Welcome to the LVMH 2018 third quarter and nine months revenue conference call. I will now hand over to Mr. Chris Hollis. Sir, please go ahead.
Hello. I'm Chris Hollis, Director of Financial Communications at LVMH, and with me is Jean-Jacques Guiony, Chief Financial Officer. Thank you for joining us today. Minus 7%. We have some brief remarks to make about LVMH's revenue for the third quarter and first nine months of 2018. As in previous periods, these revenue figures are reported in accordance with International Financial Reporting Standards, or IFRS. After these remarks, Jean-Jacques and I will be happy to take your questions. Before we begin, I must remind you that said 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 two of the presentation. Turning now to our third quarter and nine months revenue announcement.
Hopefully, you've all had the chance to read our release, which was issued yesterday evening in both French and English. As always, the release is available on LVMH's website at www.lvmh.com, as are the slides that we are using to guide today's conversation. Starting on Slide three with our highlights for the nine-month period. We're very pleased to have built on our strong momentum from the first half of the year, and once again delivered solid performance in the third quarter to which all business groups and all regions contributed. In addition, reported revenue for the most recent quarter saw currency shifting to a neutral after the negative impact it has had in the first half of the year. In terms of growth drivers at a regional level, we saw particularly strong performance in Asia and the U.S.
Looking at the brands, Hennessy continued its good performance in the context of the eau de vie supply constraints. Louis Vuitton and Christian Dior, both the couture and the perfume and cosmetics activities, demonstrated outstanding momentum. In addition, the other fashion brands performed well. Within watches and jewelry, Bvlgari, Chaumet, and Hublot each delivered excellent performance. In terms of selective retailing, Sephora further strengthened its omni-channel offering and continued its rapid revenue growth. We saw good revenue improvement at DFS in Asia, excluding the termination of the Hong Kong International Airport concessions. Now let's go into the numbers and start with a snapshot of our revenue performance over the course of the year so far. As I mentioned, the third quarter built on the solid revenue growth we delivered in the first half.
For the quarter, organic revenue was up 10%, with no currency or structural impact, which brings our organic revenue growth for the first nine months to 11%. On a reported basis, revenue was up 10% for the quarter, as well as 10% for the first nine months, taking into account a 4% positive structural impact resulting from the integration of Christian Dior Couture in July 2017, offset by a 5% negative currency effect over the nine-month period. As we noted in the press release, excluding the impact of the termination of the Hong Kong International Airport concessions at the end of 2017, organic revenue growth for the nine-month period would have been 13%. Turning to Slide 5 and the group's revenue in EUR by region. Asia, excluding Japan, represented 30% of the business over the nine months, followed by the U.S. at 23%, and Europe, including France, at 19%.
France and Japan came in at 9% and 7%, respectively. The rest of the world accounted for 12% of revenue. Compared to this time last year, Europe and Asia have increased their weight from the U.S., in part reflecting currency changes. As you can see, we continue to have a healthy revenue mix across regions. Looking at the geographical performance, all regions were close to 10% organic growth in the third quarter versus 2017. For the nine months, Asia and Japan have had the strongest performance, growing 16% and 14%, respectively, compared to the prior year periods. The U.S., excluding Hawaii, was up 10% over the nine months. Europe was up 7%.
Breaking down our organic revenue growth in the nine-month period, fashion and leather goods, perfumes and cosmetics, and watches and jewelry were each up 14%, including a very strong 14% for fashion and leather goods in the third quarter alone. Compared to the first nine months of 2017, Wine & Spirits was up 7%, Selective Retailing up 8%, or 14% excluding the impact of the termination last year of the Hong Kong International Airport concessions. Turning now to the performance of each business group. I will start on Slide 8 with Wine & Spirits. Organic revenue was up 7% for the nine-month period. Reported revenue reached EUR 3.6 billion, up 1% compared to the same period last year due to a negative 6% currency impact.
For the third quarter, revenue was up 7% on an organic basis, and after a negative 1% currency impact, rose 6% to EUR 1.3 billion compared to the same quarter last year. In Champagne and wines, organic revenue growth for the third quarter was up 5% with a negative 3% currency impact. For the nine months, organic revenue growth reached 3%, or EUR 1.5 billion compared to the same period in 2017, after a negative 5% currency effect. In cognac and spirits, organic revenue for the third quarter was up 10%, the same as reported revenue growth. For the nine months, organic revenue growth was also 10% and reached EUR 2.1 billion after a 6% negative currency impact. Moving to the group's highlights, Champagne volumes were stable in the first nine months after a return to growth in the third quarter.
We continued to see strong demand for prestige vintages. This resulted in a solid revenue momentum in all key regions. Estates and wines also contributed to performance driven by effective pricing strategies. With respect to cognac, we were pleased to see Hennessy volumes rise 4% over the nine-month period. Progress in the U.S. continued in the context of tight supply. We saw strong momentum in China during the nine-month period. We continue to see a rebound of consumer demand in Asia overall for Glenmorangie, following the de-stocking experience in 2017. Looking now at the Fashion and Leather Goods business group, revenue is up 14% on an organic basis for the first nine months of the year and 20% on a reported basis.
This reflects an 11% positive structural impact from the integration of Christian Dior Couture in July 2017, as I mentioned earlier on. A 5% negative currency effect. For the third quarter, specifically, revenue was up 14% on both an organic basis and a reported basis compared to the year-ago period and reached €4.5 billion. Thus, there is no further structural impact from the acquisition of Christian Dior Couture. This business group, this is slide 11, delivered strong growth across all regions for the nine-month period. Louis Vuitton continued its exceptional creativity, driven by both the success of its iconic lines and new product launches. These included the New Wave handbag collection and the Attrape-Rêves women's fragrance that featured Emma Stone in its autumn campaign.
The brand continued its qualitative work on stores and opened its remodeled South Coast Plaza store in Costa Mesa and its first airport store in France at Paris Charles de Gaulle Airport. Finally, the runway shows of Virgil Abloh and Nicolas Ghesquière were both highly successful. Looking at the other fashion and leather goods brands, Christian Dior Couture delivered excellent performance and had a highly successful Spring/Summer 2019 runway show last month. Fendi celebrated the 10-year anniversary of its Peekaboo bag and launched the Peekaboo X-Lite, which has been very well received. Celine continued to make good progress. Hedi Slimane's first runway show had a significant impact and was well-received by retailers. Loewe, Kenzo, Loro Piana, and Berluti all had strong performances. Rimowa has been selectively developing its distribution capabilities and launched a successful advertising campaign featuring Roger Federer.
Finally, Marc Jacobs continued evolving its product lines and introduced the very popular Snapshot bag this year. In Perfumes and Cosmetics, revenue rose to €4.4 billion from €4.1 billion in the nine-month period of last year. Excluding a 6% negative currency effect, this represents a 14% increase in organic revenue. For the third quarter, organic revenue in this business group was up 11%. After a 1% negative currency impact, reached €1.5 billion or up 10% on a reported basis compared to the same period last year. Looking at Perfumes and Cosmetics overall, this business group delivered growth across all regions, particularly Asia. In terms of brands, Christian Dior saw continued strong demand for Miss Dior and Sauvage, as well as excellent results in makeup driven by its Rouge Dior line.
It also successfully launched a new perfume called Joy, with actress Jennifer Lawrence as the face of that campaign. Guerlain skincare line, Abeille Royale, and its lipstick, Rouge G, performed very well. Givenchy launched a new women's fragrance, L'Interdit, with actress Rooney Mara. The mascara BADgal BANG! was a success for Benefit Cosmetics, which also launched its Brow Contour Pro, a 4-in-1 contour pencil. Finally, Fresh and Fenty by Rihanna, which was launched in Q3 last year, both performed well in the nine-month period. Moving to watches and jewelry, slide 14, revenue for this business group increased to EUR 3 billion versus EUR 2.8 billion in the first nine months of last year, including a very strong 14% organic revenue growth, offset by a 6% currency impact.
For the third quarter on its own, revenue was up 10% on both an organic and reported basis compared to the year-ago period to reach EUR 1.043 billion. This business group delivered solid growth on the strength of the iconic lines across brands. Bulgari gained market share of the period due to the success of its iconic Serpenti, Divas' Dream, and B.zero1, as well as its Lucea and Octo lines, and the introduction of its new high jewelry collection, Wild Pop. The brand also inaugurated last month an exhibition at the Moscow Kremlin Museums that showcases its rich heritage. Looking at the other jewelry brands, Chaumet saw continued success of its Liens and Joséphine lines, and extended its popular Bee My Love collection to include bangles. Fred opened its first store in Macau. On the watches front, TAG Heuer continued to focus on developing its iconic lines.
Hublot opened a new flagship store in London and saw strong contribution to its growth from its Spirit of Big Bang collection. Zenith did very well with its Defy line. Looking now at Selective Retailing, slide 16. Revenue increased to EUR 9.5 billion in the first nine months of the year from EUR 9.3 billion in the prior year period. While reported revenue was up 2%, this included a negative 6% currency impact. Organic revenue growth was 8%. In fact, excluding the termination of Hong Kong International Airport concessions, organic growth would have been 14%. Third quarter revenue for this business group was EUR 3.2 billion, a 5% increase in both organic and reported terms compared to the same period last year. Sephora continued on its growth trajectory, driven by strong revenue growth, especially in Asia and North America. It had solid growth in online revenue across all regions.
The brand has started the Sephora-ization of some of its Ile de Beauté stores in Russia, and also opened a new store concept in Shanghai in the third quarter. DFS showed good performance in Asia, and its recently opened T Galleria in Cambodia and Italy's Venice have been very successful, as has the newly renovated T Galleria in Auckland, New Zealand. Le Bon Marché's exhibit dedicated to Los Angeles has been extremely well-received, and it launched a new capsule collection from designer and model Inès de la Fressange, which is exclusively available on its 24 Sèvres e-commerce site. In summary, we saw a solid performance over the first nine months of 2018, with all regions and business groups contributing to growth in this latest quarter. Our strategy to focus on delivering innovative, high-quality products to consumers while selectively expanding our store network and managing costs continues.
While we are pleased with our performance to date, we remain cautiously confident as we look ahead to the rest of the year in the context of monetary and geopolitical uncertainties. As in the past, our objective in 2018 is to continue to build on the rich heritage of each of our brands and to reinforce the group's worldwide leadership position in the global luxury goods market. On that note, I want to just acknowledge a very exciting event that will occur this coming weekend across the world, our fourth edition of Les Journées Particulières. As you may know, this is a weekend where LVMH offers the public a behind-the-scenes look at our maisons and the artisans, the craftsmen, who create our uniquely desirable products.
From workshops to ateliers, wineries, private mansions, and historic stores, this year the event will showcase the work of thousands of artisans across 77 locations on five continents, including 40 sites that have not previously been opened for this event. You can find more information on our website. With that, we will now take your questions. Mélanie, please could you open the line?
Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. We have the first question comes from Thomas Chauvet from Citi . Sir, please go ahead.
Good afternoon, Jean-Jacques and Chris. Thanks for taking my questions. I have three, please. The first one, fashion leather, excellent growth in the quarter, possibly slightly boosted by Dior. Can you talk about return sales by nationality, Jean-Jacques, as you usually do in Q2? I think there was an acceleration to over 20% growth with the Chinese clientele and slowdown to low single digit with Europeans. So if you could comment on Q3 for the usual four clusters of clientele. On parallel markets, with the price cuts you did in July in China due to import duties and the weaker RMB, the gap between China and key geographies has been significantly reduced, particularly within Asia. That should limit, I think, the appeal of buying from parallel markets. So do you think the concerns around Chinese authorities cracking down on Daigou, evidence at airports during Golden Week overdone?
If we take Louis Vuitton's offshore sales to Chinese, do you have an estimate of how much is generated from real tourists versus Daigou? Finally, on the outlook, most of us noticed in your English and French press release, you no longer describe the environment as buoyant or porteur in French. As you are finalizing the budget, can you highlight your main concerns for next year, potential initiatives you have in place to offset a potential normalization in demand? Thank you.
Thank you, Thomas. Are you really sure I have to answer the third question on highlighting the concerns surrounding the environment and the trade war and whatever is our day-to-day life when we do business? I'm not sure. You know as much as I do on these things, and my only message is that there is nothing particularly specific to luxury and LVMH in all that. The world is a complicated place. Currencies are playing in all directions, and governments are making their life and our life more difficult sometimes. That's all I would mention. On your first question on LV by nationality, obviously there were ups and downs. What the most noticeable point is in Japan, where we saw a significant slowdown in the growth we have had with Japanese customers that were mid-teens in the first half of the year, which is quite an extraordinary level.
We went down to mid-single digits, mid to high single digit. A slowdown there that we expected. Obviously, the sort of normalized growth rate of the Japanese customer base is not as high as what it was over the last two or three quarters. That's the most noticeable point. As far as the U.S. client base is concerned, nothing to report. Same type of double-digit growth with U.S. customers. As far as Chinese customers are concerned, a little slowdown, but we are really talking about moving from high teens to mid-teens. It's really nothing really noticeable. To follow your point, the offshore business was a bit weaker than it was before, and the mainland business, the domestic business was a bit stronger.
All in all, with the exception of Japan, we didn't see major shifts in the main client base of Louis Vuitton in the third quarter of the year. There was a second question on price gaps and Daigou versus tourist. Obviously, we can't measure whether clients are parallelists or buying to resell or buying for themselves. It's very difficult. The only thing I would say is that it's not the first time that we see that. The Chinese authorities have some laws with regards to importation of goods and luxury goods. These laws are being enforced with more strength at some point in time, which is exactly what we understand is happening. There is nothing wrong with that. It doesn't prevent people, real tourists from purchasing goods outside China. The Chinese purchases obviously benefit from a price gap, which is quite narrow these days.
It may shift a little bit of business, as we've seen in Q3 from the traditional tourist destination like Hong Kong and Macau to China. Again, I see nothing wrong with that.
Thank you.
The next question comes from Oliver Chen from Cowen. Sir, please go ahead.
Hi. Thank you. Good morning. Regarding what's happening in luxury with platforms such as Farfetch, what makes sense for you in terms of thinking about that relationship and platforms on your own? Sephora, you continue to show great momentum there. If you could help us understand if there's categories that outperform versus where you see other opportunities for other categories, that would be helpful. Lastly, just on the Vuitton digital strategy, what are your thoughts for digital conveniences such as buy online, pick up in store, and integrating the store and digital inventory and geolocation, just because we're seeing a lot of U.S. luxury players really amplify innovation with respect to the multi-channel experience. Thank you.
Thank you. On the platform, I could spend half an hour on this, I will try to make it short. Globally, there is nothing wrong with e-retail platforms as long as we can do the same type of business as we do with department stores. Basically, when we do business with department stores, we pay a rental fee, a percentage of our sales. We don't sell the merchandise wholesale to the department stores, and they do what they want with it, including discounting it at the end of the season. Our basic model is what we call leased department. There is nothing wrong in doing the same thing with e-retailers. The type of model that would enable us to do our own business on somebody else's e-platform is philosophically, I would say, okay with us.
The only thing is that there is no such thing as a platform today that would suit our needs. Most of the platforms are wholesale platforms and not concession-based platforms. If they are, they don't provide access to the various data regarding the clients. Obviously, when we do business in a department store, it's not our premises, but it is our client, and we get all the data we want from the client, and we expect to get the same thing online as we get offline. That's a limitation, and that's actually the reason why we have decided to launch the 24 Sèvres initiative, which is in-house and basically enable us to control the data that we wouldn't get otherwise.
On the second question on Sephora categories, what we've seen since the beginning of the year is that the makeup is still doing okay, skincare is much stronger than what we used to see. Perfume is all right, not the most brilliant of the 3 categories. The hierarchy is not changed, we definitely see an improvement from skincare. On the omni-channel, obviously, this is something that we try to promote, integrating the online experience within the regular stores and vice versa is of key importance. As you suggested, the ability to integrate real-time access to the inventories, whether warehouse, stores, et cetera, is of key importance in this.
In companies like ours, where particularly the inventory systems have been developed over many, many years and sometimes many decades, therefore, it takes a little bit of time to streamline all that and to allow real-time access to the inventories. It's something we are working on, and some of our brands, including Vuitton and Sephora, are pretty well advanced on that.
Okay. That's very helpful. Just a quick follow-up. Sephora has had pretty amazing versatility in the U.S. with respect to format and innovation in your physical plus digital. What are your thoughts on the U.S. footprint of Sephora and the relationship with JCPenney? If you have any thoughts, just generally what you're seeing with real estate and rent and rent negotiations in the U.S., that would be helpful as well, given the changing dynamics of what's happening in U.S. retail.
I think the big learning from the Sephora experience in the U.S. is that both online and offline, or brick and mortar and online, reinforce each other. There wouldn't be a Sephora online without the brick and mortar, and I think vice versa, which means that despite the fact that the growth is and has been much higher in online than it is in the brick-and-mortar segment within Sephora in the U.S., and it's been the case for quite a long period of time. Despite that, we still feel that keeping and opening a lot of base of regular stores is extremely important. We understand better the behavior of customers, and they browse on the web in the same way as they browse into our stores. The two customer experiences really complement each other. It's why we think that going forward, we shall keep on opening stores.
On your question on JCPenney, obviously, there is a lot of questions being asked to us with regards to the closures of some of their stores. The only comment I would make is that we are not in all the JCPenney stores, far from that, and we are usually in the best-performing stores of JCPenney and obviously not the ones that they would think about closing. The relationship remains very good. It's a big source of business for us and a big source of client acquisition on their side. What has been the logic of this deal 10 or 15 years ago remains the same. As far as rents are concerned, it's impossible to give you a simple answer. Whether you're talking about Manhattan, Fifth Avenue, or you're talking about Wichita Falls, obviously, the situation is a bit different and diverse in commercial real estate in the U.S.
The only thing I would say is that as far as prominent retail locations are concerned, it's as costly as it's been, if not more. In this respect, the rental cost doesn't go down.
That's very helpful. Nice job on the Rimowa rebranding and the Peekaboo X-Lite. Great to see that. Best regards.
Okay. Thank you.
The next question comes from Antoine Belge from HSBC. Go ahead.
Yes, hi. It's Antoine from HSBC. Three questions. First of all, the 14% in fashion and leather, obviously Dior, you entered the base of like-for-likes and Rimowa. There is a cleaning going on. Any reason to expect a material difference from the Louis Vuitton performance? Do you believe that 14% was actually quite close to the maximum that Louis Vuitton can produce? I think in China recently, you said that, or Michael Burke said that demand was exceeding supply and like 50% of SKUs were out of stock. Was it true during the quarter as a whole? Second question, I know you don't want to bet on current trading, but there's been a lot of talks about September slowing versus the rest of the quarter or maybe more slowdown at the beginning of October.
Could you confirm there hasn't been any big changes as compared to the overall quarter numbers you just reported? Finally, on watches and jewelry, there was a bit of a slowdown there. I think there is a comment in the press release about strong performance at Bulgari. Is it fair to say that you're seeing quite a big difference between jewelry on the one side and watches? Are there any sort of technical impact, destocking and on a particular brand in watches which depressed a bit the number? Thank you.
Thank you for your 3 questions, Antoine. Starting with first one on Louis Vuitton, I will make the usual answer. I mean, the Vuitton performance is never far and is not far from the division's average, despite the inclusion of Dior and Rimowa, that makes Vuitton a slightly lower share of the total than it used to be. It remains very close to the average. If 14%, assuming this is Vuitton's growth, which I'm not confirming obviously, is 14% the maximum growth that we could get at Vuitton? I don't think so. I mean, there were quarters in the past where when we managed to do better than that. Michael mentioned some out-of-stocks in stores. The question with out-of-stocks is not a daily question. I mean, you can be out of stock for a couple of days. It's not a big issue.
The question is how quickly you replenish inventories in stores. In this respect, Vuitton is doing extremely well. We are not neither worried nor constrained in terms of growth by availability of product. In this respect, I mean, the supply chain of Vuitton is working well, and we generate the type of growth we should generate. Doesn't mean that we want to make all products available to anyone asking for the product. You know our philosophy, some of our products, we don't want to see them oversold and too visible, so we limit their availability. This being said, I mean, it's not a supply chain question, it's a commercial strategy question. Second question on September, you obviously don't expect me to answer. I usually tell you that a quarter is not a trend, what about a month?
If we had to do monthly reporting, I should know about it, and we don't do that. Actually, the question comes from the fact that it was widely understood in the industry that July and August were around the same trend as the first half of the year. When you see the Q3 being slightly lower, you figure out that the reason for this is that September was actually lower. You also probably remember that the last time we saw each other, I made my introduction to the meeting by saying that the only question I will not answer is confirming whether the trend for July and August was in line with H1. I never said that, therefore, any surprise on the trend doesn't come from this comment.
Of course, September is the most important month in Q3. I think you should look at Q3 for what it is. Even a quarter, as I said before, it's even difficult for us to understand the trends from one single quarter, so one single month doesn't mean anything. Finally, on watches and jewelry, nothing new there. I mean, jewelry does better than watches. We face a very difficult situation for watches in the U.S. with a tough comparison base for TAG Heuer with the launch of the connected watch last year. The performance of TAG Heuer in Q3, particularly in the U.S., was a bit tough on top of the comparison base and in the market in the U.S. Particularly if you look at the price range below $3,000, which is the vast majority of what we sell in the U.S., the market is extremely tough.
It's much better above $3,000. It's really bad below $3,000. There is a big discrepancy between the two, above and below $3,000. We had a tough period. We are having a tough period with TAG Heuer in the U.S. Finally, on the division as a whole, still in the U.S., Bulgari made a pretty severe cleanup of their watches, jewelry, accessories, and perfume business on the wholesale side in the U.S. Despite the fact that the retail business in the U.S. for Bulgari is still doing very well, the rest of the business was cleaned up and therefore was very negative. For these various reasons, this explains this kind of slowdown from 16% to, I don't know, 11% or 10%, which is not bad anyway. The 10% we had in Q3 in watches and jewelry, that's explained mostly by these two reasons.
Okay, many thanks. To be honest, I don't know what I have to conclude from what you said about September. I'm sure other people will follow up. Maybe just could you repeat the growth rate organic for Champagne in Q3 on the nine months? I couldn't really write them down.
The growth rate for Champagne and wine was 5%, was the organic growth rate for Champagne and wines in Q3 of 2018.
All right. Thank you very much.
For September, if you understand me, that I didn't make myself clear enough, that was the objective.
Okay.
The next question comes from Hermine de Clermont-Tonnerre from Raymond. Madam, please go ahead.
Good afternoon to all of you. My first question is on DFS in Q3. Have you felt the impact from the climate events that happened in Hong Kong or Japan that may explain the slowdown of this division? My second question is about Europe, where you face an acceleration in Q3. Can you probably speak a bit by division there? My last question is on LFL depletions in Q3 as well, particularly in China. Have you faced also the Mid-Autumn Festival? I was curious about the VS and VSOP trends for depletion during this period. Thank you very much.
Thank you, Hermine. On DFS, I wish I could blame weather. Obviously, it was not a plus as we had to close the stores for three days, but three days in a quarter is not an enormous amount of shift in business. If you look at DFS during the quarter and in comparison to H1, and if you exclude the impact of Hong Kong Airport, obviously, which was in the base last year and not this year, roughly speaking, we moved down from 30-ish type of growth rate in H1 to something around mid-teen. There is a slowdown definitely. You also have to consider that last year's comparison base in Q3 was very tough. There is a slowdown, but the absolute level of growth that we get in Q3 is very good anyway. If this is a slowdown for DFS, I buy it 100%.
It's not bad at all. Obviously, the bulk of it happens in Hong Kong, but in Hong Kong, we were growing in H1 more than 50% or 60%. This is a number I didn't give you because I knew it was not sustainable. We are coming back on Earth, I would say, in Hong Kong, same thing in Macau. Altogether, it's more normalization of growth rates at DFS than anything else. It shows on the global numbers of the division, but actually it's quite normal, and we were expecting that to take place at some point. As far as Europe is concerned, the main change that explains the higher growth in Q3 is fashion and leather. Most of the businesses in fashion and leather, including Vuitton, obviously, and Dior, have been better in Q3 than they were in H1.
Finally, on LFL depletions in China, I don't have the full quarter numbers yet. They take time to report, particularly with Mid-Autumn Festival. It's a bit longer than usual, but as far as July and August were concerned, we were very pleased with the depletions that were more or less in line for both VSOP and XO with what we had in the first part of the year. Pretty strong figure, more than 20% in both cases.
Okay, thank you very much.
The next question comes from Luca Solca from Exane BNP Paribas. Please go ahead.
Yes, good afternoon. I wonder if you could give us more color on the border controls that are happening in China and what you make of them. In the past, we've seen that they last for a relatively short amount of time. Is this a show-off procedure that is being carried out by Chinese authorities in your view, or is it going to sustain and force more purchases by Chinese consumers in China? Are you preparing for this possible scenario by planning to further align prices around the world, or do you think that the current price gaps are the appropriate ones?
Luca, you don't really expect me to answer or to comment a decision being enforced by, or law being enforced by a sovereign state on its own territory. It's obviously impossible to comment that. They do it in their own right. They are just implementing their own laws. I have no comment to make whether it will last or not. I have no opinion, to be frank, and nobody within the group knows anything about that. As I said before, we've seen that in the past. The customers adapt to this situation, and as far as we are concerned, we have no problem in selling domestically to local customers and to real tourists outside mainland China. The Daigou business, or the parallel business, let's be clear, is not something that we welcome and that we try to promote.
We limit the number of products that people can buy in stores, particularly in Paris, so that we don't fuel parallel with our own actions in European market, and we try to avoid this as much as we can. Obviously, there are limits to the control we can exert over that. The fact that Chinese authorities are moving into the same direction is obviously good news for us, and I will not comment further. Your question on prices, whether this pushes us to align more prices. The answer is no. We have a sort of objective price architecture that we have built over the last 30 or 40 years, which we know promotes the business, doesn't deter people from buying at home, but also sort of push them to seize the opportunity when they travel. That's something that we have built over the years.
The rest of the industry, with only a few exceptions, do the same, and we have no problem whatsoever with price gaps. We think our customers understand the logic of it, which is obviously the difference in lending costs. A lot of comments are being made on luxury industry, but it's not unique to luxury industry. You don't pay a cell phone the same price here or in New York. It's exactly the same and the same logic, and we don't intend to change that. Doesn't mean that we will not adjust prices to get closer to our desired price gaps. That's comments I never make on such calls. We review our price structure at all times, and when we have to take actions, we do.
Thank you, Jean-Jacques. Another question, if I may.
Sure.
On watches market in the U.S. You are referring to two segments having very different trends, and I was wondering whether you have what it takes to sort of make the most of the higher segment being more buoyant, and if you anticipate that organization changes in the watches division could be conducive to changing part of the strategy in that part of your business.
I'm not sure I get your question, Luca. What do you mean, change in management?
You were saying the segment below $3,000 is.
Yes
Very competitive, that is hurting or in a way creating a less favorable environment for TAG Heuer.
Indeed.
I presume you have Bulgari and other brands to make the most of the segment above that. We recently saw in the newspapers of the change in responsibility for Jean-Claude Biver. I wonder if that is potentially a preamble for a strategy review or for any changes in your watches division.
Well, yes and no. Obviously, a new management will do a strategy review of the positioning of the various brands. That's for the yes. For the no, TAG Heuer is legitimate at a certain price point. In our view, this price point is mostly below $3,000 or $3,500, it will be very difficult, not to say dangerous, to move above if we feel that there will only be growth above that level. I'm just commenting on the current situation, doesn't mean that for the next 10 years, what is below $3,000 will plummet and what is above $3,000 will flourish. We don't know. I'm just commenting that the last two, three quarters have been pretty tough in this segment.
We'll be reviewing the strategy of the brand with the new management team. Don't expect a major price difference in the price positioning of TAG Heuer in the years to come.
Understood. Thank you very much.
Thank you, Luca.
The next question comes from Edouard Aubin, from Morgan Stanley. Sir, please go ahead.
Good afternoon. Just two quick ones for me. On Selective Retailing which came in a bit below expectations. You explained on the situation at DFS. On Sephora, did you manage to remain double-digit up in terms of sale growth in the quarter? My second question relates to the fashion leather goods division, which posted a stronger than expected sales growth versus market expectation. It's your highest margin division. You don't provide earnings guidance, and I'm not asking you to start providing earnings guidance, why shouldn't consensus move up on the back of this, or to ask the question another way, what are the offset that maybe we are forgetting in terms of natural cost inflation which would offset the benefits from the fashion leather goods growing faster than expected?
The second question is quite far-reaching. I would say, when it comes to mix and what drives the global profitability of the group as complex as LVMH with 5 different divisions, et cetera, a lot of things collide into each other. It's quite difficult to give you a simple and comprehensive answer on those things. Yet, bear in mind that the first part of the year, we benefited strongly from hedging gains, which are usually pretty favorable, as we've seen, for instance, in Wine & Spirits in terms of margins, gross margins, but also operating margin. We had margin improvement in the first half of the year at Wine & Spirits. If I'm not mistaken, the profits went up 7% when top line in EUR was only 0% or 1% up.
This is unlikely to replicate in the second part of the year, due to the fact that actually there won't be any currency impact. There are 2 phenomenons that may collide into each other. All in all, it's quite complicated to answer your question. The second question or the first question you had on Selective Retailing and Sephora. Yes, Sephora was double-digit in Q3.
Perfect. Thank you.
The next question comes from Rogerio Fujimori from RBC. Please go ahead.
Hi, Jean-Jacques and Chris. Rogerio Fujimori from RBC. Two quick questions. On fashion and leather, just give a bit of color by region or has the fashion and leather performance by region, how does it compare to total group average? Could you please talk about your 11% growth in Asian Q3, in addition to DFS normalization to meeting growth, could you give a bit color on trends in the main Asia markets like Hong Kong, Macau, Korea, and Southeast Asia for the rest of the business? Thank you.
Okay. On the fashion and leather, numbers were reasonably homogeneous. We were around the divisions average in most areas, I would say. I have nothing really particular to report there. There were no major changes, no major discrepancies around the average that you know. Sorry, second question was about 11% in Asia. Yeah. The first point to bear in mind with regards to Asia is that the numbers we report are impacted by Hong Kong Airport discontinuation. If you look at them excluding airports, H1 was 25% and Q3, it's 18%. That's the same magnitude in terms of change, but with a different perspective, which is that we are growing very fast. We are still growing very fast in Asia. I think it's worth having in mind.
Secondly, if you look at it by country, growth in China was above 20% and was very slightly higher than what it was in the first six months of the year. Nothing comes from China when it comes to explaining the difference between H1 and Q3 growth in Asia. The biggest share comes actually from Hong Kong, which is not entirely a surprise given the narrowing of the price gap, but also given the fact that in each one, in Hong Kong, for instance, both Vuitton and DFS were growing above 50%, which is obviously not sustainable. They come back to something around 20%, 20% plus, 20% less, which is still very, very good. We are still doing very well in Q3 in Hong Kong with our main businesses.
Yes, there is what you call a slowdown, which in my view is more a normalization than a slowdown, but we remain at pretty high growth rate in these areas for our main businesses. Macau, to a large extent, is the same. The numbers are not exactly the same. The magnitude of the difference is not as big. We started from a less high point, but it is exactly the same phenomenon, normalization as opposed to slowdown.
Korea and Southeast Asia, any change in trends?
Well, it is less significant. The business was a bit lower in Q3 than it was in H1 in Korea. I don't think it is in any way linked with what your questions were asked on before. The business was a bit weaker, yes.
Thank you.
The next question comes from Omar Saad from Evercore ISI. Sir, please go ahead.
Thank you. Thanks for taking my question. Just one quick follow-up on China and the Chinese consumer. It sounds like they're holding in quite well. There's a lot of fear in the market around what's going to happen with that consumer, given the trade war and financial market volatility. Maybe you could talk a little bit about how your business and the nature of your business in China and with the Chinese consumer has changed since the last slowdown there four or five years ago. As it moved from more business and gifting nature to more self-consumption, as the nature of the income demographics of their consumer evolved significantly from them. That might help us understand how to think about how that business will perform if there is another Chinese slowdown. Thanks.
Thank you. There's been some changes. Part of the business some five or six years ago was connected with gifting. It was more or less obvious from our brand's viewpoint. Some people were getting gifts in vouchers that they could redeem in cash, and they were buying into some of our products with the cash they were provided by vouchers. We had no concerns whatsoever that our business, to some extent, was connected to gifting. By and large, we think this business is gone. In between mid-2012 and mid-2016, this business went away. We are left with, I would say, real business, with a genuine business of people buying for themselves, with themselves, and which is a natural function of luxury goods. In this respect, the Chinese market normalized in a pretty quick way from a gifting-based economy to a more normal economy.
We welcome that as good news. With regards to behavior of these normal customers, I would say nothing really new. The propensity to buy luxury goods from the Chinese customer is higher than it is anywhere else in the world, which means that the starting point in terms of individual average income at which they sort of get an interest into luxury is probably lower in China than it is outside in the Western world, in Europe and in the U.S., hence higher volatility. For this client, the level of investment into luxury goods is probably higher in proportion of their income than it is in the Western world. When they feel good or bad on the economy and on their own situation, it has disproportionate consequences on their propensity either to purchase or not to purchase.
It's a more volatile market, but a more dynamic market at the same time. We have the two sides of the coin, but it's a much sounder market with almost the disappearance of, I would say, the bad gifting, because gifting, there is also good gifting. Gifting is part of cultural habits in China, and obviously this has not disappeared and will remain.
Thank you.
The next question comes from Mélanie Flouquet from JP Morgan. Madam, go ahead.
Yes, good afternoon. Thank you. I'm trying to square a bit what you provided by geography and your comments on the Chinese consumer base. I was wondering whether you could clarify what actually did accelerate in fashion and leather goods in Europe. Is this a traveler or is this a local demand? Is it both? When I look at the three-year stack in Europe and Asia Pacific, and I don't know whether it is the right way to approach it, but I assume that the traveler did come back in force when it comes to the Chinese in H2 2016. The Chinese consumer base, Asia Pacific and Europe, are actually holding up better than I think some people would have said, and mid-tier's growth for the Chinese consumer base in total is actually arguably a pretty good growth, given the base of comparison on a one and two year basis.
I was wondering whether you could comment whether that's correct and why you think the Chinese consumer base is proving resilient so far. These are my two questions, Europe first and then the Chinese consumer base. My third question, sorry, is on your comments that you will manage the Group with some vigilance. Could you share with us what are the initiatives you would take to run your business with vigilance? Thank you.
On the last point, you will let us discuss with our business during budget sessions first, and we'll report to the market afterwards. It's not something that I intend to discuss today. On the business in Europe and whether further growth or higher growth is coming from traveler or locals, not a big shift. The travelers are doing a bit better as far as we can see. Obviously, we don't have a view on all the brands. Travelers are doing a bit better, and local are still doing more or less the same way with the same francs with French and British citizens and not so good with German. No major change, a little bit of improvement in travelers.
Once again, you're asking me to comment on few percentage points change in business trends, and it's not always easy to understand why something moved from 14%-16% or from 16%-14%. The Chinese customer base and the mid-tier is more resilient than you would have thought. Okay. It's better than what you think. As far as we are concerned, we take the numbers when they come. We spend a lot of money in marketing to attract all customers, including the Chinese one. It's difficult to give you reasons why we were not expecting the Chinese customer. We were together in China not so long ago. We were pretty optimistic as to the future of the Chinese customers. Basically, our forecast was not particularly pessimistic or negative on China. Real numbers are not particularly bad.
As far as we are concerned, we see nothing illogical or new in these numbers. I don't have a big comment to make. Obviously, when the price gaps change, as it's been the case in Q3, it has some impact on touristic markets and usually negative and positive on the domestic market. We saw both of that in Q3. The question is whether they offset each other, not perfectly, but not so badly either. All in all, the system works well, and the Chinese customer understands where they should be doing business, and it has no meaningful impact on the global demand. In other words, offer doesn't really impair or favor demand. It's really demand being expressed in a fairly free way in our various markets.
Can I ask you, what drove the deceleration in the U.S.? You commented fashion and other was more or less in the same trend, I look at the comp base was actually pretty easy in the U.S., it seems to have decelerated on an easier comp base.
What are you talking about, deceleration of what? Of the U.S.
Comp base was a lot easier in quarter three 2017, right?
Well, you never know with the comp. You have to be cautious because you have to look at the numbers in 2016. I remember correctly, in 2016, there was something with Wine & Spirits. It was pretty bad numbers, pretty tough numbers to anniversarize in 2017. It's always pretty difficult. If you look at the U.S. for the last, I don't know, 27 quarters, it's been around 10%, more or less. I think we can be pretty pleased with these numbers, we don't see any real change in the business conditions there.
Thank you.
We don't have any further question, ladies and gentlemen. I would like to remind you that if you wish to ask a question, please press zero and one on your telephone keypad.
If there are no further questions, thank you for attending the call, The next meeting or appointment will be in late January when we release both the top line and profit numbers for the year. Thank you.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.