In the below note, we’ll discuss the reasons why we view LVMH as an exceptional investment opportunity.
LVMH is the world’s largest luxury conglomerate, owning renowned luxury brands like Christian Dior, Givenchy, Louis Vuitton and Moët & Chandon.
It is a family-owned business, with the Arnault Family holding the controlling stake. Bernard Arnault is the Chairman and CEO. The owner-operator’s mindset is a real asset for the long-term investor. Whereas an externally hired CEO will be driven by incentives on a 3-5 year time horizon, the owner-operator thinks long-term.
Decisions made in the short-term are never at the expense of the long-term success of the business.
“To be really good long-term, even if the company is successful, it should be managed as if it could go under within the next 12 months.”, Bernard Arnault, CEO, Chairman and Owner.
The LVMH Group was created in 1987 when Louis Vuitton merged with Moët Hennessy. The Group owns 75 Maisons (brands), all of which are independently managed. The decentralised structure focuses on maintaining the individual identity and autonomy of each Maison.
LVMH stands out within the luxury sector given its scale, brand power, diversified portfolio, M&A track record and owner-managed structure. The company is headquartered in Paris, France, and many of its brands and companies have a long and storied history. Moët & Chandon began in 1743, Hennessy in 1765, and Louis Vuitton in 1854. 31 of the brands are over 100 years old.
The Group has market leading positions across the major categories and operates across five key divisions, all of which have outperformed their respective markets over the past decade.
Group organic sales growth has averaged 10% over the past two decades.
The Group’s largest division is Fashion & Leather Goods, representing c.50% of sales and over 70% of operating income. Organic sales growth in this division has averaged 12% over the long-term. Louis Vuitton and Christian Dior are the two key brands.
Geographically, the Group has significant sales exposure to Asia, particularly China, the US & Europe. Financial performance on a region-by-region basis will undoubtedly fluctuate in the short-to-medium-term. However, LVMH’s globally diversified position leaves it well placed to benefit from the global growth in wealth over the long-term.
Over 20 years, LVMH has compounded sales & earnings per share annually at 10% & 17% respectively. The equity has delivered a 17% total annualised return.
The Group facilitates the development of its brands by providing the Maisons with all the resources required to design, produce and market products and services. Very careful attention is paid to detail in order to deliver the highest quality products and services.
Management are experts in desirability and in sustaining that desirability over a long period of time. Superior products are the result of a culture focused exclusively on delivering the highest quality. This, in turn, drives desirability and pricing power.
“The reality is that pricing power is actually a function of the desirability of the brand. Desirable brands can increase prices, and non-desirable brands cannot. It’s as simple as that.”, Jean-Jacques Guiony, CFO.
LVMH prioritises control over the supply of their products. The vertically integrated supply chain ensures control over the quality of the finished product and the manner in which it is distributed.
A luxury brand cannot be built overnight. Time represents one of the biggest barriers to new entrants because a true luxury brand takes decades to build. The risk of disruption for a well-managed portfolio of luxury brands is low.
The power of LVMH’s brand equity is recognised by independent parties. Louis Vuitton consistently scores highly in global brand rankings and has done for decades.
In 2021, LVMH became the first company to have five brands within the Interbrands top 100 Best Global Brands, underscoring management’s ability to generate desirability and value across a large portfolio.
The release of the 2023 top 100 suggests that another LVMH brand, Moët & Chandon, could soon make the top 100.
Management’s ability to balance growth in desirability against all-out growth in volume – a dynamic which often dilutes brand equity – is exceptional.
LVMH offers software-like levels of profitability, with a gross margin of 70%, but without the higher risk of disruption inherent within the technology sector.
LVMH typically outperforms the luxury goods sector in downturns given the strength in its core customer, the demand for its products, the diversified portfolio and its overall strategy. The Group invests in good times so that it can outperform in tough times, a counter-cyclical strategy which underpins its historical success.
Luxury spending is highly discretionary and therefore susceptible to the underlying consumer and their propensity to spend. There will inevitably be volatility quarter on quarter, year-on-year. However, the secular trends in global wealth and LVMH’s leading market positioning are supportive over the long-term.
Global wealth is expected to increase by $169t by 2026, a 7% CAGR, with middle-income countries primarily driving global wealth increases.
The number of ultra-high-net-worth individuals, with wealth above $50m, is expected to reach 385,000 by 2026, rising by 121,000 in five years, an increase of over 30% in four years. LVMH is therefore operating in a growing market.
The combination of all these elements – growth, profitability, durability, and an exceptional management team make for an attractive investment case that justifies a premium valuation versus the market.
Despite the attractiveness of the luxury sector from a growth and profitability perspective, it is difficult to see how a competitor could build a replicable business. The barriers to entry are high and the barriers to scale are even higher.
We therefore remain confident that LVMH will continue to exhibit its historical equity outperformance versus the broader market over the decades to come.
Written by Archie Tulloch, Investment Analyst.
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