$LVMH
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The Leader in Modern Luxury
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9 hr ago
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Today I will be completing a deep-dive on LVMH, the largest luxury house
in the world. Within, I will be delving into a piece of the company’s
spectacular backstory, breaking down their complex house of brands,
taking a look at recent financials, and performing an analysis on where
exactly the company may find itself in the coming years.
Disclaimer: The information and research contained herein is all my own
opinion and should not be used as a substitute for proper due diligence.
Please consult your financial advisor and evaluate your financial
circumstances before making any investment decision.
Let’s get started.
There is something magical about resiliency. This phenomenon is rarely
exhibited within the modern investment industry, with many companies
falling victim to ever-increasing rates of technological innovation, poor
management, and disruption. Luxury Brands however stand in defiance,
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and have been able to scoff off these happenings, demonstrating
remarkable anti-fragility over the course of oftentimes centuries of
existence. Whether it be through their capacity to create a sense of
exclusivity and scarcity with their product or services, or their ability to
bolster craftsmanship impossible to replicate elsewhere, these brands have
been able to intertwine themselves with the very fabric of modern
affluence and the complex psychological underpinnings of our existence. As
long as our species remains a social one, there will be luxury companies,
and as the largest Luxury Brand in the world, LVMH likely stands to
benefit.
The origin stories …
In the spring of 1835, the 13 year old Louis Vuitton started a trek that befits
the opening scene to a captivating movie. The teenager traveled almost 300
miles to Paris, taking odd-jobs along the way to survive, eventually reaching
the city and starting an apprenticeship at Monsieur Maréchal’s box-making
and packing workshop. After spending 17 years there, honing his abilities
and serving elite clientele such as Eugenie de Montijo, the wife of Emperor
Napoleon III, Louis eventually decided to go out on his own. After opening
his first store in 1854, Louis would spend considerable time innovating his
trunks’ designs, creating rectangular and canvas products that would grow
in popularity and eventually allow for the man to open his second shop in
1859. Like most stories of resiliency, the business would suffer setbacks.
During the Franco-Prussian War in 1870-1871, his workshop was looted and
destroyed, an occurrence that would not deter Vuitton, instead motivating
him to reestablish the business and setup a new workshop in Central Paris.
As a result of steadfast determination, Louis Vuitton’s operations expanded
to heights never thought imaginable, and eventually resulted in his
products traversing European waters, with the opening of his first shop in
London occurring in 1885.
With Louis’ death in 1892, the company then passed on to his son, Georges
Vuitton. Georges would play a part in the continued expansion of the brand,
as he travelled across the United States to sell Louis Vuitton products,
created the company’s famous monogram logo, a design that to this day
showcases his father’s initials the graphic flowers and quatrefoils and
showcases his father s initials, the graphic flowers, and quatrefoils, and
thought-up the pick-proof spring buckle single lock systems that are still
intertwined with many Louis Vuitton pieces. In 1936 the company was
passed down, yet again, to another member of the Vuitton family, Gaston
Louis Vuitton. During his multi-decade tenure, the company would start to
incorporate leather into its products, and revamped their monogram
canvas so that it could be used across multiple different styles. Flash
forward to 1970, when Gaston passed, the company’s helm was then taken
by his son-in-law, Henry Racamier. As a result of the desire to expand the
brand’s footprint/presence across the world, the company formed an
alliance with a counterpart, Moët Hennessy, a revered brand that deemed
this partnership enticing due to the fact they were facing threats of a
potential takeover. In 1987, LVMH was officially formed. Therein, squabbles
over leadership positioning emerged, and, as a result, the wolf in cashmere,
Bernard Arnault, was welcomed through the gates of the company in the
hopes that his presence would act as a mediating force. This would be the
turning point in the rise of Bernard Arnault.
The now second-richest man in the world, and the head of the LVMH
empire, Arnault began his career within his family’s construction and
property business firm, Ferret-Savinel. After spending years leaning out the
operation, his eyes turned into an opportunistic situation in 1984. Aided by
the fact that the French Socialists had switched over to a more conservative
economic course a year prior, Arnault saw an opportunity when the textile
firm Boussac, of which housed the famous brand Christian Dior, went
bankrupt. Enlisting the services of a senior partner of Lazard Fréres,
Arnault was able to obtain $65M in financing from the bank, alongside
$15M of his family’s own capital, to acquire Boussac. After trimming the fat
from the business to arrive at what he viewed as the potential cornerstone
of a luxury-goods powerhouse, Arnault did not rest on his laurels, and
instead searched far and wide for opportunities. After being invited into the
inner circle of LVMH by Racamier, the head of Louis Vuitton, Arnault would
“switch sides”, partnering with an additional entity brought in to assist,
Guinness PLC. In an action many have deemed ruthless, Arnault formed a
holding company with Guinness, of which held 24% of LVMH’s outstanding
shares at the time. Arnault then spent an additional $600M to acquire
another 13.5% piece of the company, and an additional $500M in 1989 to
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arrive at 43.5% ownership and 35% of total voting rights, achieving the
“blocking minority” he required to direct the LVMH group as he saw fit,
rather than assist the party he was brought in to the picture by to retain
their hand at the helm. After assuming control of the company, Arnault
stepped on the gas, increasing revenues by a factor of 5 and the company’s
market value by a factor of 15 over the course of the next decade, numbers
that appear minuscule to what the company is now capable of in 2022.
What does the company look like today?
Decades later, LVMH is now a luxury house that has aggregated and
organized 75 different brands under one roof. Out of the 75 brands, only 6
of them are younger than 5 years, showing the company’s dedication to
owning houses that have stood the test of decades. The company operates
in six distinct segments. Four of these business groups, i.e. Wines & Spirits,
Fashion & Leather Goods, Perfumes & Cosmetics and Watches & Jewelry are
brands with similar production and distribution processes, whereas the
other two: Selective Retail, and Other represent entities with their own
distinct operations that have little bases of comparisons. Each of these will
be discussed hereafter (all monetary values are in millions of euros).
Wines & Spirits
Within this operating group are 26 different houses, including
distinguished century-old vineyards such as the Clos Des Lambrays,
prestigious brands like Moët Chandon and Hennessy, and some newer
esteemed brands such as the night-life-revered Belvedere. The operating
group can be split into two unique sections, Champagne & Wines, and
Cognac & Spirits. From 2013 to 2021, this business group has displayed slow
and steady growth, increasing associated top-line by approximately 4.6%,
increasing sales volume in millions of bottles markedly within each
segment, and weathering the majority of the pandemic-induced storm to
return to the growth trajectory it was previously on. Geographically, over
the course of the last few years, demand has remained strong in Asia and
Europe, but has been trumped by the strong growth in spending associated
with the US:
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The strong momentum has continued into both the first ¾ of the year from
a revenue perspective and the first ½ of the year from a sales volume
perspective. Delving into the former, wine & spirits continued its strength,
displaying 14% organic growth, a 1% structure impact and 8% currencyinduced tailwind to improve 23% YoY. Total volumes grew YoY as well, with
the four constituents, (champagne, cognac, other spirits, and still &
sparkling wines) changing 17%, (2)%, 31% and 15% YoY in 6M’22A,
respectively. The eye-sore here is evidently the slight decline in Cognac
volumes. Hennessy was and continues to be particularly impacted by the
lockdowns seen across China, as well as a series of supply chain constraints
in the US. With deliveries catching up to backlogs into the latter part of H1,
volumes should potentially stabilize heading into the remainder of the year,
contingent of course on whether or not China continues with their
ludicrous zero-covid policy. This should continue to be monitored heading
into the latter part of the year, especially given that Cognac is responsible
for a large portion of this operating group’s success. When everything is
merged together you have a best in-class portfolio of sparking and nonsparkling wine estates, dominant cognac presence, and a company that is
focused on expanding elsewhere with presence in other spirits ranging
from vodka and tequila, to whiskey. In 2019 it was estimated that the LVMH
portfolio accounted for nearly 22% of all champagne sales and nearly 46%
of cognac sales, an astonishing metric. Things to consider going forwards
are the fact that LVMH does not maintain full ownership of the group, with
34% being owned by Diageo. In addition, there has been major growth in
the popularities of spirits outside of wine, champagne and cognac globally,
a phenomenon that LVMH doesn’t have the most ideal exposure to.
Regardless, as supply chain pressures ease, it will be up to LVMH to
continue to expand internationally and gain market share doing so, an
enticing prospect given the overall profitability of this operating group:
Fashion & Leather Goods
The Fashion & Leather Goods business segment is comprised of 14 different
houses including the likes of Loewe, Louis Vuitton, Moynat, Fendi, Christian
Dior, Givenchy, Kenzo, Marc Jacobs and more. By far, this is the most
important component of the LVMH business. Comprising 40% of Total
Revenues, the top-line of this operating group has increased at an
approximate 15.3% CAGR between 2013 and 2021, and has continued a
steadfast rate of growth into 9M’22A, increasing 31% YoY, with 24% of that
growth attributable to organic improvements and the remaining 7% to
currency tailwinds. Geographically speaking, from 2013 heading into
6M’22A, we’ve evidently seen a noticeable uptick in the amount of revenue
attributable to the Asia region, a phenomenon that will likely need to
continue if growth is to maintain its current trajectory. Also, notably, this
rapid growth has been sustained all while continuing to expand the already
supremely high operating margins of the segment as a whole:
Looking forward, the brands with the highest contributions to this
operating segment, i.e. the likes of Louis Vuitton, Christian Dior, Fendi,
Celine, Loewe, etc. will need to continue expanding and innovating with
their product lines, as well continue their steadfast focus on having
excellent retail network, the likes of which are the origin points for 94% of
this segment’s revenue. On the Q3 revenue call, LVMH’s CFO was adamant
about the fact that “luxurynomics” do not follow the same trajectory as the
economy overall. Consumers in this area are less sensitive to
macroeconomic turmoil, and inflationary pressures are able to be passed
along to the consumer without the batting of an eye, a phenomenon that
arises as a result of brand desirability, a good sign going forward for the
segment overall.
Perfumes & Cosmetics
The Perfumes & Cosmetics business segment is home to 15 different houses,
the oldest of which dates back to 1803. Examples of brands include
Gurelain, Parfums Christian Dior, Givency Parfums, Cha Ling, Fenty Beauty
by Rihanna, and more. From 2013 to 2021, this segment compounded its
top-line at an approximate 7.5% CAGR, diminishing as a % of total however,
coming in at approximate 9.9% in 9M’22A compared to 13% in 2013, a
result of the commendable growth of Fashion & Leather goods. One may
notice that 2021 numbers did not normalize fully to trend. Notably, this
operating segment is highly selective about their distribution. Despite
pandemic-headwinds easing off, limited recovery in some areas of
international travel and reopening of points of sale dampened recovery.
Even so, the group decided to remain selective, limit promotional offers and
develop online sales channels, unlike competitors who increased their
proportion of discounted sales or sales in parallel networks. Recovery
continues to progress into this year, with the operating segment displaying
19% YoY growth for 9M’22A, 12% of which is organic and the other 7% of
which is a result of currency tailwinds, driven by growth in fragrances
demand and the normalization of makeup demand in the United States.
From 2013 to 6M’22A, Geographic distribution remained relatively
constant, with Asia less Japan growing the most noticeably during this
period:
Looking forwards, investors can likely expect continued progress and
market penetration with the product lines housed by this operating
segment. In the next year, Parfums Christian Dior, Guerlain, Parfums
Givency, Maison Francis Kurkdisain and Fresh are engaging in varying
degrees of flurrying activity, ranging from the relaunch of new lines,
reinventions of star products, unveiling new opuses and initiatives, etc.
However, given the fact that these brands are a low proportion of total topline, combined with the low operating-margin nature of the business, they
are unlikely to have major impacts on LVMH’s bottom line going forwards:
Watches & Jewelry
This operating segment contains 8 different houses, Chaumet, Tiffany & Co,
Tag Heur, Zenith, Bulgari, Fred, Repossi and Hublot. The transition into
hard luxury is arguably one of the most exciting developments of late, a
phenomenon I will touch upon later. The top-line of this segment has scaled
at a fast pace from 2013 to 2021, increasing at a CAGR of approximately
16.2% and accounting for approximately 13% of Total Revenues in 9M’22A,
compared to approximately 9.3% in 2013. As a result of the company’s
various acquisitions, the geographic profile of this revenue has differed
quite substantially, with noticeable share now shifting over to Asia excl.
Japan and the United States (primarily due to the recent Tiffany
acquisition). Growth continued into 9M’22A, with associated revenue
increasing 23%, 16% attributable to organic growth and the other 7% to
currency tailwinds.
Looking forwards, it will be important for this segments brands to maintain
strict cost controls while expanding, keep up their focus on craftsmanship,
as well as direct steady efforts at nurturing various relationships with
celebrities, business icons, sports organizations (NFL, NBA in Tiffany’s case,
World Cup in Hublot’s, as examples), etc. to ensure that these brands
maintain their ability to intertwine themselves with the upper echelon of
modern culture. Bulgari has arguably been the best performer herein into
this difficult environment, with Tiffany maintaining steady growth. In
inflationary environments, as mentioned on the Q3 revenue call,
consumers tend to lean towards purchases of gold rather than silver (where
Tiffany excels), therefore they have slowed slightly, a phenomenon that will
need to be monitored. Nonetheless, growth is an exciting prospect when
one gauges the marked improvement in Operating Margins seen of late:
Selective Retail
The Selective Retail Operating Group contains 5 houses. Retail locations
such as Le Bon Marché Rive Gauche and La Grande Epicerie De Paris,
retailers focused on providing customers with unique shopping
experiences in their stopovers or during their travel experience with DFS
and Starboard Cruise Services, and mega global brands like Sephora. This
segment has grown more slowly than its peers from 2013 to 2021,
increasing at a 3.5% CAGR, and decreasing from approximately 30% of
Total Revenues in 2013 to approximately 18% in 9M’22A. From 2013 to
6M’22A, the segment has made substantial progress internationally and in
the United States, particularly with Sephora’s key integration with Kohl’s
across the landmass. Lastly, momentum was noticeable heading into
9M’22A with the segment growing 30% YoY a result of 20% of Organic
9M 22A, with the segment growing 30% YoY, a result of 20% of Organic
Growth and 10% currency tailwinds. Despite that, growth has still not
returned to the pre-pandemic trend:
Looking forwards, progress, especially with the retail stores and unique
experiences tied to stopovers and cruise ships, will be largely contingent on
travel maintaining its recovery trajectory. Sephora has been investing
heavily in improving customer experiences through the adoption of
omnichannel experiences, developments that should spur customer
contentment going forwards. In addition, the company has made noticeable
expansionary efforts into the UK with their Feelunique acquisition. The
sore spot with these figures is tied to DFS (also not majority owned by
LVMH, 39% ownership is held by another party). The house has been
seriously impacted by the zero-covid policies in China and will likely
continue to feel the brunt of these decisions. With that in mind, these
developments again have little impact, as of right now, on the company’s
bottom line. Regardless, they play an essential role in the company’s
provision of unique experiences to luxury customers and are thus critical
going forwards.
Other
This segment, though not of enough importance to warrant delving deeply
into, consists of ten different horses, ranging from the Royal Van Lent yacht
manufacturer, the Belmond luxury hotel chain, a series of print media
entities such as Connaissance des arts and Les Echos, etc.
With all of LVMH’s unique parts in mind… what does the company look
like when everything is put together?
From 2013 to 2021, LVMH’s topline has compounded at a rate of 10.4%, with
the average pre-pandemic period organic growth rate (2013-2019 inclusive)
coming in at approximately 8%, a level that should be returned to once
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operations normalize in the future. During that period, there has evidently
been an increase in the importance of the Asian and American consumers,
end-markets that will need to be monitored to ensure demand is
maintained at beneficial levels going forwards. For the 9M’22A, organic
growth came in at 20%, highlighting that FY’22 is likely to come in very
strong and that the growth trend set pre-pandemic is likely to be exceeded
in the interim:
During the same period, we saw a slight uptick in gross margins,
reminiscent of values typically seen in SaaS operators, increasing from
approximately 66% in 2013 to 69% 6M’22A:
Operating efficiencies started to creep through from 2013 to 6M’22, with
Marketing & Selling Expenses, as well as General & Administrative
Expenses decreasing relatively speaking from 37% to 35%, and 8% to 6% as
a proportion of top-line. As a result, operating margins for 6M’22A were
best in class, values that could likely come in even higher if the company
were to stop reinvesting so heavily in their business going forwards:
Similar to other retailers & consumer goods companies, working capital has
seen an uptick over the course of the last 6 months. This metric is one I will
be monitoring going forwards to ensure inventory has been able to
properly offloaded into a normalized environment:
The company’s substantial progress has been achieved while maintaining a
conservative financial profile (as measured by Net Debt/EBIT coming in at
0 74 for 6M’22A) continuing to direct steady amounts of capital at operating
0.74 for 6M 22A), continuing to direct steady amounts of capital at operating
investments to strengthen their foundation and scale, and displaying
commendable ROIC over the last few years:
With this insight into LVMH’s past, how should we think about the
future?
Over the course of the last two decades, the Global Luxury Goods Market
has grown at a remarkable pace, as illustrated by the following Bain &
Company figure:
Looking at how these values have changed over the years, a few things
stand out, particularly the growth of spend related to China and the
resiliency of the category overall. Honing in on the former, there is still
room to grow in the Chinese market. Although we have seen dampened
activity this year as a result of the zero-covid policy, a degree of
normalization will likely occur once these enactments fade away. With
approximately 20% of total luxury spend in 2021 attributable to China,
growth is still anticipated to occur with restrictions lifted, with the region
expected to become the largest luxury market in the latter half this decade.
This is evidently an idealistic scenario and will need to be continually
monitored, especially given the geopolitical tensions that are running
rampant globally at the moment. A decay in relations between countries
could negatively impact the ability for LVMH to operate internationally in
the future. Moving on to the latter, we have seen how the luxury industry
has responded to two crises. Dips in total spend were observable both
during the GFC and the pandemic, however, the overall resiliency of the
affluent should be noted and considered when one is pondering the impact
of a potential lasting and looming recession. With the global luxury market
expected to grow to approximately €360B by 2025 (a 8.4% CAGR from
2021E), as well as continued opportunities in both China, and other
international markets such as India and Africa, I don’t think it is
unreasonable to underwrite 5% continued growth in the market overall
heading into the end of the decade (if economic situations become less
doomy). The continued growth of LVMH’s main brands, particularly with
the likes of Dior, as well as the company’s expansion into the hard luxury
space, a strategic move made possible with the company’s 2011 acquisition
of Bulgari and the 2021 acquisition of Tiffany, represent an interesting
opportunity for the next decade. On the hard luxury side of the equation,
there’s a structural opportunity here as a result of the lack of name-brand
penetration in this area (approximately 20% worldwide), an exciting
prospect if LVMH is to continue expanding therein.
All in all, I believe LVMH represents an opportunity to get in on the ground
floor of one of the most timeless, exceptionally managed luxury houses in
the world, of which contains brands that have demonstrated remarkable
resilience throughout a series of crises; an enticing prospect for someone
who is such a big fan of resilience like myself. When I modelled out what I
feel to be a reasonable, albeit extremely idealistic, scenario (at a relatively
premium 2028 EV/EBIT multiple in the mid-range of what we’ve seen
historically), we arrive a decent IRR. In the event of faltered execution,
economic contraction, etc. this may obviously change but I believe these
estimates are achievable:
The elephant in the room with this story, all else considered, is the
succession trajectory. Arnualt’s children are involved with the business
currently, however, it is still up for debate whether or not they will possess
the business prowess, managerial excellence and overall ruthlessness that
has made Arnault such a good leader in the first place. Although I can see
Arnualt being one of those individuals, such as Buffer and Munger, that live
well into their 90s and continue working while doing so, this is an
existential threat that bears mentioning and monitoring.
In short, I will be covering LVMH for years to come. It is a fascinating story
of some of the world’s most cherished brands, an epitome of anti-fragility
with key houses having been around for centuries, and is an interesting
exhibit of human psychology in the business space. I look forward to
continuing to write about LVMH and hope you enjoyed this deep-dive.
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Until next time,
Matt from MT Capital Research.