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Now for today’s piece:

Inside The Business Of LVMH

A Deep Analysis Of Luxury’s Biggest Name

Key Metrics

EV/EBIT – 22.5x

D/E – 1.38

10-Year Dividend Growth Rate – 24.43%

Dividend Yield – 1.34%

Dividend Payout Ratio – 44.83%

Market Cap – $493.36B

FCF Yield – 3%

Earnings Per Share (TTM) – $28.03

Highlights

Company Profile

Louis Vuitton Moët Hennessy engages in the manufacture and sale of luxury products.

The company operates through Wines and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewelry, and Selective Retailing business groups.

LVMH is headed by CEO Bernard Arnault and is headquartered in France.

Note: LVMH does not trade on any U.S. stock exchange. It may be purchased on the OTC market under tickers LVMHF and LVMUY.

Strengths

Established Portfolio of Brands

LVMH has an incredibly diverse portfolio of brands, most of which have an incredibly long history of providing luxury products. Some of its brands include:

• Louis Vuitton (1854)

• Tiffany & Co. (1837)

• Birkenstock (1774)

• Hennessey (1765)

• Fendi (1925)

• Moët (1743)

Throughout all of the unprecedented events and uncertainty the last few hundred years have brought, LVMH’s brands have proved to be resilient.

Alcohol, fragrances, and luxury clothing are a deeply competitive industry, yet LVMH’s brands continue to shine year after year.

Global Presence

LVMH boasts an international footprint with a wide distribution network and a strong presence in key markets.

It has 5,664 stores in worldwide and saw tremendous growth in the U.S. and Asia last year.

Strong Margins & Pricing Power

Despite the inflation over the past 2 years, LVMH has been able to maintain its margins.

The company has been able to raise the prices of its already high-priced items, and consumers haven’t batted an eye.

LVMH remained steady at about a 26.6% operating margin in 2022.

Super impressive and efficient.

Management

Assessing management isn’t usually my main focus when digging into a company, but LVMH is an exception.

LVMH’s CEO Bernard Arnault is as good as they come.

David Senra of the Founders Podcast delivered an incredible breakdown of Arnault’s rise to become the CEO of LVMH.

Arnault started with a $15 million investment in a failing French textile company called Boussac.

Through a series of moves, Arnault has gained control of LVMH and grown the market cap to $493.36B.

Here are some highlights:

• Took over LVMH in 1989 by buying up shares and taking advantage of the beef between the CEO of Louis Vuitton and the CEO of Moet Hennessey

• Bought Bulgari for $5.2 billion in 2011

• Acquired a 50.1% stake in Rihanna’s fashion brand Fenty

• Bought Tiffany & Co. for $16 billion in 2021

Weaknesses

Dependence on the Luxury Market

While LVMH has had incredible success in the luxury market space, its business is highly dependent on consumer tastes.

Many, if not all, of LVMH’s products are discretionary and may be among the first things to be cut if sh*t hits the fan, economically speaking.

Its brands have been tried and true for decades, but will that remain to be the case?

Will people always want luxury goods?

My guess is probably, but its not guaranteed.

Overreliance on Fashion and Leather Goods

In 2022, LVMH amassed an impressive 79.184 billion euros in revenue.

Its largest contributor was the Fashion & Leather Goods segment, contributing 48.8% of total revenue.

Were there to be a drastic change in demand for fashion and luxury goods, LVMH’s revenue would suffer.

It’ll be interesting to see if the business can diversify its revenue streams to reduce its reliance on fashion & luxury goods.

Counterfeit and Brand Dilution Concerns

Counterfeit items are something every luxury brand likely deals with, and LVMH is no exception.

It’s estimated that $3.15 trillion worth of counterfeit luxury goods were sold in 2019.

LVMH sets aside $17 million per year to fund its team of over 60 lawyers and its anti-counterfeiting measures.

LVMH also has an extensive history collaborating with brands.

Most recently, they collaborated with Nike to release the “Tiffany 1s” and while these partnerships may increase LVMH’s exposure to new customers, they have to protect their luxury brand and be sure to not dilute its exclusivity.

Opportunities

Emerging Markets

LVMH’s biggest markets consist of the U.S., Asia, and Europe.

Its next leg of growth may come from its fastest-growing market — the emerging economies in Asia, such as China and India.

Both China and India boast a rising middle class that may offer an opportunity to widen LVMH’s customer base.

Digitalization and E-Commerce

Much of LVMH’s products are sold in-store where Arnault and his team work extensively to craft a luxury shopping experience.

But since the days of the pandemic, we’ve seen how shopping habits have changed.

Many people prefer an e-commerce experience where they can shop from anywhere, anytime.

LVMH can leverage its strong brands and distribution to create an Omni channel shopping experience for consumers.

Sustainable and Ethical Practices

In the past few years, there has been a push for more sustainable products.

With many of LVMH’s products being made of leather, there may be room to expand their product lines to include more vegan-friendly materials.

This may even attract more customers to the business that are looking for sustainable luxury goods.

Threats

Economic and Currency Risks

LVMH provides luxury products with exorbitant price tags and may see a slowdown in sales during a recession.

Having a worldwide presence may cushion the blow of isolated recessions, but if the world economy slows down altogether, there would be nowhere for LVMH to hide.

Over the past few year or so, LVMH has also benefited from the strong U.S. dollar.

If the U.S. dollar weakens, it may impact LVMH’s bottom line.

Changing Consumer Preferences

As we talked about earlier, LVMH’s highest earner is its Fashion and Leather Goods segment but for the past few years there has been a push for more sustainable practices.

With leather making up a majority of sales, it will be interesting to see if the company could pivot its most popular products to fit the demand of more sustainably-conscious consumers.

In addition, consumers may choose to shop more through e-commerce, which is not LVMH’s forte. Could the company change its offering to meet more e-commerce friendly consumers?

Also, it’s not a given that luxury products will remain a sought-after product by younger generations. While I think many people my age (24) would want an LVMH product, can they realistically afford it? With the prices of rent, housing, groceries, gas and restaurant food all on the rise, will anyone my age be able to afford these products? Will they go into debt in order to buy LVMH products? It remains to be seen.

Lastly, LVMH has had some peaks and troughs as a company. Many of its brands have had to go back to the drawing board and redesign their branding and products. It has worked in the past, but will it work in the future? Will LVMH be able to remain at the forefront of luxury or will some other company snatch the throne?

The Dividend Breakdown

LVMH has rewarded shareholders by way of dividends. Its 10-year dividend growth rate is 24.43% which puts it on par with 2 of my favorite stocks UNH and HD. All three of these companies have 10 years of 20%+ dividend growth and are elite companies in my opinion.

LVMH’s dividend payout ratio is 44.83%, which is well under my limit of 60%. There’s plenty of room to keep growing the dividend.

Its dividend yield is 1.34% which is impressive given that shares of LVMH are trading at an all-time high.

LVMH has paid a dividend for 9 years and has raised it for 3 consecutive years.

The Thesis

Louis Vuitton Moët Hennessy is a diversified luxury goods conglomerate specializing in high-end fashion, spirits, accessories, and fragrances.

Their core customer base consists of higher-income people which are less affected by recessions. LVMH has amassed popular brands that are sought out by many consumers around the world it has a long-standing history of favorable acquisitions.

Its diversified product offerings and consistent demand from recession-resistant customers around the world should fuel growth for years to come, regardless of the state of the world economy.

Valuation

LVMH is trading at all time highs, but that doesn’t mean it’s terribly expensive.

Today the company trades at 22.5x EV/EBIT, which isn’t cheap by any stretch, but it’s not outrageous either.

Over the past 5 years, LVMH’s average EV/EBIT was 21x.

A 21x EV/EBIT would put shares at $879.24

For comparison, its closest competitor Hermes trades for 41.6x EV/EBIT.

LuluLemon and EssilorLuxottica trade for 27.6x and 28x EV/EBIT respectively.

Final Thoughts

LVMH is not a typical stock that I’d add to my portfolio.

I’m not big on discretionary stocks, and I’m not big on clothing or alcohol companies either.

So why LVMH?

For me, the business is too expansive and well run to be ignored. Its luxury brands have incredible brand loyalty and I put Bernard Arnault’s business acumen in the top tier. He knows what it takes to take a brand into the stratosphere of luxury.

Many of LVMH’s brands have seen centuries of sustained success. How many business have that claim to fame?

Right now, shares are a tad too expensive for me to start buying, but I will be patient and wait for shares to reach my buy zone.

I’d like to buy with a 10% discount to the $879.24 intrinsic value I found before, which would put my buy zone at $791.32

LVMH is a company I can’t wait to add to my portfolio!

What do you think LVMH? Buy, sell or ignore it all together?

Let me know in the comments and thank you for reading!

Sincerely,

Dr. “Luxury” Dividend

Links & Memes

Here are some of the best things I saw this week:

• Why red is the most common color on country flags – I had no idea the color red could be seen from a further distance than any other color. (The Cultural Tutor)

• Infrastructure that looks like sci-fi – Google’s quantum computer looks absolutely mind-boggling! (Kane)

• The globe as we know it is a lie – Here are 20 facts that give you a vastly different perspective on the size and shape of countries on Earth. (Tomas Pueyo)

And of course, some memes:

And a beautiful picture of a field of tulips:

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