LVMH MOET HENNESSY LOUIS V LVMUY
October 04, 2019 - 9:45am EST by
Barong
2019 2020
Price: 349.00 EPS 0 0
Shares Out. (in M): 505 P/E 0 0
Market Cap (in $M): 176,117 P/FCF 0 0
Net Debt (in $M): 8,684 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.

  • Luxury
  • owner operator
 

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)