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LVMH: Growth of cognac sales could be hurt by supply squeeze

French luxury goods group LVMH Moët Hennessy Louis Vuitton SE said Oct. 10 that supplies of cognac would be constrained in the near term as bad weather hurt grape harvests, preventing sales growth of the brandy from reaching levels achieved over the past two years.

"For the foreseeable future, i.e. the next three to four quarters, volumes will not increase very significantly," LVMH CFO Jean-Jacques Guiony said during a conference call with analysts and investors. "All in all, we should have a quite flat or slight increase in volumes for the end of the year and the first quarters of next year."

Guiony's comments came after LVMH said on Oct. 9 revenue for the first nine months of 2017 increased by double-digit percentages in all of its divisions except wines and spirits, which booked 8% organic growth.

LVMH, which owns 21 wines and spirits brands, including Hennessy and Dom Pérignon, said supply constraints for cognac had affected its U.S. business. A revenue breakdown within wines and spirits showed that cognac and spirits sales in the third quarter were 664 million, largely unchanged from 665 million a year ago but down 12% from €757 million in the first quarter.

The lower volume was most evident in the very special, or VS, cognac products, Guiony added.

LVMH expects volume growth for cognac to become subdued compared with the past two years. Cognac and spirits reported year-over-year organic revenue growth of 6% in 2015 and 8% in 2016.

"The type of growth we've had over the last two years is not something we can replicate forever," Guiony said, adding that the normalized growth in annual volume for cognac was between 3% and 5%.

"We've had two tough years in terms of supply," he added. "We had hail in 2016 and frost in 2017. Altogether, what we put in our cellars [for] cognac was lower than what we anticipated. All in all, this creates a little bit of constraint for the business for the quarters to come."

On Oct. 10, LVMH shares advanced 2.2% to close at €237.40, nearing the record high level of 238.10 achieved in May.