Artist. And Maison Francis Kurkdjian launched l'Homme À la rose for men. And last but not least, Fenty released its highly anticipated skin care brand, Fenty Skin, and it's off to a most encouraging start.Turning to our Watches & Jewelry business on Slide 14. In the third quarter, organic revenue was down 14% compared to the same period last year, and including a 2% negative currency impact, reached EUR 974 million. For the 9-month period, revenue was EUR 2.3 billion, a 31% decrease from the year ago period.Looking at the business in detail, its performance in the third quarter reflects a good rebound in China, while not compensating for the declines elsewhere. To give more insight by brand, at Bvlgari, the rollout of the high jewelry line Barocko is going well. And there has been good performance of core jewelry, in particular the B.Zero1 and Divas' Dream collections. TAG Heuer celebrated its 160th anniversary with the launch of limited editions, including in its iconic Carrera line. And the success of the third generation of the connected watch reflects the ongoing appeal of this innovative product.Hublot's Big Bang remains a big draw, and the brand has now introduced the sought after Big Bang E connected watch. Chaumet introduced a new fine jewelry collection, Perspectives. And finally, at Fred, the new capsule collection of Chance Infinie is going very well.Now looking at the Selective Retailing group, organic revenue in the third quarter was down 29% after a 4% negative currency impact and reached EUR 2.3 billion. In the 9-month period, organic revenue was down 31% and included a 1% negative currency impact, reached EUR 7.2 billion, down 32% from the year ago period.To break the performance down, Sephora, despite the impact of the pandemic, has shown good resilience in terms of revenue and gained market share in key countries. This was fueled in good measure during the period of store closures and since by strong growth in online sales. Sephora has also opened new stores in selected locations, both in the U.S. and in China. And maintaining its reputation for bringing newness to the market, Sephora exclusively launched Rare Beauty from the highly talented and revered singer and actress, Selena Gomez.On the other hand, as we've discussed, travel retail has been severely impacted by the pandemic, and this is evident in revenue performance at DFS, store closures across all of its global stores and locations and have now begun the gradual opening of its stores in Venice, Macau and Hong Kong.And lastly, before I close our remarks, Le Bon Marché has enabled its clients to discover Belgium without leaving the Left Bank of Paris.And now before we open the line to your questions, let me say that despite the unprecedented global crisis, our brands have shown good resilience since the beginning of the year. We believe this reflects consumer focus worldwide on seeking quality and enduring value in their purchases. And of course, quality is a hallmark of our brand, along with our dedication to creativity and innovation. We are pleased with the recovery we've seen in the third quarter with all of our business groups, seeing improving trends versus earlier this year and across all regions. This is a credit to the strong creativity, commitment and agility of our teams.We are, of course, keeping a very close eye on all business trends, but these are uncertain times. The preservation of our brand value by maintaining marketing and communication investments will be key, while we will continue to be highly selective in our investments, notably with our store network expansion as well as our spending across the board. At the same time, our commitment to innovation continues as we focus our overall objective by reinforcing our leadership position in the global luxury goods market.Thank you. And now we'll take any questions you might have. Gregoire, could you please open the line?

[Operator]

[Operator Instructions] We have a first question from Zuzanna Pusz from UBS.

[Zuzanna Pusz, Head of European Luxury Equity Research]

I have 3. First of all on Fashion & Leather Goods, was a really amazing performance. So can you maybe tell us what was the percentage of stores closed, if any, still this quarter and discuss growth by nationality. Specifically, I will be interested to know maybe what was the fastest-growing nationality this quarter, if the Chinese consumer turned positive. And I presume the U.S. consumer was also strong, so if that's in your view sustainable heading into Q4?Second question is on Watches & Jewelry. So that came a bit weaker, and I think especially compared to Fashion & Leather Goods and the comments earlier today from Tiffany. So is there any chance you could maybe comment on performance of jewelry versus watches, how did Bvlgari did given that it's most comparable to Tiffany? That would be very helpful.And the third question is on profits. So how should we think of leverage at group level given the strong recovery in the most profitable Fashion & Leather Goods division? And is it likely that actually in H2, profits will recover much faster? I think in H1 the deleverage on sales was around 2.5x. So it would be just interesting to know how are you thinking about costs in H2.

[Jean-Jacques Guiony]

Thank you, Zuzanna. So your first question -- questions actually on Fashion & Leather, the stores closed, I don't have an exact number in mind, but it's negligible. I mean it had no -- hardly any impact on the business for the division in the third quarter of the year.Second question is by nationality. We've seen the Chinese. I confirm that we've seen the Chinese turning positive in Q3 at Vuitton. The North American customers, and particularly the U.S. ones, did extremely well in Q3. The highest percentages were reached with European customers. Doesn't mean that the numbers are sufficient to offset the disappearance of tourists in Europe. But nevertheless, we are pleased to report that our German, French, British and Italian customers, particularly at Vuitton and Dior, did very well in their home countries during the third quarter. So all in all, that's the picture.Japanese customer base was slightly negative. But as you obviously remember, we had last year in Q3 the VAT impact, which added up to the Japanese performance about 10%. So we are against this backdrop of very strong sales last year in Q3. So that's probably a way to look at the numbers slightly in a different way. So that's it for Fashion & Leather.On Watches & Jewelry, the comment I would make is that this division, particularly for jewelry, had a pretty important emphasis on Asia. As you know, Asia means business in Asia and tourism flows into Europe. You know what happened to tourism flows in Europe. And although the Asian business is doing pretty well, and we are very happy with the performance of our brands, particularly Bvlgari in the eastern part of the world, we lost a big chunk of the tourism business. And unlike what I described with Fashion & Leather and Vuitton in particular, we don't have the boost of a local client base, which are less developed in jewelry than they are at Vuitton or Dior, which in this respect sounds as a much more balanced business. So the reason why Watches & Jewelry is lagging behind, I would say, Fashion & Leather in terms of recovery in Q3 is mostly it's geographic exposure and the big impact of Asia for them.Within Watches & Jewelry, the performance of both was quite similar within jewelry. I mean particularly at Bvlgari, jewelry did much better than watches. So this is not exactly homogeneous. So this means that TAG Heuer did better than Bvlgari's watches. We also had the wholesale business being a little bit under pressure, be it accessories or perfumes at Bvlgari. But all in all, it's a similar performance.And finally on profit, well, I'm not so sure you really expect me to answer that. There will be very many factors at play within operating leverage. Obviously, the business having the highest margins are the one having also the best recovery in Q3. So it's a factor of optimism. At the same time, we have currencies that are not necessarily going in the right direction. So all in all, I mean it's a bit early to say what we will end up with. So we're working on this, obviously, almost as we speak.And I don't have the result of our budget revision. And to be frank, even if I had it, I wouldn't give it to you. But that's a little bit where we are.

[Operator]

Next question from Edouard Aubin from Morgan Stanley.

[Edouard Aubin, Head of Luxury Goods]

So 3 questions for me as well. So just to follow up on Fashion & Leather Goods, Jean-Jacques, is it fair to say that the outperformance of your 2 biggest brands versus your smaller brands in the division was as significant as what you've experienced in the first half? So that would be my first question.Secondly, just to come back on nationality, so you just mentioned that the Chinese national turned positive worldwide in Q3. I guess if I kind of triangulate your comment, I get to low single digits, something like that, growth potentially in Q3. So could we envisage a scenario whereby the growth rate of the Chinese going forward would gradually go back to the kind of 15% or so that they posted in the past few years as reshoring continues to materialize?And lastly on Sephora, I think you gained relatively significant market share in the U.S. in Q2. If you could comment on your relative market share performance in Q3, which I guess maybe was a little bit less significant. And related to that, you have a new CEO at Sephora, Martin Brok, who joined from Starbucks a few weeks ago. And what should we expect in terms of the change, potential change in strategy there?

[Jean-Jacques Guiony]

Thank you, Edouard. Well, I don't think I ever commented on any outperformance of Vuitton and Dior compared to the others. So I basically said in Q2 that as always, Vuitton was not very far from the division's number, that Dior was above, and that the others were, as a consequence, a bit below. It's exactly the same hierarchy this time around for Q3.So there are differences. Some businesses, particularly Celine, Loewe and Fendi, had a big improvement in Q3, so we are very pleased. Not all of them did as well, but all in all, I mean, we see a gradual improvement in all our businesses. And that's I think quite encouraging, but the speed at which this happens obviously differs from one brand to another.Well, your question on the Chinese, I mean my crystal ball is broken, so I don't know. I mean we have -- it remains a complex situation despite the great strength of the demand coming from Mainland China. You know that in the past, a big chunk of it was taking place outside China and that most of these markets are not accessible to Chinese travelers because there is no such thing as a Chinese traveler for the time being.So from a demand viewpoint, we have no particular worry, and we are very pleased with the response from Mainlanders following the end of the lockdown. From another viewpoint, it's a little bit different as our clients, they are not allowed to shop where they would want to shop or as they used to shop.So all in all, we are doing reasonably well, but that doesn't enable me to answer to your question in a precise way because I really don't know. We hope that we shall be able in due course to extract as much value as we can from the Chinese customers by enabling them to shop where they want to shop. But for the time being, there are serious constraints as to their ability to shop outside China, and this is obviously a weight on the growth for coming quarters as we all know.With regards to Sephora, I don't have very precise numbers. It's a bit early for Q3 market share, but I think they improved. Maybe not as much as in Q2, but they improved. The end of August is a fairly promotional period, which is always complicated to manage. Q4 will be exactly the same.So I think it's not really worth commenting market shares on a sort of monthly or quarterly basis. It's really at the end of the year when we can see whether we have increased or not market share. The first part of the year was reasonably good, although the market is down and we are down as well.And so that gaining market share in a market which is shrinking is not ideal. I'd rather be losing market share in a growing market than gaining it in a shrinking market. Hopefully, this will not last forever, and we'll regain traction in this market. But the focus on market share is, in my view, not necessarily the main topic as we speak.Yes. Martin Brok, sorry, doesn't announce any change in strategy, but I'm sure that Martin will review inside out the house. But as far as strategy is concerned, we think the balance from a geographic viewpoint and the great achievement, which is the fact that our online business has been able to really be the offsetting factor of the drop in traffic and these key pillars, the 2 pillars of Sephora strategy, really this geographic exposure and the online, obviously, Martin is there to continue and to reinforce these assets.

[Operator]

Next question from Luca Solca from Bernstein.

[Luca Giuseppe Solca, Research Analyst]

I have a question on how you think about European consumer confidence. You said that domestic European demand has been supportive during the summer. We are facing significant COVID-19 resurgence in a number of countries, including France and Italy. I wonder how you think about that and if that is the reason for great concern versus the demand resurgence that we have seen.Second question on your online performance and strategy, a number of brands, 6 according to Farfetch, have partnered with Farfetch. I wonder where your ambition to build a multi-brand platform with 24S stands and what you think about the possible cooperation with Internet giants like Facebook, for example, and Amazon, moving into dedicated multi-brand luxury platforms. Is that a similar move to what you see in China where you've been working with, for example, with Luxury Pavilion?And lastly, there was a specific point, I think, you mentioned about the cosmetics and color market that was moving in an adverse direction for Sephora. I'm curious and keen to understand how Sephora is progressing in its ambition to become relevant or more relevant in hair and skin care.

[Jean-Jacques Guiony]

Okay. Thank you, Luca. Your question on European consumers is a bit complex, but I would basically say that as always in luxury, luxury consumption is not a proxy for the general economy. So we might have some doubts or some fear that with second wave and all these things, economy might be a little bit under pressure in the months to come, which I'm not in a position to comment obviously. Doesn't necessarily mean that this would impact in the same way luxury consumption.And within luxury, you have different luxuries. I mean we know that hard luxury and soft luxury differ in some ways. Cosmetics and handbags are not at all the same thing, et cetera, et cetera.So it's really, really difficult. And we try not to focus too much on customers as a whole, but rather on customers within brands, if you see what I mean. I think Dior and Vuitton, for instance, has a very good idea of what their customers or who their customers are and what type of growth they may expect. And this is why I mentioned the numbers with European in Q3, which by the way were also positive in Q1 and Q2, surprisingly enough. So this definitely means that this business is not a proxy for the global economy.With regards to Sephora, I mean Sephora by definition has looked at, they don't have much travel flows, and they have looked at their own customers where they operate. So they know. Sephora in France knows inside out the French customers. And the same happens in the U.S. with Sephora in the U.S. So that's the way we look at them. And we have different customers in different brands. So it's extremely difficult to make generalization and to comment on that for the months to come, apart from saying that, and I repeat, that luxury consumption is not proxy for global consumption.As far as online is concerned, our 24S platform did quite well, I'm happy to say, in the recent months. I will not elaborate and I will not go into details for competitive reasons. But we have tested different ways to deal with our customers, and the reaction has proven quite positive. We wouldn't call this full and lasting success yet, but it's encouraging. So we'll see what happens, but it's really something that we want to pursue.Cooperation with Facebook and Amazon, that's always a big question whether we need to partner with distribution behemoths to distribute our products. We don't think it is necessary. I mean Vuitton has a 400-plus store network plus a very powerful e-commerce tool in basically all countries. What's the need to team up with other partners?In some segments, some partners like Tmall for instance in China are extremely important. And not being with them, and I'm talking about mostly cosmetics, is really not getting access to a large chunk of the potential customer base. But it's not the general case for luxury. This is the exception more than the norm.So maybe we'll have a different reasoning in 5 years' or 10 years' time. But for the time being, we don't see the need to team up with anybody when it comes to distribution. We feel we are doing pretty well ourselves.Finally, your question on cosmetics, on skin care at Sephora. To be frank, the current situation all over the world, but particularly in Europe and in the U.S., is not a fantastic launchpad for product initiatives. So although the vision and the ambition to develop in skin care is intact, and although we are doing pretty well in skin care particularly at Sephora in the U.S., it remains reasonably small business compared to color, and therefore not fully able to offset the drop in color that we have witnessed so far this year. So it's encouraging. The strategy is still there. But in terms of numbers, obviously, it's a little bit complicated to really get the full benefit of what we expect in the medium term.

[Operator]

Next question from Antoine Belge from HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

It's Antoine at HSBC, 3 questions. First off, to follow up on your comments about different ways of servicing consumer, can you elaborate a little bit on that? Because it seems that traffic of course seem to be still down significantly. So maybe a few comments about online, but also those new ways of reaching out consumers? And my second question relates to the again the strength of the sort of western clientele. Is it possible for you to quantify the increase in local clients in Europe and U.S.? I mean from some calculation, it would seem that both would be above 20%. Would that make sense? And specifically on the U.S., what's driving the strengths of the U.S. consumer? And finally on cognac, could you comment on the dynamics in China and the U.S. of the -- and demand versus more the selling, and where -- how you're seeing inventories and maybe some issues in terms of supply?

[Jean-Jacques Guiony]

Thank you, Antoine, for your 3 questions. The first one on the ways -- the different ways to serve customers, I think what this complicated period has shown us is that there is a validity in the vertical e-commerce system for all the brands, let's say. I mean we've been progressing very significantly with all our brands, obviously more with the ones having already installed a large online platform. But with all of them, it definitely shows that when people cannot go into tours, they go -- they shop online as well, which is an interesting learning is what I would say. Yet, we do not change our view that the best way or the most efficient and value-adding way to sell our products is within stores. I mean building image is easier in stores than it is on the website. Yet, people shop as well on website, and it is important therefore to have websites and stores. And we have both, so that's no problem whatsoever. And the current crisis has shown the validity of this model. But don't take me wrong. I mean stores will be the privileged way to deal with our customers going forward. We are not trying to replace stores with online sales, but we welcome our customers to shop online if they feel that way. So that's -- I could talk about that for the next hour, but that's in a nutshell that basically the core of the group's philosophy when it comes to on versus off. As far as LV U.S. and Europe customers are concerned, you know how much I love to give details on these type of numbers. So I will not disappoint you, I will not answer the questions. But as I said, I mean Q3 was very strong with both U.S. and European customers. Obviously, U.S. ones have a larger share of the pie than European ones. And finally on cognac, so the trends, particularly in Q3, were very strong in the U.S. both in terms of sell-in and also in terms of sellout. As you may remember, we ended H1 with a very, very low level of inventory, which we have replenished, but also depleted in the same way. So we end up Q3 with the same level of inventory like we had at the 30th of June, but we did very good business in the meantime, a very strong double-digit business. Obviously, this is VS. You know how much we praise this business. We've had a fantastic run in the U.S so far this year, both from a sell-in or a sell-out viewpoint.The situation in China is obviously a bit more complex, and we have had negative volumes since the beginning of the year. Q3 was still negative from a sell-in viewpoint and also from a sell-out viewpoint in the early part of the quarter. I don't have the Mid-Autumn Festival numbers from a sell-out viewpoint, so it's hard for me to comment. The rumor or at least the grapevine comment we get from our people there is that Mid-Autumn Festival was pretty strong. Not amazing, but we are definitely coming out from a period when a lot of the outlets were closed.And as you know, I mean in this market, the nightlife is more important than it is, for instance, in the U.S., where the bulk of the consumption takes place home, unlike in China where half of it is in the on-trade business. So that's where we are in these 2 regions, but definitely I mean recovering in China and booming in the U.S.

[Antoine Belge, Global of Consumer and Retail Research]

Just a follow-up, so no issues short term in terms of supply that could, I don't know, limit a bit the growth in the next couple of quarters?

[Jean-Jacques Guiony]

We'll see. We still have some bottles to sell. Depletions show no signs of slowing down. At the level we have had over the past few months, obviously, we will encounter some limits in the number of bottles we can deliver to the U.S. market and sell. But I also doubt that this type of demand will last forever. So we'll have a normalization of the market at some point, and that will smooth the impact on our side.It's clear that the level of inventory, which is very low as I said, doesn't help very much to smooth the situation and the recaps in demand, but we are not particularly worried. And to be frank, these are good problems to have. I mean we have other pockets of the business within LVMH where we would love to have a supply problem. I mean it's not the case everywhere, so let's enjoy it.

[Operator]

Next question from Oliver Chen from Cowen.

[Oliver Chen, MD & Senior Equity Research Analyst]

With the online momentum across different important parts of the business, what should we think about with margin structure over time and/or CapEx needs with DCs and getting your customers, and/or using your stores as distribution points? And then a second question, Jean-Jacques, is the local client base on the Bvlgari brand and that segment, what are strategies that you can pursue to try to optimize that, given that it's going to be an issue in the foreseeable future?And third and final on Sephora, how are you thinking about the store base and the square footage opportunity? It looks like you really have the freedom to pursue multiple types of format with that concept? I would love your thoughts.

[Jean-Jacques Guiony]

Thank you, Oliver. Well your first question is pretty difficult because online will continue to develop. Certainly not at the speed we've seen this year, which was definitely a function of stores being closed, so you cannot make strategy and CapEx planning on that type of situation which is one of a kind, I would say. So we shall develop, but as -- the online business. But as I said, we don't intend to give up, far from that, on the rest of the distribution and particularly the brick-and-mortar distribution. What we see in businesses which are where online is well developed like Vuitton Sephora is that margins in brick and mortar and online are reasonably close. I mean you would -- I mean conventional wisdom would tell you that margins are higher in online than they are in brick and mortar. It's not really the case because the amortization or the depreciation of online investments is much, much faster than it is the case for brick and mortar. So all in all, if you take depreciation cost into account, which is the right thing to do, you end up with operating margins which are not too dissimilar actually. So I'm not going as far as saying that we are totally agnostic as to where the business takes place. I said already that we think stores are by far the privileged way to deal with customers. Nevertheless, in terms of financials and the impact of potential, and I'm not -- don't take my word on this, but a potential shift of the business gradually from off to on, I don't think we should have tremendous impact on the financials of the group. That's my assessment. Time will tell. On Bvlgari, well developing plant base, there is only 2 things to do: stores, which is an illustration of what I said before. And we had done it to a large extent in the U.S for instance with encouraging results before the pandemic. Obviously, the pandemic made this a little bit different, not surprisingly. But stores is one thing, and marketing strategies and the type of advertising and presence online and in traditional advertising is another thing. So I'm stating a little bit obvious, I'm sorry to answer this way, but basically when you want to develop a client base, you have to invest into stores and marketing. This is what we do. And it takes time, that's for sure. But we had success in many, many, many places. We have pockets of strengths with some client basis, and we intend to develop that in the future in markets where we are weaker for Bvlgari. And the strengths we have in Japan, in China, that we begin to have in the U.S., great strength in Russia, in the Middle East, I mean these are great assets for the future. Cracking Western Europe markets has proven a little bit more complicated or -- and for many years, not really necessary, given the fact that our stores were full with tourists, it's clear that the current situation shows that we should be doing it as well and that's what we are going to do. Your question on Sephora, sorry, I missed exactly your question.

[Oliver Chen, MD & Senior Equity Research Analyst]

Yes, the last question on Sephora, just about the store base and format and the footage, what you're thinking about with the footage as well as the size of the floor in different regions.

[Jean-Jacques Guiony]

Well we think we are in a good position. We have different average sizes of stores in different regions. The U.S. is bigger than Europe and is also bigger than Asia.This being said, that does not prevent us from testing new formats, which is not for the pleasure or for the sake of doing it. It's just that we are trying to bring something to the clients. So if they get more, I don't know, home delivery or a larger assortment or on a given category or things like that or a different layout, we test. So we spend our life having concept stores in the 3 regions and test them. And little by little, we adopt the main format to the learnings of such concept stores. We are not believers in big bangs. I mean all of a sudden, you decide that you are 400 stores or 500 stores in the U.S. should be different. And that's caused an enormous amount of money. And on top of that, if you happen to be wrong, I mean that's a big mistake. We'd rather move little by little. We test formats. We have innovations. And we implement them one by one into existing stores when -- as long as we renovate them. So that's more the strategy we implement.

[Oliver Chen, MD & Senior Equity Research Analyst]

Okay. And this is hard to answer, but regarding the vaccination outlook and the complication of planning inventory, what are some principles you're taking in terms of planning your inventories with agility and flexibility, as we may have increasing visibility to hopefully travel resuming at some point?

[Jean-Jacques Guiony]

Good point. It's a very important question. Is it just a question on Sephora or more global question?

[Oliver Chen, MD & Senior Equity Research Analyst]

A global question.

[Jean-Jacques Guiony]

Global question, so...

[Oliver Chen, MD & Senior Equity Research Analyst]

A challenging question.

[Jean-Jacques Guiony]

Yes. It's definitely a challenging question because you've seen in the first half that we were affected to some extent by the fact that we were caught by surprise by the pandemic. And therefore, we had ordered in-house or outside a lot of merchandise that we were not in a position to sell because the stores were closed.Frankly, being flexible is one thing, but there are limits of flexibility. At some point, we have to take a little bit of a risk. Risks won't be taken, I think, in H1 next year. I mean we are pretty cautious when it comes to the cruise collection or the spring collection because we don't really know. So we'll obviously take into account the learnings of the last few months when stores are open.And we know that we don't get as much people in stores as we used to, but the conversion rate is much higher. So we have less people browsing, and we have more people shopping. So all this, on a brand-by-brand basis, has to be taken into account and will be taken into account.I mean all our brands will be spending a lot of time assessing what is a reasonable bet when it comes to open to buy for the next season or the next seasons, I would say, because we don't expect all this to normalize within some months, as you can imagine. So that's not easy, but we start to have now a little bit of data and experience on what happened in those difficult months. And we expect to benefit from that when it comes to taking good decisions in terms of open to buy.

[Operator]

Next question from Omar Saad from Evercore ISI.

[Omar Regis Saad]

The first question is on tourism, a follow-up on tourism. Have you had the time or the chance to develop a view or a framework on when tourism might return? And also maybe talk to your ability, your strategies you're implementing to recapture through domestic consumption. Or do you think that luxury demand will be inherently limited as long as tourism and travel are limited? I guess I'll start with that question.

[Jean-Jacques Guiony]

Well obviously the tourism return is a function of probably vaccine. I mean I'm not an expert on these things. But for our traditional clients with confidence that they can travel again, they won't be caught at the border and be put in a hotel at the airport for quarantine, that type of thing. I mean it's very basic, but that's a fact of life as we speak. Obviously apart from a vaccine, I am not particularly hopeful that we'll see a lot of tourist inflows before that.This being said, when you walk around Paris these days, you see a lot of non-French people, but most of them, if not all of them, are European. So it's not as if tourism was at a complete standstill. It's just that long-haul tourism is not there.The recapture of the domestic consumption is something that we have not invented since the 15th of March. I mean we have been talking -- the way to talk about this was repatriation. I mean we knew that the trend was that as it happened with the Japanese, as it happened with the U.S. customers 20 years ago. The trend is that people tend to shop more at home than they shop abroad. And it was bound to happen, and it was happening actually with the Chinese customers. And we saw the share of the total business now with Chinese customers inside China are increasing inside mainland China, increasing progressively. And that's something that we have witnessed for the past 4, 5 years, so it was something that we knew was coming. Obviously, we were not expecting this to happen within 2 weeks, which was a little bit extreme. But the fact that the -- conversely, we will have to compensate for the fact that particularly the Chinese would shop more at home than they would when they travel, which is a normal pattern for all client bases is something that is also not new, and we were working on that. And as I answered before on the question, it's all about marketing and developing marketing strategies, local marketing strategies that are more directed towards local customers than towards international travelers. That's not entirely new. We just need to review those strategies when we get the benefit of a cleaner situation, to assess whether the strategies are the right one. Now that we know that for a while, even if these strategies do not work, we will not be compensated by tourists doing the business anyway, you see what I mean. So that's a more important topic than it used to be. A more visible, I would say, topic than it used to be, but it's a very valid point.

[Omar Regis Saad]

Okay. I have one follow-up. Can you talk to -- have you seen a big uptick on your online percentage as many brands and retailers have? Is it -- have you seen a step function change in your consumer -- global luxury consumers' willingness to transact with you online?

[Jean-Jacques Guiony]

Yes. We've seen a big increase. The reason I don't mention the number that I don't think it will be lasting because it was mostly a function of stores being closed. And we definitely see a negative correlation in between the both in the online business and the growth in the brick-and-mortar business. When the growth in brick-and-mortar resumes, we see the growth in online going down. So a quarterly number or a monthly number would be meaningless. This is why I didn't mention anything after Q2, and I will not comment further. But your observation is absolutely the right one, we've seen a big surge in the share of the business we do with online, I would say, across the board.

[Operator]

Next question from Sam Sabbagh from Hunting Hill Capital.

[Sam Sabbagh, Portfolio Manager]

Just regarding Tiffany's, if the judge rules that you do have to complete the transaction at $135 a share, I'm just wondering how that might affect your forward earnings guidance going forward and your overall strategy? And if you chose to complete the Tiffany's transaction, let's say, at a price cut, what deal price would you need to achieve the same ROI target that you had initially planned for when you first did the transaction?

[Jean-Jacques Guiony]

Well Sam, I'm really sorry, but I won't answer your question. I mean first of all on earnings guidance, we don't give any, so that will be easy.For the rest, I mean we are in the middle of a legal dispute with Tiffany, and you will understand that I cannot comment in any way where we are on this. A lot of documents are public, what we said about the case, what Tiffany said about the case. The merger agreement is public, so you can draw your own conclusions from that. But you will understand that I'm not in a position to comment in any way where we are and how we feel about that. Sorry about that.

[Sam Sabbagh, Portfolio Manager]

Understood. No, don't apologize. That's fair enough. I just had to ask the question. But can you talk about your overall strategy going forward if you did have to complete the transaction?

[Jean-Jacques Guiony]

Well we commented that many times, we still believe Tiffany is a great brand, that the stock market wasn't necessarily the best home for Tiffany with their short-term view on quarterly earnings that was preventing Tiffany a little bit from developing a sound marketing strategy. This is what we would implement. But I mean I will not make further comments. All these comments we made them in due course when we announced the transaction, nothing has changed.

[Sam Sabbagh, Portfolio Manager]

Okay. Got it.

[Operator]

Next question from Astrid Wendlandt from Miss Tweed.

[Astrid Wendlandt;Miss Tweed]

You were talking about the surge online, and you made some brief comments about vingt-quatre. From what I understand, there is more and more integration between Le Bon Marché and vingt-quatre in terms of merchandising, in terms of theme. That's my first question. And also, I was wondering if you could give us an update on Fenty, the Fenty fashion brand.

[Jean-Jacques Guiony]

Thank you, Astrid. I'm glad you said that because it's exactly what we are trying to do. Vingt-quatre is the online arm of Le Bon Marché. So the fact that you noticed it is extremely encouraging on top of what I said before, which is the various solutions or the various tests that we have implemented over the past few months. To be frank, I mean, we cannot use lebonmarche.com name, which doesn't belong to us. But definitely, we want more integration between vingt-quatre and Le Bon Marché because we think the curation potential of Le Bon Marché is obviously extremely important and valid for many customers as we see each and every day in the stores on the Left Bank in Paris. So that's exactly what we are trying to implement.on Fenty fashion, it's obviously still -- we are still in a launching phase, and we have to figure out exactly what is the right offer. It's not something that is easy. We were starting entirely from scratch. Obviously, we have the great help from Rihanna on this, but we are still -- I would say it's still work in progress when it comes to really defining what the offer would be.We have success. We have things that have worked less well. So we have to sort in between the 2 and really decide what should be the core strengths of the offer in the years to come. And it's work in progress, and we are working hard on that.

[Operator]

And last question would be from the gentleman from MainFirst.

[Rogerio Fujimori;MainFirst;Equity Research Analyst]

This is Rogerio Fujimori from MainFirst. I have 2 quick questions on LV and one follow-up on Sephora. Could you give us an idea whether the Q3 growth came through consistently across LV's 3 main categories?

[Jean-Jacques Guiony]

I can't hear you. I mean the line is extremely bad, so we have a lot of interferences.

[Rogerio Fujimori;MainFirst;Equity Research Analyst]

Can you hear me, Jean-Jacques?

[Jean-Jacques Guiony]

That's better. That's better.

[Rogerio Fujimori;MainFirst;Equity Research Analyst]

It's Rogerio Fujimori here from MainFirst. Two questions on LV and one follow-up on Sephora. The first on LV, could you give us an idea of whether the strong Q3 growth came consistently across LV's 3 main categories, bags, ready-to-wear and shoes and accessories? Anything to call out in terms of categories or lines outperforming in Q3?And then my second question on LV, is the strong growth in Q3 driven by existing customers or new young customers buying LV for the first time? So just wondering if there was a change in the balanced growth contribution that comes from new and existing customers with the shift to online.And then sorry if I've missed, but could you please share the retail comps for Sephora in the U.S., Europe and China in Q3?

[Jean-Jacques Guiony]

You haven't missed, Rogerio. I didn't mention them and I won't. So the business is improving, as I said, and we have a marked improvement at Sephora in Q3. But the situation is not ideal, I would say. So hopefully, we shall be able to announce better numbers in the quarters to come. But we see a lot of improvement everywhere in the world, which is important point.On LV, on the different categories, not really, I mean the growth was -- the improvement we saw in Q3 was quite homogeneous. We've seen it in most categories, I would say. There are obviously pluses and minuses, but I will not go into details. But I wouldn't say that this is driven by one category at the expense of the other. No, it's not the case. It's reasonably homogeneous.With regards to existing customer base, customers and/or newcomers, we've seen a little increase in the share of newcomers, but it's a little increase. I mean nothing to write home about. I don't know whether I'm giving the number for what they are, but I don't think it is particularly significant from a branding and marketing viewpoint. One quarter again is a complex quarter to assess and analyze such trends. I mean you need more than 1 quarter to look at this. So I give it to you for what it's worth, but I don't think it is worth at all.So I understand there are no other questions. Thank you for attending this call, and I look forward to discussing with you Q4 numbers, hopefully in person at LVMH headquarter, but nobody knows. But I look forward to it anyway. Thank you and have a good night.

[Chris Hollis, Director of Financial Communications]

Good night.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.