By Jalpa Bhoolia
"Whoever said money can't buy happiness simply didn't know where to go shopping. - Gertrude Stein"
In 1987 Louis Vuitton and Moët Hennessy merged creating the LVMH Group. As a family-run group, LVMH strives to ensure the long-term development of each of its Houses in keeping with their identity, heritage, and expertise. LVMH is home to 75 distinguished Houses rooted in six different sectors. The company produces and sells Wines and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewellery, and Selective Retailing. In terms of geographic footprint, Asia contributes ~37% to revenue, the United States ~27% and Europe 23.8%.
The personal luxury goods sector
The personal luxury goods market is expected to be a $354.80 billion industry in 2023 and is forecast to grow annually by 3.4% CAGR through 2028.
China, Europe and the United States are key consumers in this industry, however, the Chinese have been responsible for most of the growth over the past two decades. Chinese shoppers do around 70% of their luxury goods shopping outside of Mainland China and so geographically the Unites States has the highest amount of luxury sales by location, with Mainland China constituting 11%. Appareal, leather goods and perfume and cosmetics make up the majority of sales within this sector.
With regards to distribution channels, personal luxury goods' largest sales channel is wholesale. This constitutes sales at department stores, independent high-end multi brand stores and franchise stores. The retail distribution channel is growing at a fast pace, however, and generally margins tend to be higher in this space. It also allows for greater control over the shopping experience and product assortment.
Demographically, generations Y and Z (born after 1980 and around 2000, respectively) have been responsible for most of the market growth within the personal luxury goods sector and are expected to account for 80% of the market by 2030.
Long term, the industry's solid fundamentals are expected to continue guiding its growth and it is also believed that a new season of mergers and acquisitions is anticipated. Shorter term, there could be some challenges - mainly due to depressed economic growth and high interest rates dragging on disposable income. The industry is expected to be more resilient than other areas of the consumer discretionary space since high-income individuals tend to be less impacted by economic cycles.
LVMH plays in the upper end of the luxury goods space along with the likes of Kering, Richemont, and Chanel. The group currently holds majority market share across most of its segments. In Fashion & Leather Goods, LVMH holds ~60% of market share, followed by Kering and Hermes. Fashion & Leather Goods remains a key driver of growth, accounting for ~49% of revenue.
LVMH growth strategy
LVMH's vocation is to ensure the development of each of its Maisons while respecting their identity and autonomy, providing all the resources they need to design, produce, and market products and services defined by excellence and the highest quality.
Vertical integration fosters excellence both upstream and downstream, allowing control over every link in the value chain, from sourcing and production facilities to selective retailing. Sharing of resources on a group scale creates intelligent synergies while respecting the individual identities and autonomy of its Maisons. The combined strength of the LVMH Group is leveraged to benefit each of its Maisons. LVMH has the resources to sustain regular growth thanks to the balance across its business activities and a well-distributed geographic footprint. This balance means that the company is well-positioned to withstand the impact of shifting economic factors.
Financial Performance
3Q23 Sales Results
While the group enjoyed a solid first half of the year, this result was softer than expected and pointed to a clear slowdown in momentum on an aggregate basis.
Revenue rose 10% y/y to €62.2 billion, or 14% y/y on an organic basis so far for the year. For the third quarter, revenue was up 1.1%, compared to Bloomberg expectations for growth of 9.7%. All business groups reported sustained organic revenue growth over the period, except for Wines and Spirits, faced with a high basis of comparison.
Key metrics fell short of Bloomberg forecasts, with four of the five operating segments (save for Selective Retailing) missing consensus expectations on an organic growth basis. For the third quarter itself, sales in Asia (excluding Japan) recorded growth of 11%, down from 34% in the preceding quarter - this raises some concern given the region's weight on the top line. For reference, Asia (excluding Japan) accounted for ~32% of revenue so far for the year.
Segment performance
Outlook
The group maintained confidence in its growth trajectory and will focus on enhancing the desirability of its brands, drawing on the authenticity and quality of its products, excellence in distribution, and agile organisation. LVMH will continue to tap into innovation and high-quality products, continued selective investment, particularly in store network expansion and cost management and agility. Additionally, the company aims to take advantage of the gradual travel rebound while staying vigilant in the context of macro and geopolitical uncertainties.
Investment Case Summary
Risks
Consensus considerations
Valuation
LVMH is trading on 20.1 times forward PE well below its longer-term average rating. The company trades at a premium to its peers but we believe this is justified given the quality and diversity in its brands, its relative scale, and the strength of its balance sheet.
