LVMH's fashion and leather goods division posted a 5 percent organic sales decline in the three months to Sept. 30, missing a consensus forecast of a 1.6 percent drop and returning to negative territory after one positive quarter.

The division, home to Louis Vuitton, Dior and Loro Piana, had broken a two-year losing streak in the second quarter. The relapse tracks a demand slowdown in China, where a tax crackdown on wealthy individuals and the fallout from Louis Vuitton's trademark dispute with tea chain Molly — which triggered a nationalistic backlash — pressured sales.

Group revenue rose 1 percent in the third quarter to 18.50 billion euros, in line with market expectations and up 1 percent in organic terms. LVMH released the figures after the market close on Monday.

"In the third quarter, organic revenue growth reflected the impact on business activity of a less buoyant environment in China, while the United States, Europe and Japan saw good growth," the company said in a statement.

Which divisions carried the quarter?

The fashion and leather goods unit — the group's profit engine — was the outlier. By division, third-quarter organic performance broke down as follows:

• Wines and spirits: up 6 percent
• Perfumes and cosmetics: flat
• Watches and jewelry: up 6 percent
• Selective retailing: up 8 percent
• Fashion and leather goods: down 5 percent

What do the warning signs look like?

U.S. credit card spending on luxury goods tracked by Citi fell for a third consecutive month in September, pointing to potential demand normalization in the world's largest luxury market. HSBC downgraded LVMH to Hold from Buy last month, cutting its price target to 490 euros from 600 euros, citing the weight of the fashion and leather goods division.

"While we remain confident on the mid-to-long term growth potential of this division and the LVMH Group overall, we move to the sidelines for now, given a challenging macro backdrop and slower than expected pick-up at Dior," HSBC wrote in a report.

LVMH shares have fallen more than 41 percent this year. The decline has cost the group its position as France's most valuable company to L'Oréal and pushed Bernard Arnault out of the top 10 of the Bloomberg Billionaires Index.

What will analysts watch next?

Jelena Sokolova, senior equity analyst at Morningstar, said analysts would scrutinize the post-results conference call for signs of stabilizing Chinese demand and insight into fashion and leather goods performance.

"While the luxury sector is showing early signs of recovery, LVMH's flagship division has yet to return to the level of outperformance investors have come to expect. We will be looking for evidence that Dior's new collections and Louis Vuitton's product pipeline can help close that gap," she said.

Sokolova called the medium-term outlook encouraging. "With shares trading at their lowest valuation in over a decade on top of cyclically depressed earnings, the market appears to be pricing in a much weaker outlook than we believe LVMH's brand strength and competitive positioning warrant," she said.

Investors will now look to the conference call for evidence that Chinese demand has bottomed and that Dior's collections and Louis Vuitton's product pipeline can restore the division's historical outperformance.