LVMH FH24 result--are we there yet?

 LVMH FY24—are we there yet?

SUMMARY

As widely expected, a tough year for luxury but LVMH proved resilient when there were some notable failures. Possibly 2025 or 2026 will see trend growth re-establish itself after the C19 volatility.  

Some negatives for LVMH in 2024 were the numerous “one-offs” impacting the results including write-downs, loss on sale, and sponsorships, detailed below.

Pricing also caused some concern with the lower price increases compared with the past couple of years coming with FX volatility that made orchestrating smooth FX-adjusted price increases difficult. Price rises are now in the 2-3% range, back to normal.

LVMH has a strategy to invest through the cycle, so in a year of poor revenue growth, we can expect a hit on margins. That said, cost and inventory control, as well as the balance sheet, remain very strong.

There appear two significant operational issues, wine and spirits and DFS. New Management has been given two years to turn W&S around, and DFS remains in review, by the look of it.

2H24 should be the bottom for relative revenue momentum, whether the upturn starts in 2025 or 2026 is uncertain. The numbers for 2H/FH24 (organic revenue growth) were not great with W&S -9%/-8%, F&L +1/-3%, P&C 6%/2%, W&J -3%/0%, and SR +8%/+5%. Only Watches and Jewellery showing some + momentum, possibly Tiffany in the US. The rest are still in negative territory, negative or slowing.

VALUATION

Im in two minds with LVMH. A leader in luxury, although we could argue the much smaller Hermes is better placed, there is little doubt that earnings momentum will recover. LVMH remains very well managed despite a couple of small missteps. An earnings recovery should see some SP re-rating. Do not exit at the bottom of the cycle. Counter to this is that the SP is incorporating some recovery already and luxury can only grow at a certain cadence to remain healthy. There must be unsatisfied demand to retain allure and pricing. Therefore a huge earnings surprise is unlikely.

Under various scenarios, I can see modest value but not great value. LVMH remains a great company and a good diversifier but has little to promote adding to the holding at any prices well above $600, at $740 it is a hold or even a lighten to reallocate to other opportunities. So remains a mid-sized holding.

 

 

Results Call Q4 24 Summary

Bernard Arnault-CEO

Today, I'm not going to report record revenue, but it was nonetheless a robust year and I am rather confident for the year to come.

There is EUR1 billion coming from outstanding items (negative one offs)

Our business groups fared well, especially fashion and leather goods.

A great performance from Sephora. Remarkable

Two major events in 2024, the Olympic Games. We were one of the main sponsors. Now, this is linked to the drop in recurring operating income, because it did cost us a lot of money. And we also supported the renovation of Notre-Dame.

Wines and spirits. We can see that demand is normalizing. Champagne still fared well, even though there was a small decrease. However, cognac and spirits reported a more substantial decrease. And in two years, we expect to see a good recovery, especially since we have a new team. Let's give them two years so that they can show us what they can do.

For watches and jewellery, we have exceptional brands. Tiffany, a record year with its landmark in New York. In Q4 2024, they had great results. we did have a 9% organic growth, which is not bad. Same for Bulgari great results there with some new collections

TAG Heuer is going to be the official timekeeper of all Formula 1 competitions for 10 years. So this is going to have a very good impact on the future.

DFS has been challenged. But outstanding results for Sephora.  As for Le Bon Marche in Paris, well, they reported good results as well.

Jean-Jacques Guiony-CFO

EUR84.6 billion in revenue, +1% for organic growth. The revenue mix has not really changed.

Quarter-by-quarter sales at the beginning of the year were significantly influenced by Sephora. Whereas at Q4, it is far more balanced. Fashion, jewellery, and Sephora all contribute to seeing our business grow in North America.

Asia is still pretty difficult all year round. That's true across Asia, including mainland China. Roughly 10% drop over the year. As for Europe, it's similar to what you saw in the U.S. Slight improvement at the end of the year, mainly in fashion and leather goods.

DFS and Sephora have two very contrasting situations. DFS most of that business is in Hong Kong and Macau. And the currency is pegged to the U.S. dollar, high compared to the renminbi, meaning that for Mainland Chinese, there's no point in them going to Macau or Hong Kong to do their shopping. So DFS had a very specifically difficult year with hundreds of millions of losses on that

Wines and spirits. In a difficult situation, organic growth is actually negative. But we are seeing a slight drop in volume, a drop in prices, and a drop in mix, which explains this.

Overall, quarter after quarter things are improving, especially for watches and jewellery, thanks to Tiffany

operating costs have increased 2%, which is more than the increase in revenue, and therefore has led to negative leverage. we could have been more active on taking costs down. And that would have meant that we were saying that the crisis was structural. But it isn't. It is circumstantial. And we have to be able to react. And we wouldn't want to damage our potential budget or marketing budgets for later. So we had to strike a balance.

The gross margin, was a bit tricky. About -180 basis points, which is a bit more than we had expected. Two factors can explain this. First of all, we haven't or almost haven't increased prices last year, so we couldn't offset in gross margin the increase in the cost of labour or input. The fact is that we usually get profit from fx hedges and when that stops, you've increased the prices of your products and offset it. That's what we've been doing for years and years. But seeing as we haven't done this, the forex effect is in fact particularly negative.

The second explanation is that there have been several one-offs affecting the gross margin which explains about half of the gross margin going down. There's one issue that is very technical. The fact is that the margin on our own champagne or grapes is booked the year of the harvest. We didn't have much in 2024. And therefore not a very good margin. And indeed a negative margin as compared to the previous year- about EUR100 million.

A number of other provisions to the tune of a number of dozens of millions were booked. And that has therefore had an impact on the gross margin.

Store openings that have been decided in 2021, ‘22, ‘23. And that are now open that have contributed to the cost base increase.

We have held back on marketing. Bringing down the marketing cost by about 5%. General and admin expenses have gone up 9% therefore because of a number of non-recurring events such as the Olympic Games, for instance.

Then there are a number of non-recurring items. First of all, the restructuring of DFS in Italy and in France with the sale of La Samaritaine to LVMH with significant losses. Then withdrawal from Stella McCartney. And then the divestment of Off-White. And there again there was a significant loss.

The forex impact, exchange rate fluctuations. I told you that we had a bit of a problem offsetting it. But we are talking about 1 billion, roughly, which is about a third of our operating profit changes explained by forex.

Note inventory is controlled and investments were decreased. Operating free cash flow is up EUR2.4 billion. Net debt lowered.

Questions

Chinese customers from mainland China for 2024, they remain stable, which is worth noting. Of course, it was positive in H1 and slightly less in H2. However, we can see that the situation has been improving in Q4, but it is not outstanding.

As for the U.S., we share the same observation. Stable customer base for the year. Negative in H1 and positive in H2. US appears to be gaining momentum.

As for China, our high-quality products are still extremely desirable in China. People still want to buy our products. What I expect is to see a gradual recovery, so we're going to get back to a normal situation after two years. It's not going to happen overnight. In the U.S., it's going to be a boom, but it's going to take more time for China to recover fully.

Regarding wine and spirits, no divestment is on the agenda.

Tiffany was a sleeping beauty, and we decided to wake her up. Unfortunately, we were not able to keep everyone. We are quite confident Q4 2024, we announced some decreases, but there was a 9 per cent increase. Revenue or the profits from last year was double the profits from before the acquisition. Sales in jewellery were multiplied by four. The landmark reported an outstanding performance, and it is the number one luxury store for LVMH Group, so we are very confident. We have four icons, four main icons that we are developing. And they are growing substantially and gradually. We still have a few stores in the pipeline. It requires investments, but every time we open a new store or renovate a store, the revenue goes up by 25%.

The fashion and leather goods division, if you have a mid-single digit growth of 4%, 5%, 6% (could be lower), you would maintain the operating margin at a stable level.

DFS has some potential strategic changes. Well, you won't be surprised, but in terms of strategic options, I can't tell you much.

Pricing strategy.

We should distinguish between inflation and the forex impact on revenue. Inflation is fairly easy. You just need to increase prices 2% or 3%. It's fairly easy because it's no longer 4%, 5% as was the case in 2021, 2022. So, we can increase the prices moderately as we always have. But then there's the very local factor which is offsetting currency drops by price hikes. We've done that. We did that in Japan, for instance, last year. But we haven't increased our prices there as much as the currency has dropped. Hence the forex impact. So, if we had a more serene currency environment, it would be easy. And we would only have to manage inflation, and a 2% price increase would be easily put across the board.

Customers are increasingly aware of the value of the product beyond the price. Increasing prices is something that is properly understood by clients. The problem is when you increase your prices for no good reason. You have to be able to justify a price hike. Better quality, better finish, different materials used.

A number of competitors have, unfortunately, and again, not all, but some increased their prices in a somewhat extravagant manner without really giving any justification or having any justification to provide. I mean, pushing prices up 15% just doesn't make sense if there's no change in the product. And if that happens, then the clients just wonder what's happening and why they're being taken for a ride.

You have to be realistic, and honest about it, and give the clients high-quality products. Justifiable quality and therefore justifiable prices. And that's what we try and do. And I think we're pretty good at it.

The geographical balance of revenue in the future, well, the current geographical breakdown is pretty good. 25% in the U.S., in Europe, and 30% in Asia, with the rest broken down between Japan and the Middle East. It looks good because it means that we still have a good balance when things go badly in one area. So what has to be done now is not so much focus on the geographical balance of the whole group, but do it for the brands. Louis Vuitton, Dior, and Wines and Spirits do manage, but we really have to make sure that all of our brands manage to have a balanced presence in the U.S., in Europe, and in Asia. And that's not always the case.

the below is only partly reproduced, contact me if keen

APPENDIX INDUSTRY STUDY- BAIN 2024

Summary

These graphs show the perhaps, unprecedented challenges to luxury brands since C19. The volatility over the last few years is starting to work towards normalising. Potentially 2025 is a trend year or maybe 2026. Global personal luxury goods market is lower in 2024, an unusual occurrence from an all time high in 2023. Overall, this is a return to normal trend growth and traditional drivers reasserting themselves.

The top 2% are increasing their share, to circa 45%, Millennials and Gen Z now make up 65% of spend, highlighting the need to remain relevant with these younger groups. Tourist spend continues to recover from C19, 35% versus 40-46% pre C19. The aspirational customers have declined post the C19 bump, this will be a factor on individual brand fortunes.

Regionally, Mainland China continues to struggle, Americas flat, Europe slow, resilient growth and Japan strong due in part to currency. The small but growing EM remain an opportunity.

In many ways this plays to the strong well managed brands strengths, with the proviso that they continue to appeal to the generational changes.