LVMH fails to reassure on luxury recovery, shares fall

July 28 (Reuters) - Shares in LVMH slipped 1.5% on Tuesday after the French luxury giant's second-quarter results failed to reassure investors that a broader recovery in luxury demand was firmly underway, despite signs of improvement at its key fashion and leather goods division.

The results left open the question of whether the luxury sector is emerging from a prolonged downturn, with growth at LVMH's most profitable business still falling short of expectations.

LVMH, the owner of fashion brands Louis Vuitton and Dior, said fashion and leather goods sales rose 1% on an organic basis to 8.90 billion euros ($10.12 billion) in the second quarter. While that marked the segment's first quarterly increase in two years, it missed analysts' expectations for growth of 1.7%.

"All the focus was on fashion and leather goods," a trader said after the results.

SIGNS OF RECOVERY?

The group reported overall organic sales growth of 3% for the quarter, helped by an 11% increase at its watches and jewellery division, its fastest-growing business.

LVMH shares are trading near six-year lows and have lost about 30% of their value this year, reflecting investor concerns over the pace of any recovery in luxury demand.

"The results were decent, but unlikely to change the debate," UBS analysts wrote in a note to clients.

Brokerages including RBC, Morgan Stanley and UBS cut their target prices following the results.

Morningstar analyst Jelena Sokolova said trends were turning more positive, although LVMH continued to lag some rivals.

Kering shares are down around 17% so far this year, while Hermes has dropped 21%.

The two groups' results, on Tuesday and Wednesday respectively, will be closely watched for further signs of whether luxury demand is recovering after a prolonged slowdown.

LVMH said tourism-related spending in Europe was affected by the conflict between Israel and Iran, weighing on demand in a region that had previously benefited from international visitors.

"While recent performance has been disappointing, it is not unexpected given that backdrop. Over the longer term, we continue to believe LVMH is well positioned to return to industry outperformance," Sokolova said.

Luxury strategist Rafael Carlesso said the fashion division's growth appeared to have been supported by pricing and cost discipline rather than a meaningful improvement in demand.

"Discipline is a finite lever. Desire is the renewable one," Carlesso said.

LVMH's wines and spirits division, which includes champagne brand Moet & Chandon and cognac maker Hennessy, reported 5% organic growth, while sales at its selective retailing division, which includes the Sephora brand, grew 6%.

Shares in spirits makers Pernod Ricard, Diageo and Remy Cointreau and cosmetics group L'Oreal rose between 1% and 2.7%.

($1 = 0.8798 euros)

(Reporting by Alessandro Parodi in Gdansk, additional reporting by Dominique Patton and Lisa Jucca, editing by Milla Nissi-Prussak)