This week we continue our coverage of ‘never sell stocks’. The purpose of this column is to put forward companies that we have confidence will be equally or more dominant in 20 years as they are today. We take a look at LVMH, or Louis Vuitton Moet-Hennessy, the company which briefly made its chief executive and largest shareholder Bernard Arnault the richest man in the world in December 2019.
The company made news recently after successfully acquiring the well-known jewellery brand, Tiffany and Co for US$16 billion, but the company is much more than that. In 2020 the group houses some 75 individual luxury brands and is the only global consumer company with operations across all five sectors of the market:
• wines and spirits;
• fashion and leather;
• perfumes and cosmetics;
• watches and jewellery; and
• selective retailing.
For some background, the company effectively began as Christian Dior, which remains the holding company, owning some 60 per cent of the headline stock. Christian Dior was purchased by Bernard Arnault along with the well-known supermarket chain Le Bon Marche in 1984. Over many years he was behind the merger of LV and MH and acquisition of any number of additional brand names.
Today’s LVMH looks very different to that of 1987 when it was first traded. The company now has a market cap of close to $50 billion, employs 156,000 people and is the clear global leader in luxury, high quality products. For some background, here are just a few of the ‘houses’ that form the group in 2020:
• Wines and spirits: Moet, Hennessy, Ruinart, Veuve, Krug, Cape Mentelle, Belvedere Vodka
• Fashion and leather: Louis Vuitton, Fendi, Marc Jacobs
• Perfumes and cosmetics: Christian Dior, Guerlain
• Watches and jewellery: Tag Heuer, Hublot
• Selective retailing: Sephora, DFS, Starboard Cruises
Clearly, the brand names are impressive, but more important are the financials and outlook for the business. In the final quarter of 2019, the company reported strong revenue growth of 8 per cent, to €15.27bn, and €53.67bn for the year, for a total increase of 10 per cent. This supported a circa 10 per cent increase in profit from €6.35bn to €7.17bn for the full year and a 10 per cent increase in the dividend. In just two years the company has grown revenue from €42bn to €53bn with operating leverage and margins meaning profit has increased by over 20 per cent in the same period.
One of the more attractive features of the business, however, has been its ability to pivot, diversify and enter new markets successfully. Such has been its success that the likes of the US and Europe represent around 24 to 30 per cent of revenue respectively with the fast growing Chinese and Indian markets hitting 30 per cent in 2019. Diversification across business lines is similarly strong, with fashion and leather goods the primary source of revenue (41 per cent) but selective retailing (28 per cent), perfumes (13 per cent) and wines and spirits (10 per cent) all material contributors. Further evidence of the strength of their business model is the fact that some 1,453 of their 4,915 stores, being 30 per cent, are located in the faster growing Asian region.
The company’s continued success has been driven by its simultaneously autonomous and vertically integrated business lines. It allows each of the major brands to act on their own and react to market changes, but also ensure that the experience of other houses can be leveraged to the benefit of every other business. Easier said than done for most companies.
Management highlighted a few key details in its latest report, which was released in early February:
• all geographic regions saw revenue growth;
• wines and spirits, which is 35 per cent owned by Diageo, recovered after a weak 2018;
• Louis Vuitton and Christian Dior delivered exceptional growth and continue to exhibit substantial profit margins;
• duty free business DFS showed some resilience in the face of the Hong Kong protests;
• Operating free cash flow increased 13 per cent to €6.2bn;
• Gearing fell to just 16.2 per cent to finish the year.
Whilst the coronavirus is likely to have a short-term impact on sales around the world as more populations are quarantined or travelling less, this will be just a blip on the company’s long-term growth radar. With its oldest business established in 1593, we wouldn’t be surprised to see the company still delivering products in 2100; as they say, champagne never goes out of style.