Moët Hennessy Louis Vuitton ($LVMH), a renowned luxury brand, or in the world of finance, a renowned stock. With an incredible average return of 18.1% per annum in the last 15 years, it may be stated that from an investment point of view, it has been a standout company. However, since historical data is no certainty for the future, it is important to determine whether the investment is still lucrative for, let’s say the next 15 years. I have recently decided to start accumulating stock of the fashion giant and want to share some insight on my findings. I am also very curious to hear your opinion on the stock and whether I left out anything that is definitely worth noting.
Disclaimer: This is by no means financial advice and it is always important to do your own research before making any financial decisions. The article I have written is merely my opinion on why I have decided to invest in the company, by no means do I encourage you to do the same.
Diversification & Market Analysis
One of the standout features of LVMH that sets it apart from other businesses is its size and the diversity of income streams. LVMH's portfolio encompasses a wide array of products and services, as evidenced by their recent interim financial report for this year.
This report will be used throughout the article to conduct the analysis.
1.1: Revenue streams by business group. Source: LVMH 2023 Interim Financial Report.
As can be seen in figure 1.1, large diversification is present, however it is worth noting that all these products fall within the luxury industry. The luxury industry can go through extreme short-term volatility during economic crises when purchasing power diminishes, causing luxury items to be the first to be sidelined from shopping lists. On the flip side, when considering the long term, we can observe that even after major events like the Great Recession and the COVID-19 pandemic, the luxury market experienced significant downturns but ultimately managed to grow more than fourfold over the past two decades, at a rate exceeding 6.1% annually (see figure 1.2). Projections indicate that the market is expected to continue growing at a rate of 6.2% annually until 2028. Consequently, it can be concluded that while short-term shocks can occur swiftly, the luxury market demonstrates steady long-term growth.
1.2: Annual market value of the luxury industry from 1996 to 2022. Source: Statista.
Another aspect of LVMH's diversification is its geographic reach. In their 2023 interim financial report, one can see that both revenue sources and currency exposure are well-diversified (see figure 1.3). However, a short-term risk lies in the current economic conditions in Asia (ex. Japan), which accounts for 34% of LVMH's revenues, with China being the largest contributor. This short-term concern has contributed to large drops in LVMH's stock price, currently trading at around 20% from all-time highs.
1.3: Revenue by geographic region and invoicing currency. Source: LVMH 2023 Interim Report.
Nonetheless, there are positive signs in the Chinese economy, as data released on September 15th, 2023, by China's National Statistics Bureau (NBS) reveals encouraging trends. Total retail sales of consumer goods in August increased by 4.6% year-on-year and by 0.31% month-on-month. Retail sales of cosmetics rose by 9.7% year-on-year, and sales of gold, silver, and jewelry increased by 7.2%. Additionally, in August, the Consumer Price Index (CPI) increased by 0.1% year-on-year, compared to a 0.3% decrease the previous month. These are all positive indicators for the Chinese economy and signs of stabilization.
However, it is important to acknowledge that short-term volatility is expected and one must keep in mind that investments for the long-term can still experience huge losses in the short-term. Therefore, it is very important to focus on long-term results beyond these temporary headwinds when considering investments in LVMH and to be able to hold on to such investments for long periods of time.
Financial Analysis
Income Statement
2.1: Consolidated income statement. Source: LVMH 2023 Interim Report.
LVMH has demonstrated robust revenue growth, averaging around 11.5% since 2008 (see figure 2.2), which outpaces the overall luxury industry's growth rate of 6.1%. Furthermore, the first half of 2023 witnessed an impressive 15% year-on-year increase compared to the same period last year.
2.2: Annual revenue from 2008 to 2022. Source: Statista.
In terms of net income, the company has shown remarkable performance, with an average annual growth rate of 20.4% over the past five years (see figure 2.3). The temporary dip in performance during the COVID-19 crisis can be explained by the exceptional circumstances of the pandemic, but the years after experienced much greater growth. In fact, the net group share profit surged by 29.8% year-on-year for the first half of 2023 when compared to 2022. However, it is worth noting that China's economic slowdown may pose a risk to achieving expected results in the second half of 2023, potentially affecting year-on-year growth for the entire year.
2.3: Annual net profit from 2017 to 2022. Source: Statista.
Balance Sheet
2.4: Consolidated balance sheet. Source: LVMH 2023 Interim Report.
Looking at the balance sheet (see figure 2.4), it's evident that the company maintains a positive working capital position, with current assets outweighing liabilities. Also they state: “Property, plant and equipment were up 1.9 billion euros and totaled 25.0 billion euros as of the period-end. This increase resulted from 2.0 billion euros in investments, net of depreciation charges and disposals (the comments on the cash flow statement provide further information on investments), as well as an additional 0.1 billion euro increase due to changes in the scope of consolidation during the fiscal year.” Thus their investments are paying off, we will get to that later. They also state that inventories were up, 2.3 billion euros, this is also covered later. Both under the “Retained Earnings & Investment Analysis”.
Cash Flow Statement
2.5: Consolidated cash flow statement. Source: LVMH 2023 Interim Report.
Further analyzing the cash flow statement (see figure 2.5), it is important to recognize that interest rate increases have had a significant impact on the company's finances. The interest paid on net financial debt resulted in a net cash outflow of €328 million, compared to a net outflow of €24 million in the previous year, primarily due to the substantial rise in interest rates over the past year. Additionally, the increase in working capital was mainly driven by higher inventories (€3.178 billion). The Group made this adjustment to secure critical supplies in anticipation of increased business activity in the Fashion and Leather Goods, Watches and Jewelry, and Wines and Spirits segments. Exchange rates also had a notable effect, resulting in a negative impact of €234 million, in contrast to a positive impact of €294 million in 2022.
2.6: Net cash and operating cash flow. Source: LVMH 2023 Interim Report.
Despite these factors, the company still generated free cash flows of €1.797 billion (see figure 2.6), which comfortably covers interest expenses on debt. Nevertheless, the increase in interest outflow on debt is a noteworthy development, and it should be monitored closely if interest rates continue to rise. However, the company still has a good net financial debt to equity ratio (see figure 2.7) and as long as interest rates can be covered comfortably, this should not incur any problems
2.7: Net financial debt to equity ratio. Source: LVMH 2023 Interim Report.
Retained Earnings & Investment Analysis
It's evident that from the net profit of €8.484 billion in the first interim of 2023, a substantial portion, €4.1 billion (see figure 3.1), was distributed to shareholders in the form of dividends, which are paid semi-annually. This results in a current payout ratio for the first half of 2023 and the last half of 2022 of 48% when dividing dividends by net profit. This payout ratio indicates that slightly less than half of the net profit is being returned to shareholders as dividends, while the majority is retained by the company for reinvestment and other purposes.
3.1: Interim and final dividends paid. Source: LVMH 2023 Interim Report.
The fact that investments doubled year-on-year (see figure 3.2) further supports the notion that the company is actively reinvesting in its business to drive growth and potentially enhance shareholder value. Retaining a significant portion of earnings for reinvestment can be a strategic move to fund expansion, research and development, acquisitions, or other initiatives that can contribute to the company's long-term success. Which we see has been working the last years due to significant revenue growth outperforming the luxury market.
3.2: Investing activities. Source: LVMH 2023 Interim Report.
This is also backed by notes on the Cash Flow Statement: “Operating free cash flow halved due to major investments in exceptional real estate and in operational inventories, notably in high jewelry.” Meanwhile dividends have still been growing at 13.04% on average over the last 10 years, compared to 8.91% as a sector median. Thus the investments do not go at the cost of lower dividends or shareholder earnings.
Management Analysis
Thus far investing in LVMH appears to be a well-founded decision (taking into account the risks mentioned). Another compelling reason is the company's strong and capable management team. Bernard Arnault, the CEO and Chairman, has played a pivotal role in leading the company to success. Under his leadership, LVMH has consistently expanded its portfolio, acquired prestigious brands, and maintained a dominant position in the luxury market. Arnault's focus on innovation and a commitment to excellence has positioned LVMH for continued growth and prosperity in the luxury goods industry.
Furthermore, the fact that Bernard Arnault is grooming his five children to take on leadership roles within LVMH is a positive sign of continuity and succession planning. Given that all of his children are already in high positions within various companies under the LVMH umbrella, it suggests a seamless transition plan and a commitment to ensuring the company's ongoing success.
Additionally, the insider buying (see figure 4.1) of LVMH stock by Bernard Arnault and other key insiders is a strong indicator of confidence in the company's future prospects. Even during periods of declining stock prices, their significant investments, often in the millions of dollars, demonstrate a belief in the company's long-term potential. This level of commitment from company insiders can be reassuring for outside investors, as it aligns the interests of management with those of shareholders
4.1: Insider from Q2 2022 to Q3 2023. Source: Insider Screener.
In sum, the combination of strong leadership, effective succession planning, and insider confidence in the company's performance make LVMH an attractive investment opportunity. It suggests that the company is well-positioned to continue its growth and success in the luxury goods market, even as it undergoes leadership transitions in the future.
Competition & MOAT Analysis
In the luxury market, LVMH undeniably holds a strong competitive advantage, often referred to as a "moat." This advantage is deeply rooted in the company's impressive portfolio, which spans over 60 subsidiaries, managing a total of 75 brands across various segments, including fashion, wines and spirits, perfumes and cosmetics, watches and jewelry, selective distribution, and more. Many of these brands date back several centuries, contributing to their strong reputation and status required in the industry. While the luxury sector is highly competitive, LVMH's size and capacity to acquire both emerging fashion brands and well-established, prestigious names, strongly enhances their moat. The company's ability to grow and adapt in such a competitive landscape truly shows their strength. Nevertheless, it's essential to recognize that competition is always present in this industry. Therefore to stand out and maintain relevance, companies must distinguish themselves through their heritage, brand recognition, status, and unwavering commitment to quality.
5.1: Operating margins. Source: LVMH 2023 Interim Report.
This competitive moat holds significant importance over extended periods, as it significantly influences profit margins, which, at present, stand impressively high at more than 25% (see figure 5.1). The sustainability of these margins depends on the company's ability to retain its pricing power, which, in the world of luxury, remains paramount for long-term success.
Conclusion
The luxury market has demonstrated long-term growth, maintaining strong demand for luxury goods despite occasional downturns. Although factors like higher interest rates and inflation can impact the luxury sector's performance in the short term, the overall trajectory appears to be steady for the years ahead.
In this context, LVMH's well-diversified portfolio, spanning different geographies and product categories, positions it for long-term growth. The company's commitment to incremental investments and consistent dividend growth is a strategy that can keep shareholders satisfied and potentially allow it to outperform the broader luxury market.
Furthermore, LVMH's prudent debt management and its ability to cover debt costs even under significantly higher interest rates demonstrate financial stability. The alignment of management incentives with shareholder interests, as shown by regular insider purchases, adds to the company's appeal.
Next to that, LVMH's has a well established competitive moat, demonstrated by increasing margins and outperformance against competitors. While the luxury industry is ever-evolving and subject to consumer emotions, LVMH's strategic focus on investments and capital allocation, particularly those generating high incremental returns, positions it well for long-term success.
With Bernard Arnault gradually grooming his children, who already hold high positions within LVMH's companies, the transition plan appears to be well-structured, indicating a potentially smooth handover of leadership in the future. Therefore the biggest question remaining is: “Who will be the successor of this mega luxury conglomerate?”
Final Word
This was my first company analysis written out in article form. I am still diving into the world of company valuations, where it is always important to take into account the quantitative as well as the qualitative side. I would love to hear your opinion and please do not hesitate to share if I missed anything, as I am always open to feedback! If you want to discuss companies together, feel free to reach out to me. Thank you for reading!