As my second write-up, I will publish a piece on the luxury company Luis Vuitton Hennesey Moet, ticker symbol LVMH, and listed on Euronext Paris, Xetra, or the OTC list in the US.
Profitability and valuation numbers for the last twelve months & five-year average
Gross Margin: 67.3% 65.6%
Operating margin: 25.6% 19.5%
ROIC: 18.9% 10.1%
ROE: 23.0% 16.3%
EV/E: 34.86 (€621.6 /share)
EV/FCF: 21.28 (€621.6 /share)
Mcap: €330 billion
Net interest bearing debt: €16.815 billion
The business
LVMH’s mission is to become the world leader in luxury, with a philosophy summed up in its motto; “Passionate about creativity”. Since the merger between Luis Vuitton and Moet & Hennesy in 1987, the company has been highly active in making mergers and acquisitions of companies with a long and deep history. The brands in their portfolio are highly recognized as exclusive and are often regarded as the most exquisite in their product categories.
Luxury items are all about the feeling, the feeling of the fabric on the skin, the taste of champagne, the history of the brand, and how wearing, drinking, and otherwise using the products portray a story about you. This might be the best way of demanding premium prices. People buy luxury items based on the feeling they give you or the “status” you get from having an exclusive item.
Looking at the chart above you can clearly see that the company is creating a lot of cash. Investments required to generate organic revenue are typically low, because of high returns on invested capital. For every euro invested in the business net of goodwill, the company generates €1.96 in revenues. Combining a modestly capital-light business with high margins at around 20-25% operating margins is a fantastic combination.
Brands
The list of brands under the LVMH umbrella is quite large, standing at 75 houses of which only six brands are younger than five years.
The brands are categorized into six different categories:
Wine & Spirits: Wich includes most famously Moët & Chandon, Hennesy, Dom Perignon, Veuve Clicquot, Belvedere, Krug, and a total of 23 houses. These houses bring in €4 755 million in revenue (2020) and it would be difficult to not find any brands that you had not heard of. High margin business with its 34.2% operating margin in H1 2021
Fashion & Leather goods: Includes Luis Vuitton, Christian Dior, Givenchy, Marc Jacobs, Loewe, and in total 14 houses making up €21 207 million in revenue (2020) from 2007 stores located worldwide. This is also a very high margin business unit at a 40.8% operating margin in H1 2021.
Perfumes & Cosmetics: Many of their perfumes bear the same name as their original brands in the Fashion & Leather segment, like Fenty, Marc Jacobs, Givenchy, Christian Dior, and in total 14 houses. They made €5 248 million in revenue in 2020. It’s what I would call a decent margin business at 13% operating margins in H1 2021.
Watches & Jewelry: Diamonds are a girl’s best friend is widely known. That’s why LVMH bought Bulgari in 2011 and completed the purchase of Tiffany’s in 2021. Other widely known brands are watchmakers Tag Heuer, Zenith, and Hublot. A total of 7 houses bring in €3 356 million in revenue in 2020 and operating margins came at almost 20% in H1 2021.
Selective retailing: Bringing unique shopping experiences with brands like Sephora, Starboard Cruise Services, DFS, and in total 5 houses making €10 155 million in 2020. The business is low margin though, standing at 2.6% operating margins in H1 2021.
The last category includes other activities and is not very materially impactful on the LVMH group but is a division that’s currently incurring losses.
Moat
As you might have noticed the moat consist of having intangible assets that take time to develop. Brand loyalty and the perceived quality take time to develop. Some of LVMH’s brands have several centuries worth of history, and that’s not something you could copy in a matter of a few years and some millions in marketing budgets.
Moat is what makes the margins relatively smooth, even though 2008 should’ve been a bad time to own a company selling luxury items, the companies revenues and margins showed resilience. Same with 2020 that was a horrible time to have retail exposure, but the business did fine. Of course, some margin contraction because of closed stores and a worldwide recession.
The brand’s strength makes LVMH available to demand premium prices and receive higher margins than ordinary fast fashion products, cheap watches, and beverages.
The luxury market
The luxury market experienced a substantial decline in 2020, the market fell from a peak of $316 billion in 2019 to an estimated $257 billion in 2020, a decline of 18.6%. By the looks of the LVMH H1 2021 report, there was obviously a lot of pent-up demand that was released in the first six months of this year.
Looking forward there is estimated that the luxury market will be worth $353 billion at a growth rate of 4.6% in the period 2020-2027. Looking at the table below, the company has been taking large amounts of market share in the last decade. It would be no surprise if the company’s continuing to grow faster than the market in the future.
Balance sheet
The company’s balance sheet is stellar, LVMH could pay down almost all of their net borrowings in a little over a year. Borrowings stand at €24 046 million, the company has €7 231 million in cash and €14 485 in lease commitments. The company generated €15 513 million in free cash flow in the last twelve months, so it should be no problem to deal with their debt level, and there are ample possibilities to commit M&A.
Just look and behold the company’s ability to issue debt at almost no cost. 0% interest on €2 500 million worth of bonds maturing in respectively 2024 and 2026, and almost nothing in interest on the bonds maturing in 2028 and 2031. The markets are telling us that LVMH’s creditworthiness is as good or even better than many decent-sized countries.
ESG
In my opinion, the best way to get exposure to the ESG trend is to own companies that make an effort to improve their own carbon footprint, their impact on communities, and fight for equal opportunities for people. Diving into the 2020 annual report the company is focused on providing more sustainable ways of doing business and providing assistance to female entrepreneurs in the challenging year of 2020.
Important risks
Global warming can ruin crops for their Champagne, spirits, and wine products.
Paying too much for mergers & acquisitions could deliver subpar returns.
Their brands could become uncool and undesired.
China stands for a considerable amount of revenue. It’s very unlikely that they would lose a majority of revenues, but the “rich” and upper class could reduce splurging on luxury items to prevent pissing off the communist party.
Conclusion
“It’s far better to buy a wonderful company at a decent price than a decent company at a wonderful price” has been quoted by Warren Buffett a number of times. In my opinion, LVMH falls under this quote because of their number of brands that have rich histories, great profitability, and a reputation that stands the test of time.
Looking at the estimates for the near-term earnings the business looks decently valued. LVMH at 27 times 2022 earnings is not a bargain, but it isn’t that expensive looking at the alternatives. The company should be able to grow in line with the market or more for a long time, and M&A leaves more upside if their able to deliver on synergies and doing good deals.
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Disclosure
Always do your own research before investing in a stock! I own shares in LVMH, and because of that my views on the company might be overly optimistic, and I might be inclined to overlook risks. I hope that you enjoyed this post but It should not be considered financial advice.
Sources
https://www.fortunebusinessinsights.com/luxury-goods-market-103866
https://www.lvmh.com/investors/
Borsdata.se