Stock story: LVMH

October 2019

France-based LVMH, which sells fashion, alcohol, watches, jewellery and cosmetics, is the world’s leading personal-luxury-goods company. In its 2018 annual report, the company acronymed for the fashion name Louis Vuitton and the Moët Champagne and Hennessy Cognac labels confirmed what many people in the industry knew. The phrase that “provisions for impairment of inventories ... are generally required” was judged an admission LVMH destroys its goods (apart from wine and spirits) rather than sell them at a discount.[1]

Think about that. As do other personal-luxury icons that control the distribution of their goods via their own stores, LVMH refuses to reduce prices on its designer goods to clear stock. The company, which achieved record sales of 46.8 billion euros in 2018, knows that consumers the world over so aspire to own its often-centuries-old brands they will pay the price the company sets.

Truth be told LVMH doesn’t end up with much unwanted stock. The company that also controls the production of its goods is struggling to keep up with demand. Sales are strong for the conglomerate that includes the Christian Dior, Fendi and Veuve Clicquot brands because the world’s expanding middle class is keen for luxury goods.

Above all, LVMH’s revenue has risen at a 15% annual pace[2] in recent times largely because the group that consists of 75 ‘houses’ or brands across six divisions is enjoying “unheard of growth rates” in China, in the words of Vuitton CEO Michael Burke.[3]

China, where Louis Vuitton opened a store in 1992, has long been the world’s most promising new market for consumer companies. LVMH, which has posted record revenue and profits and increased its dividend so far in 2019, now earns about 33% of its revenue from Chinese consumers.

That percentage is likely to grow. US consultancy Bain & Company forecasts that the Chinese share of the 260-billion-euro personal-luxury market will grow from 33% in 2018 to 45% in 2025, by when the market will be worth about 340 billion euros. Of note is that in seven years, 46% of purchases by Chinese are expected to be struck in Mainland China compared with 24% in 2017. (The balance is purchases by Chinese travellers.)[4]

LVMH shares have surged to record highs in 2019 on such buoyant prospects. Investors judge the company that wants to protect and transmit ‘savoir-faire’ to the world has the right mix of brands synonymous with creativity, artisanship, heritage and quality for the fast-growing luxury market.

Some qualifications: LVMH would be vulnerable to any political or economic disruption in China, as it would be to any European, US or global recession. For all its maisons, the business pivots around the three brands represented in its name and Veuve Clicquot, while 76% of earnings derive from just two of its six divisions; namely, ‘fashion and leather goods’ and ‘wines and spirits’. The personal-luxury market is hyper-competitive in most segments so LVMH must constantly refine its offerings (including its e-retailing capabilities) and revamp its marketing strategies to hold market share. That LVMH has five brands younger than five years old and has the savvy to use Rhianna to launch Fenty Beauty products and record 500 million euros in sales in the first year shows the company can stay relevant. LVMH could get better at controlling costs. In Europe, the luxury-goods industry is under pressure to limit its environmental damage.

Even allowing for these risks and challenges, LVMH’s great advantages – iconic brands produced and distributed under its control that earn healthy margins on growing sales – position the company well for the foreseeable future. Especially for one where the Chinese are richer.

Heritage abounds

The oldest brand in the LVMH group is the Château d'Yquem wine label, which dates from 1593 when the Sauvage family bought the property and converted it into a winery.

While LVMH’s history can be extended to more than four centuries, the modern story starts in 1987 when Moët Hennessy merged with Louise Vuitton. Two years later came another significant event; the company ended up under the control of Bernard Arnault, still LVMH’s chairman and CEO.

Arnault’s ambition when he took charge was to create a conglomerate of luxury brands – and he relentlessly pursued his vision (and become Europe’s richest person as a result). In 1994, for instance, LVMH bought the Guerlain makeup label. Three years later, the company bought fashion-label Marc Jacobs makeup and perfume and cosmetics retailer Sephora. Other acquisitions include Pink Shirtmaker London in 1999 and Italian fashion house Fendi in 2001. And so on to the purchases of Italian jewellery brand Bulgari in 2011, Christian Dior in 2017 and the Belmond luxury hotel chain in 2018.

LVMH these days is structured along six divisions. Fashion and leather goods represented by the Louis Vuitton brand is the largest source of revenue, bringing in 39% of sales in 2018. ‘Selective retailing’, which includes Sephora, the duty-free chain DFS and Le Bon Marché Rive Gauche department store in Paris, accounted for 29% of sales. The other personal luxury divisions are wines and spirits, ‘watches and jewellery’ and ‘perfumes and cosmetics’. The sixth is ‘other activities,’ which includes the Royal Van Lent shipbuilding business and the media assets, the Les Echos and Le Parisien newspapers and French commercial station Radio Classique.

LVMH controls all key aspects of these units including, of course, the decisions not to discount and what to destroy.

Sources: Company filings and website, Bloomberg and others were noted.