Description

LOUIS VUITTON MOET HENNESSY

Luxury powerhouse 

Elevator pitch

LVMH is the world’s leading luxury/aspirational brand company. Its brands have timeless appeal and will continue to symbolize success and wellbeing for future generations. Over time, the global upper middle class will grow in size, and LVMH should have a long growth runway ahead. I don’t see any compelling reasons why LVMH can’t continue to grow earnings at a mid to high single-digit pace for a very, very long time. It is well run and enjoys strong competitive advantages.

This is not an investment where I think I have some special insight into how earnings will develop in the near term or when or where some particular catalyst will occur that will unlock value. In fact, I first wrote it up focused only on how much I liked the qualities of the company and was merely thinking that at some point, I wanted to own this for the long term. I figured it would be grossly overvalued now like almost all other megacaps out there (yes, there are exceptions). Surprisingly, it isn't. At the current price, LVMH is not exactly cheap, but should still provide a mid to high single digit annual return going forward when including dividends. Given the many strengths of this company, I think that's pretty decent.

“You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right – that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else.” Warren Buffett

Thesis overview

•MC FP Equity is the world’s leading luxury/aspirational brand company. 

•Its brands have timeless appeal and will continue to symbolize success and wellbeing for future generations. As such, the company should have a long if not indefinite growth runway ahead, albeit at a moderate pace and with intermittent pauses due to economic cycles.

•It is very well managed by people with a truly long term orientation and has a very long history of successful operations. And it’s still growing fast: yoy organic rev growth in H1 2019 was 12%!

•In the short term however, the risk of a global economic slowdown and deterioration in global trade conditions could provide headwinds, especially a significant slowdown in China. I think it’s important to do the required work on LVMH now as this may mean an even better buying opportunity is close at hand (but I’m not sure about that obviously, or I would have waited to buy altogether).

•Key assets include famous brands Louis Vuitton, Christian Dior, Givenchy, Kenzo, Guerlain, Sephora, Hennessy, Dom Perignon, Moet & Chandon and the Belmond and Cheval Blanc hotel chains.

•LVMH has a very strong history of increasing revenue and free cash flow (and high shareholder returns), and a rock solid balance sheet (0.7x net financial debt/EBITDA , weighted avg coupon on bonds of 0.9%, lots of available undrawn capacity).

•The largest and arguably strongest company in its category, with wide moats: Cost advantages from efficient scale, strong intangible assets (brands). Should be durable. 

•Well managed; effectively controlled by the Arnault family. Bernard Arnault has 3 kids in central positions in the company which will ensure power stays with the Arnaults after Bernard retires. I view this as a very good thing, long term planning and avoiding short term profit optimization is crucial for conserving brand value.

•I expected 2019 to provide a great opportunity to buy LVMH at a discount to its long term fair value due to trade war worries, so far that has not been the case. Given the quality of the company, I still think it looks like an ok investment from current levels and should be bought. Hence I recommend starting a smaller position now, and adding more later should my expectation of a global economic slowdown be correct.

•My p-weighted expected return here from current levels is about 7% per annum including dividends. Not terribly exciting, but not terrible either given the quality. 

Main risks

•Bad acquisitions is always a risk

•After Bernard Arnault’s time is up, a conflict between the Arnault heirs could be detrimental

•Risk of a global economic slowdown and deterioration in global trade conditions as mentioned

•FX risks, EUR vs RMB e.g, in our case the EUR vs the NOK also a risk

•Changing global travel patterns due to war/other conflict or terrorism/natural disasters

•Not least: the fact that I agree with consensus – but then again, the consensus may very well be correct.

Strong track record

Brief company history

•1854: Woodworker Louis Vuitton designs luggage and opens his first store. The LV logo is created in 1896. By 1900 Louis Vuitton had stores in the US and England, and by WWI Louis' son, Georges, had the world's largest retail store for travel goods.

•Henry Racamier, a former steel executive who had married into the Vuitton family, took charge in 1977, repositioning the company's goods from esoteric status symbols to designer must-haves. Sales soared from $20 million to $2.5 billion within a decade. Concerned about being a takeover target, Racamier merged Louis Vuitton in 1987 with Moët Hennessy (which made wines, spirits, and fragrances) and adopted the name LVMH Moët Hennessy Louis Vuitton. Moët Hennessy had been formed through the 1971 merger of Moët et Chandon (the world's #1 champagne maker) and the Hennessy Cognac company (founded by Irish mercenary Richard Hennessy in 1765).

•Racamier tried to reverse the merger when disagreements with chairman Alain Chevalier arose. Racamier invited outside investor Bernard Arnault to increase his interest in the company. Arnault gained control of 43% of LVMH and became chairman in 1989. Chevalier stepped down, but Racamier fought for control for 18 months and set up Orcofi, a partner of cosmetics rival L'Oréal.     

•In 1987, shortly after the creation of LVMH, the brand new luxury group resulting from the merger between two companies, Arnault mediated a conflict between Alain Chevalier, Moët Hennessy's CEO, and Henri Racamier, president of Louis Vuitton. Racamier tried to reverse the merger when disagreements with chairman Alain Chevalier arose. Racamier invited outside investor Bernard Arnault to increase his interest in the company. Arnault gained control of 43% of LVMH and became chairman in 1989. Chevalier stepped down, but Racamier fought for control for another 18 months and then set up Orcofi, a partner of cosmetics rival L'Oréal.        

•In July 1988, Arnault provided $1.5 billion to form a holding company with Guinness that held 24% of LVMH's shares. In response to rumors that the Louis Vuitton group was buying LVMH's stock to form a "blocking minority", Arnault spent $600 million to buy 13.5% more of LVMH, making him LVMH's largest shareholder. In January 1989, he spent another $500 million to gain control of a total of 43.5% of LVMH's shares and 35% of its voting rights, thus reaching the "blocking minority" that he needed to stop the dismantlement of the LVMH group. On 13 January 1989, he was unanimously elected chairman of the executive management board.

•Since then, Arnault led the company through an ambitious development plan, transforming it into one of the largest luxury groups in the world, alongside Swiss luxury giant Richemont and French-based Kering. He promoted decisions towards decentralizing the group's brands. As a result of these measures, the brands are now viewed as independent firms with their own history (“houses” in LVMH parlance).

•LVMH increased its fashion holdings with the purchases of the Givenchy Couture Group (1988), Christian Lacroix (1993), and Kenzo (1993). The company also acquired 55% of French media firm Desfosses International (1993), Celine fashions (1996), the Château d'Yquem winery (1996), and duty-free retailer DFS Group (1996).

•Next LVMH bought perfume chains Sephora (1997) and Marie-Jeanne Godard (1998). In 1998 LVMH integrated the Paris department store Le Bon Marché, which was controlled by Arnault.

•In 2016 LVMH acquired Germany luxury baggage brand Rimowa for around 640 million Eur. The acquisition increases LVHM's exposure to the growing luxury tourism market.

•LVMH acquired Christian Dior in a 12 billion deal in 2017 and the Belmond resort brand in 2018. 2018 and 2019 activities also include building the Dior brand to a new major profit center, “repositioning” at Marc Jacobs and Tag Heuer and taking a minority stake in Stella McCartney as well as buying the premium rose winw producer Chateu Du Galoupet.

Sources: Hoovers, Wikipedia, Business of Fashion, The Fashion Law.

Timeline available on http://www.thefashionlaw.com/home/lvmh-a-timeline-behind-the-building-of-a-conglomerate

Senior management and board

CEO: Bernard Arnault

 “I always liked being number one...I did not succeed at the piano, I did not succeed at tennis. I consider that success is to arrive at a point where all my teams, the group is the number one in the world...We are still small. We’re just getting started. This is very fun. We are number one, but we can go further.” 

“I hate the past. What interests me is the future. Have a chocolate.”

Bernard Arnault (2019) https://www.ft.com/content/21f64410-9117-11e9-aea1-2b1d33ac3271

This is the head of a company with a 175 billion EUR market cap, a guy worth over a hundred billion dollars. He’s seemingly devoid of nostalgia and still hungry!

The FT article is required reading, and here is some more background on Arnault from the company website:

Bernard Arnault is Chairman and CEO of LVMH Moët Hennessy – Louis Vuitton, the world’s leading luxury products group. Born to an industrial family in Roubaix, France on March 5, 1949, Mr. Arnault attended the Roubaix lycée and the Faidherbe lycée in Lille. He then went on to study at the Ecole Polytechnique.He began his professional career that year as an engineer with the Ferret-Savinel construction company and successively was promoted to various executive management positions before becoming Chairman in 1978. Mr. Arnault remained there until 1984, when he undertook the reorganization of the Financière Agache holding company. He returned the group to profitability as he embarked upon a strategy of developing the world’s leading luxury products company. In the process, he reinvigorated Christian Dior as the cornerstone of the new organization. In 1989, Mr. Arnault became the majority shareholder of LVMH Moët Hennessy – Louis Vuitton, creating the world’s leading luxury products group. Mr. Arnault has been Chairman and CEO of the company since that date. Mr. Arnault is also President of the Board of Directors of Groupe Arnault S.E. (his family holding company). Mr. Arnault is married and has five children. He has been awarded the honorary titles of Grand Officier de la Légion d’Honneur and Commandeur des Arts et des Lettres.

CFO: Jean Jacques Guiony

Jean-Jacques Guiony was born in France on December 31, 1961.

After graduating from HEC business school in 1984, he began his career in 1985 as a Research Analyst with Banque Nationale de Paris in Paris and then with Merrill Lynch in 1988 in London. In 1990 he joined the Mergers & Acquisitions department of Lazard Frères, becoming a Partner in 1997 and then Head of Mergers & Acquisitions in 2000.He joined LVMH in 2003 as Deputy Finance Director before becoming Chief Financial Officer in 2004. He is also Chairman and Chief Executive Officer of La Samaritaine since 2010. Jean-Jacques Guiony is a member of the LVMH Executive Committee. He has been awarded the honorary title of Chevalier de la Légion d’Honneur.

Group managing director: Antonio Belloni

Antonio Belloni was born in Italy on June 22, 1954. After earning a degree in economics from the University of Pavia (Italy), he joined Procter & Gamble in 1978. He held a series of positions of increasing responsibility in the United States, Greece, Belgium and Switzerland before being appointed President of Procter & Gamble Europe in 1999. He joined LVMH in 2001 as Group Managing Director, with responsibility for strategic and operational management of Group companies. He is a member of the Board of Directors of LVMH and Chairman of the Executive Committee.

Development and acquisitions: Nicolas Bazire

Nicolas Bazire was born in France on July 13, 1957. He is a graduate of the French Naval Academy (1978), the Institut d’Etudes Politiques de Paris (1984) and studied at the Ecole Nationale d’Administration. 

He is an honorary public auditor with the French Cour des Comptes, the state audit body.Nicolas Bazire served as Cabinet Director for Prime Minister Edouard Balladur from 1993 to 1995. In 1995 he joined Rothschild et Cie Banque as a Managing Partner. He was appointed Managing Director of Groupe Arnault in 1999 and became a member of the LVMH Board of Directors. He is a member of the Executive Committee. He is also member of the boards of Carrefour, Suez and Atos.Nicolas Bazire is a Commander in the French Naval Reserve. He has been awarded the honorary titles of Officier dans l’Ordre National du Mérite and Chevalier de la Légion d’Honneur.

Board of directors:

Bernard Arnault, Antonio Belloni, Antoine Arnault, Delphine Arnault, Nicolas Bazire, Sophie Chassat, Charles de Croisset, Diego Della Valle, Clara Gaymard, Iris Knobloch, Marie-Josée Kravis, Lord Powell of Bayswater, Marie-Laure Sauty de Chalon, Yves-Thibault de Silguy, Hubert Védrine.

Given that the Arnault family controls 47% of the shares and 63% of the votes in LVMH and that 4/5 of Bernard Arnault’s children work in LVMH, a brief profile of the most centrally placed of these kids follows (Frederic is not shown but works as strategy and digital director in Tag Heuer while Jean, 21, has not yet started to work in the group). The most likely successors to Bernard are Alexandre and Delphine. 

Antoine Arnault

•“One of two heirs presumptive to the LVMH empire, Antoine Arnault is the chairman of Loro Piana, chief executive of Berluti and head of communications and image at LVMH.

•Arnault was appointed chairman of Loro Piana in December 2013. The appointment came after LVMH, the company his father  Bernard Arnault controls, purchased 80 percent of the luxury cashmere retailer. Arnault was "expected to take up a managerial position at Loro Piana after playing a pivotal role in LVMH’s 2 billion-euro ($2.73 billion) acquisition of the company in July, according to a person familiar with the situation," reported Bloomberg at the time.

•Antoine's first chief executive role was at Berluti, charged with recasting the luxury shoemaker into a global luxury menswear label, a role in which he continues. Arnault began his career at LVMH in 2005, working in its advertising department. In 2007, he was appointed director of communications at Louis Vuitton , a role that would see him launch the "core values" campaigns featuring unexpected international figures, including Mikhail Gorbachev and Muhammad Ali, as well as Angelina Jolie and Bono. In 2011, Arnault launched "Les Journées Particulières," an opportunity for enthusiasts to enter the hallowed ateliers of LVMH’s design and accessories houses and witness the craftsmanship of their artisans.

•In Jun 2018 he was named head of communication and image at LVMH, charged with managing the growing attention’ in the company from the media and public, in addition to his two current roles.

•One of two heirs presumptive to the LVMH empire, Arnault is often forced to justify his accelerated ascension through the company. Describing himself and his sister Delphine, Arnault says simply, "We work hard. We were raised with real values about the importance of work and respect for the people.”

•Antoine Arnault sits on the board of LVMH, alongside his father and his elder sister Delphine Arnault. He lives in Paris with his partner, model Natalia Vodianova.”

Source: https://www.businessoffashion.com/community/people/antoine-arnault

Delphine Arnault

•“Prior to her appointment as executive vice president of Louis Vuitton , Delphine Arnault, one of two heirs-apparent to her father Bernard Arnault ’s role as head of LVMH, had served as deputy managing director of Christian Dior.

•Credited with overseeing one of the label’s most successful periods during her decade long tenure at Dior, the executive played an instrumental role in steering the growth of the leather goods and accessories businesses and in overseeing the appointment of Raf Simons as creative director, following the sudden departure of John Galliano .

•Arnault joined Dior in 2001 as commercial director, following a year-long turn at the helm of business development at the John Galliano brand, and was appointed as deputy managing director in 2008, becoming second-in-command under chief executive Sidney Toledeno.

•The French businesswoman began her career at McKinsey & Co in Paris, having attended EDHEC Business School in Lille and the London School of Economics. Appointed to the board of LVMH in 2003, Arnault also serves on the board of Christian Dior S.A., as well as the individual boards of Pucci, Loewe and Céline.

•At Vuitton, Ms Arnault has been charged with overseeing the label’s re-positioning within the luxury market following slowing growth at LVMH’s biggest luxury brand.”

Source: https://www.businessoffashion.com/community/people/delphine-arnault

Alexandre Arnault

•“The son of LVMH chairman Bernard Arnault , Alexandre Arnault is one of fashion’s youngest chief executives. At just 25 years old he helms luxury luggage brand Rimowa, particularly renowned among the celebrity jet-set crowd, and has been influential in propelling LVMH’s digital strategy forward through its collaborations with Supreme, Off-White's Virgil Abloh and Fendi.

•Arnault comes from a digital background, originally graduating from Télécom ParisTech before going on to gain a master of research in innovation from École Polytechnique. He has been an influential force in pushing digital to the forefront of LVMH’s agenda, and was a key behind-the-scenes player in the launch of 24 Sèvres, the conglomerate’s new multi-brand e-commerce platform.

•In October 2016 LVMH announced that it would acquire an 80 percent stake in suitcase maker Rimowa for €673.6 million, confirming that Arnault would be appointed co-chief executive upon completion of the transaction, running the German company alongside Dieter Morszeck. His executive appointment came after just three years of behind-the-scenes work at the family holding company Groupe Arnault.

•Arnault was reportedly the first to spot Rimowa as a potential acquisition target for LVMH — after Samsonite announced it would acquire Tumi in March 2016, Rimowa was the last high-end luggage brand left on the market — and sources close to the conglomerate say Arnault was also the first to reach out to Morszeck. Upon his official appointment in January 2017, Arnault confirmed plans to open seven stores in addition to the Parisian flagship over the course of the year.”

Source: https://www.businessoffashion.com/community/people/alexandre-arnault

Business overview: product lines, geographical footprint, historical figures

1. Wine & spirit houses (owned 34% by Diageo)

Strengths:

•Large and agile distribution network spanning 160 countries

•Efficient scale in advertising, procurement, bottling and logistics yield sustainable cost advantages

•Successful high end strategy focusing on constraining supply and maintaining high price points. This has been possible because of clever marketing and successfully anticipating changes in consumer preferences while never compromising on quality. Difficult to replicate this portfolio of brands for existing or new competitors.

Weaknesses and risks

•Little exposure to growing gin and tequila markets, partner Diageo has this elsewhere and will not pursue it here necessarily. Not the broadest offering? Could have a presence in more categories.

•Cognac supposedly becoming less popular in recent years (but decent volume growth in recent years for MH)

•Not 100% owned and controlled as 34% is owned by Diageo

•Trade barriers/protectionist policies may cause trouble (China-US, Brexit etc)

•Currency effects

2. Fashion & leather goods

Strengths

•Differentiation: Several iconic brands (Louis Vuitton, Dior, Givenchy, Kenzo, Marc Jacobs etc), hard/impossible to replicate this portfolio. 

Clever limited advertising and distribution strategy preserves exclusivity (LV for example destroys overstock, never puts anything on sale)

•Efficient scale and vast distribution network, various cost advantages from scale and scope

•Opportunity to grow Rimowa and Dior Couture going forward, on a smaller scale finish the restructuring of Marc Jacobs, develop newly acquired minority stake in Stella McCartney

Weaknesses and risks

•Growth limitations: By default a limited audience means fast growth is impossible, but probably large enough to grow at an ok pace almost indefinitely

•Cyclicality – high end fashion spending suffers when the global economy turns down

•Poor decision making on marketing and brand equity destruction – possible but unlikely

•Lack of innovation and adaptation to younger audience

•New marketing channels like social media challenging position? Not so far, quite the opposite

3. Perfumes & Cosmetics

Strengths

•Differentiation: valuable brands. Marketed through A-list celebrities for decades. Hard for competition to get same position and brand awareness (and match marketing budgets)

•Growing popularity of perfumes in Asia is a tailwind

•Good growth in its key brands like Dior, Guerlain, Givenchy and Kenzo

•Younger brands like Fenty by Rihanna and niche high end brands like Maison Francis Kurkdjian shows LVMH is able to reinvent itself and create new trends in the market - Fenty for example is a big success

•Weaknesses and risks

•Growth in discount make-up taking share and reducing pricing power? Not so far

•Are LVMH present enough in natural beauty categories? This will be a major growth area in my opinion, it looks like LVMH is aware of its opportunities here

•E-commerce share increasing and still only about 14% of market (Nielsen numbers)

•Disruption risk from social media marketing – to wit the Kylie Jenner brand, an amazing digital growth story:

https://econsultancy.com/behind-kylie-jenner-s-success-in-a-saturated-cosmetics-industry/

4. Watches & jewelry

 Strengths

•Differentiation: valuable brands with long heritages – but no super-high end brands though. This is with the exception of Zenith a second tier collection in my opinion, but still a good collection of names

•Better brand image perhaps in the jewelry part of business with Bvlgari (also produces watches) which has been showing strong growth recently in several lines

Weaknesses and risks

•Weak sales growth in high end watches globally for some years, but picked up again from 2H 2017. LVMH has done alright throughout this period

•Growth in digital watch technology/wearables – so far Tag Heuer smart watches seem unconvincing?

•Milennials less interested in traditional watches? Lack of innovation? Still young though, 35+ years of age is when interest kicks in on average. Recent data suggest this cohort also prefer purely mechanical luxury

•Personally I find this brand portfolio the weakest among the many LVMH business lines and it would benefit from some clever acquisitions. 

Some other large luxury watch brands that still stand alone: Audemars Piguet, Chopard, Breitling, Richard Mille, Bell & Ross (Rolex & Patek Phillipe are also stand alone brands, but I can’t ever imagine them being for sale).

5. Selective retailing

Strengths

•Sephora: Enhanced retail experience both on and off-line: «Try before you buy», augmented reality, facial scanning. Partnership with smaller, trendy brands. Strong loyalty and bonus/rewards programs.

•Expanding Sephora e-commerce into new markets (Germany, Scandi countries, Mexico, Middle East)

•More focus on digital enhancement of travel retail (DFS)

Weaknesses and risks

•Competitors like Ulta Beauty, clean/natural beauty brands growing fast

•Amazon and other ecommerce players like Net-a-Porter entering more aggressively

•However, high end marketing/branding is a difficult proposition on amazon

6. Other activities

Strengths

•The Cheval Blanc and Belmond chains are great collections of luxury properties

•Fairly high margin, Belmond e.g. is a ca 25% EBITDA margin, 10%+ EBIT margin business

•Not only profitable properties  in their own right, but also great sales channels for the group’s luxury product portfolio!

•The group’s activities as a whole probably means LVMH know a great deal about how to efficiently market and optimally price luxury vacations to a discerning clientele, room for margin expansion at Belmond?

Weaknesses and risks

•Weak other-other? Not sure of the benefit from owning newspapers and radio channels at this point in time…?

•Cyclical businesses

•Political risk in some geographies probably

•Did LVMH overpay for Belmond? Steep price.

Annual revenue breakdown by product line and geography

Leading industry sources agree that China is the most important luxury market going forward. I view this market as solid in the long term, but perhaps vulnerable in the short term due to trade wars and currency risks. I have no special insight into the near term outlook for the luxury market globally but will include what Bain wrote in its june 2019 luxury market report for those interested:

“Milan – June 13, 2019 – The global personal luxury goods market reached a “new normal” pattern of growth, following back-to-back years of strong performance in 2017 and 2018. In 2018, 6 percent global growth (at a constant exchange rate) led to €260 billion in sales, which is expected to balloon to €271-276 billion in 2019, registering an expected 4 percent to 6 percent growth at constant exchange rates. This was driven primarily by the acceleration in domestic spending of mainland Chinese consumers and an increase in European tourism, which, despite socio-political turmoil in countries like the United Kingdom and France, fueled positive growth in the region through the 2018 holiday season. Meanwhile a temporary weakening of consumer confidence in North America, as well as a decrease in traffic to malls and department stores, negatively impacted personal luxury spending during the 2018 holidays stateside.

These are key findings from Bain & Company, the world’s leading advisor to the global luxury goods industry, in the“Bain Luxury Goods Worldwide Market Study, Spring 2019” presented today in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers’ industry foundation.

“This year looks to be on par with our new normal of growth in the market,” said Claudia D’Arpizio, a partner with Bain & Company and lead author of the study. “China continues to dominate the luxury scene. Elsewhere we are continuing to see geopolitical uncertainty shape and reshape tourism spending patterns, with Chinese consumers choosing to spend domestically with more frequency. Overall we are seeing moderate growth in most markets.

Regional performance of the luxury market

In the Americas, the U.S. luxury market was tepid with mild growth throughout 2018. A newly issued U.S. tax reform plan created temporary uncertainties for consumers and negatively impacted domestic spending on personal luxury goods. Meanwhile malls and department stores continued to struggle with decreasing traffic, while mono-brand stores maintained a positive growth trend. Going forward, Bain & Company forecasts 2-4 percent growth (at constant exchange rates) in the region in 2019, with a promising rise in domestic consumption of full-price stores despite a declining flow of Chinese tourists.

Despite socio-political turmoil in the United Kingdom and France, Europe experienced positive growth in 2018 due to an influx of tourism driven by the weakening of the Euro against all major currencies. Going forward, socio-political upheaval and a weakening macro-economic outlook continue to pose threats to the region’s spending on personal luxury goods, with 1-3 percent growth (at constant exchange rates) forecasted in 2019.

Mainland China continues to dominate the global market as local consumers demonstrate a strong preference for purchasing luxury goods at home thanks to price harmonization, consumer-centered strategies, and governmental initiatives. Solid consumer confidence and willingness to buy, especially among young generations, are expected to drive year-over-year growth of 18-20 percent (at constant exchange rates) in the region.

Japan remains an exclusive and attractive market for luxury brands, with forecasted growth of 2-4 percent (at constant exchange rates) in 2019. Tourist spending is expected to rise ahead of the Tokyo Olympics in 2020, with Chinese consumers already confirming their interest in the area.

Across the rest of Asia the outlook is positive, apart from Hong Kong and Macau, which continue to lose out to Mainland China. Bain & Company believes the luxury market in the region is set to grow by 10-12 percent (at constant exchange rates). An expanding middle class with increasing disposable income is fueling growth in Indonesia, Philippines and Vietnam, while sustained growth in South Korea is the result of local consumers and a mild rebound of tourism.

The rest of the world is expected to be flat or see a slight decrease of 2 percent (at constant exchange rates), with the Middle East remaining stagnant as domestic consumer spending begins to flow outside of the region.“We expect stable growth in 2019,” said Ms. D’Arpizio.  “But under the surface of this new normal, the future of luxury is taking shape with a number of key characteristics, including Chinese Generation Z, access, ownership, sustainability and social responsibility, the impact of digital across the entire value chain, preference for luxury experiences over products, and consumer networks as a new measure of value.”

Looking forward: Mega trends in medium and long term

Bain & Company’s research identifies five megatrends that are likely to shape the next generation of luxury in the long-term:

• A new generation: Chinese Gen Z is “the segment to watch.”  They will have significant spending force as proud and empowered impulse buyers.

• Post-ownership:  Bain expects a paradigm shift in consumption favoring access over ownership (e.g. rental, second-hand market).

• Afterlife: Sustainability, social responsibility and circular fashion will be the new mantra, based on a new vision focused on the environment, human labor and animal welfare.

• Beyond physical: Digital will disrupt the entire luxury value chain and necessitate a holistic redesign of the technology eco-system, with an emphasis on luxury experiences over products.

• Above volume/price: Customer networks will be the new and exponential measure of value, beyond product and brand.

“It’s important to highlight the role that insurgent brands will play in the luxury sector,” said Federica Levato, a partner with Bain & Company and co-author of the study.  “They will challenge established brands, pushing for a real paradigm shift with a more creative approach that goes beyond the product itself and impacts all facets of business, ultimately creating a more direct and continuous dialogue with consumers.”

(For those interested in this report: contact Katie Ware at katie.ware@bain.com or +1 646 562 8107).

What I view as the most important long term growth drivers for LVMH specifically:

• Continued growth and vanity of the upper middle/affluent classes, especially in emerging markets

• Development of the Christian Dior brand, recovery of the Marc Jacobs brand

• Possibly acquisitions of smaller, less successful fashion firms with good names like Ferragamo or Tod’s? LVMH has a pristine balance sheet and could lift bigger deals, but probably won’t at this point in the cycle anyway.

• Continued growth in luxury experiences/hospitality, very likely through acquisitions, though large ones aren’t likely in this space

• Growth in selective retailing, especially Sephora where the company is taking share in North-America, the Middle-East and Asia  

Valuation

A SOTP suggests the shares are slightly underpriced at the moment (2018 full year split):

Another ok way of looking at valuation here could be to start with the consensus FCF for 2019 and then make certain assumptions about the growth rate in free cash flow going forward, and then apply  a reasonable multiple based on how the market has valued MC FP historically on FCF a few years out. I don’t think I have any particular edge in terms of estimating FCF or the growth rate in FCF here for that matter, that’s not the point. I just want to be roughly right about valuation over the long term.

Anyway. Assuming half of the trailing ten year growth rate in FCF is sustainable for another 6 years until 2025 (i.e. 9.5%), one ends up at a FCF in 2025 of roughly 11.2 Bn EUR. 20x seems reasonable and fairly conservative based on the long term historical average multiple, meaning the company should be worth around 224 Bn EUR. Current multiples are, unsurprisingly, elevated.

Historical P/FCF: long term avg around 20x / 5% FCF yield. Elevated currently

Historical EV/EBITDA: currently elevated compared to recent history

NB: typo in the table: the multiple contraction from 20 to 12.5x would obviously be larger than 25%.

Conclusion:

7% isn’t that exciting, but this is an ultra-liquid, super high quality company. So I’ll take it! This is a company with timeless growth drivers and great stewardship.

Appendix: peer valuation, qualitative assessment, analyst recommendations

Peer valuation (BB):

Proprietary checklist score and overall qualitative assessment:

Analyst recommendations as of october 04.2019 (BB)

Catalyst

Time and human nature