LVMH with the segment under pressure, looking at entry levels for this leader.

 LVMH—FH24 RESULT

There is little doubt that LVMH holds the most prestigious selection of global luxury brands. There are other brands, Gucci, Hermes and Chanel but LVMH is the leader. That leadership will help through troubled times, as more aspirational brands will suffer compared to brands focusing on a wealthier client base.

Having said that there is one lingering issue with LVMH being the size of the demand uplift coming out of C19. The question is are luxury brands over-earning and due for a retracement or a lengthy period of low growth or is the current level of a new base to push higher?

We can use 2019 as the last normal year and assess what 9-year growth rates imply for the 2028 revenues.

2019 revenues	Growth rate to 2028	2028 revenues	Earnings Growth
$60.2B	5%	$93B	1%
2023 revenues	7%	$111b	5%
$95.1	9%	$130B	7%

 

Note that a 5% revenue growth from 2019, implies a decline from current revenue levels!

Below are my current assumptions for earnings. One look at the graph suggests that these assumptions are unlikely, being too smooth. The C19 bump is quite plain to see. The 2016 fall in earnings coincides with the Chinese slowdown, which hit the commodity stocks as well.

 

What are the currently disclosed segments 2023 over 2019. Note Tiffany was acquired in 2021 in the jewellery segment.

Targeting the areas where we can see double-digit growth as a possible sign of excess demand we find that F+LG may show signs of excess demand. The other categories show healthy growth but are not that out of line with longer-term trends and LVMH gaining share in a growing market.

 

In terms of geography, the signs are more difficult to determine. As LVMH management states the large Chinese mainland cluster does move geographies. That is, the Chinese buy luxury goods when they travel. There is also strong evidence of travel plans changing with the purpose of cheap shopping! Overall that is a strong endorsement of the brands. The double-digit growth in the “rest of Asia”, France and “others” may include the Chinese consumer spending up.

There may be the secular trends of growing wealth in the EM and that driving demand for LV bags more than other categories at his stage.

As a comparison, Hermes has seen 18% company revenue growth from 2019 to 2023. Hermes has perhaps been the most successful luxury brand over this period, most LVMH sits below this rate of growth with LV bags the only one close to it. Indicating ther is solid but not extraordinary growth for LV.

Sensitivity Analysis

The last 10 years has seen LVMH trade at an average PE of 32X with a Std dev of 12. That implies PE of 20X is also the low point. Could the stock trade at a PE lower than 20X. anything is possible but hard to see the brand strength being priced at this level over an extended period.

The bear case is no eps growth for 5 years an exit PE of 20X and a 1.5% dividend is received. To not lose any capital under this scenario, a buy price of around $640 is required.

 

Last result

A mix of resilience and softness. The group saw revenues down 1% and profit down 8% half on half. Organic growth was 2%, FX -3%. Profit was 85 lower, LVMH will spend on S&M through a downturn so will see negative operating leverage. That is, sacrifice short-term profits to support the brands for the next cycle higher. That strategy has proven very successful over the LT and will see competitors reduce spend to support profits.

Wines and Spirits bore the brunt of poor conditions, especially Champagne, Cognac some signs of stabilising. Revenues are down 12%, organic growth is down 9% and profits down 26%. The company commented there is little to celebrate in Europe at the moment.

Fashion and Leather Goods, the dominant segment, saw sales down 2%, organic growth up 1% and profit down 6%. The segment has proven resilient so far.

Perfume and Cosmetics, sales are up 3%, organic growth is up 6% and profits are flat. Again a resilient performance.

Watches and Jewellery, note watches are 10-15% of the segment. Revenues are down 5%, organic growth is down 35 and profit is down 19%. The remaking of Tiffany is ongoing, the strategy is to uplift the icon range and downplay the more entry-level products, enhancing Tiffiny’s luxury mix over time. This change will likely be a multi-year endeavour.

Selective retailing, Sephora is taking a significant share in this market, the Duty-free businesses were soft. This segment could be regarded as not really a luxury business like the others so the growth here, while pleasing is of lower quality.

LVMH FCF significantly increased as inventories were managed and PPE fell after some prestigious site buying last year. The company is operationally well run from these numbers.

 

Conclusion

LVMH is in the category of not making you rich quickly but slowly as long as you get the entry price right. The volatility in the earnings growth does give rise to opportunities to have a reasonable stake in this stock. I entered a modest holding at $665 with the view to increase at lower prices. There seems no need to change this strategy. With the consumer under some pressure and associated stocks following, an opportunity could arise here. Look to add.