Detailed Examination of LVMH’s Financial Performance, Insider Activity, Impact of Economic Conditions, and Future Growth Prospects for Investors

 

1. Introduction

Some data may be slightly outdated since I wrote this article on September 21, and I do not have the time to fully revise the analysis. Therefore, I would like readers to view this article not as an exact analysis but as an approximation that helps provide an idea of the company’s potential. That said, let’s begin the analysis. Thank you and apologies for any inconvenience.

Disclaimer: The content of this article is for informational purposes only and does not constitute financial advice, investment recommendations, or a suggestion to buy or sell assets. Cryptocurrencies and digital assets are highly volatile and may involve significant risks. Always conduct your own research (DYOR) and consult a professional financial advisor before making investment decisions. The author and the website are not responsible for any loss or damage that may result from investments based on the information provided.

2. Overview of LVMH

LVMH is a French conglomerate with over 6,000 stores and 76 globally recognized luxury brands. Its stock has reached annual lows; it has fallen by 31% since March and 34% from the 2021 highs.

3. LVMH Revenue Structure

Fashion and Leather Goods

Nearly half of the company’s revenue comes from fashion and leather goods, with brands like Louis Vuitton, Dior, and Loewe. The products they design, manufacture, and sell include clothing, shoes, handbags, among others, of their various brands, as well as items like luggage from the Rimowa brand. Typically, the products they sell are priced quite high. They can do this due to the strong brand power many of their brands hold, allowing them to charge much more for their products than if they were sold under a less prestigious brand.

Wines and Spirits

The wines and spirits segment accounts for 8% of sales, with prestigious luxury wine, champagne, cognac, and other alcoholic beverage brands. For example, they own the cognac brand Hennessy, the Dom Pérignon and Moët Chandon champagne brands, and the Château d’Yquem wines. Some bottles cost over $1,000.

Perfumes and Cosmetics

The perfumes and cosmetics segment makes up 9% of sales, with brands like Guerlain, Kenzo, Loewe, Givenchy, and Christian Dior perfumes.

Watches and Jewelry

The watches and jewelry segment generates 13% of revenue, thanks to the acquisition of Tiffany in 2020. Other brands like Bulgari and TAG Heuer are part of this segment.

4. Global Luxury Consumption Behavior

Consumption in China: The Importance of Chinese Tourists

A significant portion of luxury consumption is driven by tourists. What stands out is the importance of the Chinese consumer for the luxury sector, a customer who has gained significant importance over the last 15 years. However, it’s important to note that the current crisis in China is slowing down Chinese consumption (including luxury consumption), impacting the entire luxury sector, not just LVMH, but also companies like Hermès, Kering, and Prada.

Consumption in Europe: Global Distribution

Luxury consumption worldwide is distributed similarly to LVMH’s sales, but some nuances must be made:

• In China, 16% of global luxury is consumed, while the Chinese consume 22% of global luxury.

• In Europe, 28% of global luxury is purchased in Europe, but only 21% of global luxury consumption comes from Europeans. This is because a significant portion of Chinese consumers buy luxury in Europe, especially when traveling.

5. Analysis of Aspirational vs. Ultra-Luxury Consumption

The Luxury Pyramid

An important aspect when analyzing a luxury company is understanding its position within the luxury pyramid. The higher up a company is in the pyramid, the more exclusive its brand, products, and customers.

• Accessible Luxury

• Luxury

• Ultra-Luxury: This group consists of more exclusive brands that select their clients, with limited access.

Impact of Exclusivity on Luxury Consumption

The closer a company is to the top of the luxury pyramid, the fewer aspirational customers it will have. An aspirational customer is someone who desires to use a product or service but cannot afford it. This type of customer reduces their luxury consumption during adverse economic conditions. At the top, however, wealthy customers won’t have trouble consuming luxury regardless of the economic scenario.

6. LVMH Management Structure and Leadership

Bernard Arnault and His Experience

Bernard Arnault has been at the helm for over 35 years, bringing vast experience, as have many members of the management team. His leadership has proven successful, as the stock has multiplied by 30 since 1990, delivering a 15% annual return to shareholders, including dividends.

Financière Agache and Corporate Governance

Financière Agache, owned by the Arnault family, along with the family group, holds nearly 50% of the company’s shares. Thus, we have a management aligned with shareholder interests.

Succession at LVMH

A risk exists as Arnault is 75 years old. Although he has extended the maximum age to 80, there will come a time when he steps down. He has been preparing his succession for some time; his five children occupy leadership positions in various brand divisions. They have been educated at top schools and universities worldwide, but it is still unclear who will succeed him.

7. Risks and Economic Factors

Impact of Inflation and Rising Interest Rates

In economic crises, the company may see a slight decline in sales due to the aspirational luxury segment. In cases of high inflation, costs rise, but the company doesn’t have trouble raising prices. Interest rates have a mild impact due to increased interest expenses.

Social Changes and the Rise of New Millionaires

The company stands to benefit from the future rise in new millionaires and the expansion of the global middle class, which are its potential customers.

Political or Technological Factors

No major risks related to politics or technology seem likely to significantly impact LVMH.

8. Recent Results and Temporary Factors

Impact of the Japanese Yen

The results for the first half of 2024 show a 1% revenue decline, which, without currency effects, would have been a 2% increase. This is largely due to the weak Japanese yen.

Chinese Luxury Consumption: A Temporary Factor

The weak Chinese consumer in 2024 is a significant luxury consumer. From our perspective, all of these issues are temporary, and temporary problems offer opportunities to buy good businesses at reasonable prices.

Impact on the Wines and Spirits Segment

The decline in alcoholic beverage consumption compared to 2023 is not unique to LVMH. A giant like Diageo saw revenue drops in 2024 after post-pandemic revenue increases. Looking at LVMH’s wine and spirits segment, we see that some years have seen revenue drops, but they tend to grow gradually over time. Thus, these sales declines are unlikely to continue in the coming years.

9. Financial Indicators and Multiples of LVMH

Debt and Net Margins

The company’s net debt increased in 2021 due to the Tiffany acquisition. However, it remains low. Margins are excellent, as is its ROCE. Compared to other companies in the sector, its net margins are higher due to the positioning of its brands in the luxury pyramid.

LVMH Average P/E

The company has historically traded at a P/E ratio of 22, generally staying between 20 and 27 since 2017, except during sector euphoria post-pandemic.

Capital Allocation

Of the company’s profits, 45% is used for dividends, 10% for share repurchases, and 45% for growth or debt reduction. It typically invests in acquiring other brands. While it has a ROCE of 18%, its new investments may not always yield such high returns.

10. Growth Prospects and Future Valuation

Earnings Growth and Revaluation Potential

The forecasted increase in wealth and the middle class globally in the coming years, especially from emerging markets, is a catalyst for growth in the sector above economic growth. Forecasts range from 5% to 7%, depending on the study. This forecast makes sense, especially considering that from 1996 to 2019, the sector grew at an average of 6% annually.

Expected Annual Returns

Finally, let’s examine why the stock has dropped so much in the last six months. The potential revaluation over the next five years is around 66%, which translates to 10% annually. Adding dividends and share buybacks, we arrive at an expected annual return for shareholders of 13%.

Conclusion

LVMH positions itself as an undisputed leader in the luxury sector, supported by a diversified portfolio of iconic brands and a robust management strategy led by Bernard Arnault. Despite current challenges, such as the slowdown in Chinese consumption, currency fluctuations, and global economic impacts, the company has consistently demonstrated resilience over the years, with superior margins and steady growth in revenue and valuation.

LVMH’s diversified revenue structure, focus on exclusivity, and positioning at the pinnacle of the luxury market, along with its ability to adapt to global trends, offer strong long-term growth prospects. However, certain risks, including dependence on Chinese tourism, the impact of interest rates, and leadership succession, must be considered when evaluating the investment.

For investors, LVMH represents a solid long-term opportunity, with revaluation potential and expected returns that outperform market averages. The company appears well-positioned to capitalize on projected growth in luxury markets, particularly in emerging regions, and to maintain its leadership in the industry in the years to come.

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