PARIS, France — Energy stocks used to be the safe bet, now it's handbags and shoes.
Case in point: The market capitalisation of LVMH, which owns fashion brands including Christian Dior, Louis Vuitton and Celine, passed the €200 billion mark on the Paris Stock Exchange this week. Earlier this year, the French luxury group moved ahead of Anheuser-Busch and Unilever to become the second-largest company in the eurozone following oil and gas company Royal Dutch Shell.
The €200 billion milestone marks an excellent year for LVMH, which has seen its shares jump more than 50 percent. (Shell’s shares are flat over the same period.) It is now three times bigger than arch rival Kering (which has a market cap of €65.7 billion) and five times as big as Richemont, which is currently valued at about €40.8 billion. The conglomerate’s Chairman and Chief Executive, Bernard Arnault, was named the second-richest man in the world this year by Forbes, which estimated his net worth to be over $103 billion.
Why has LVMH’s value increased so much this year?
The short answer is that LVMH has built such a large and diverse portfolio of luxury brands that investors see its success as practically a foregone conclusion. Some analysts have even described the company as undervalued.
“The desirability of LVMH's key brands currently remains very high; this should allow the group to continue to grow consistently and profitably,” wrote Edouard Aubin, a Morgan Stanley analyst, in a May research note. “With the stock trading at a discount to a number of other high-quality global consumer growth names, we see the stock's valuation as attractive.”
LVMH was formed in 1987, with the merger of Louis Vuitton and the wine and spirits group Moët & Chandon and Hennessy, and has acquired numerous brands since then. Aubin said that LVMH’s ability to increase the desirability of its 70-plus brands over the long term has set the group up to outperform competitors in all five divisions: wine and spirits, fashion and leather goods, perfume and cosmetics, watches and fine jewellery and finally, selective retailing, which includes airport shops and Sephora.
The conglomerate’s diverse portfolio and sheer size give it key advantages over the rest of the industry, too. In luxury fashion, only Kering, LVMH’s closest-in-size competitor, along with a few strong independent companies — Hermès and Chanel — can operate on a similarly global scale, creating an environment where smaller groups and standalone fashion brands are struggling to thrive.
In 2018, LVMH generated €10 billion in profit on recurring operations, up 21 percent over the previous year, while Kering made €3.9 billion in operating profit, up 46.6 percent. Not only do these category leaders have more money to spend on marketing and advertising, opening physical stores and improving their e-commerce experience, but they’ve also moved their operations further upstream, buying factories, tanneries — even alligator farms — so that they can control the entire luxury supply chain, boxing competitors out.
And, in terms of scale, LVMH is far ahead of everyone, allowing it to capture a significant share of the €270 billion global market for personal luxury goods.
With such a diverse portfolio, LVMH can take its time developing trickier-to-market brands — such as the little-known-but-historic Patou label — while ramping up growth where consumer interest is high. For instance, Rihanna’s Fenty beauty label hit nearly €500 million in sales in just over a year. Not only was it developed in-house by LVMH’s Kendo beauty incubator, but it was also distributed widely at LVMH-owned Sephora stores, meaning that LVMH controlled the entire process.
LVMH has also remained fairly insulated from the slowdown in China spending. Sales in Asia (excluding Japan) were up 12 percent in the third quarter of the year, with LVMH citing strong performance across the region despite the ongoing political unrest in Hong Kong.
It has also dodged the overall “cooling” of the global economy, spurred by trade tensions between the US and China — as well as the US and Europe. While the US has enforced new tariffs on many goods imported from Europe, including wine, several of LVMH’s top revenue drivers — including handbags and Champagne — have been spared. A recent meeting between Arnault and US President Donald Trump at a newly opened Louis Vuitton factory in Texas spurred controversy, viewed by many as a tactic to keep in the good graces of the president, whose policy-making has often been driven by personal relationships.
What will LVMH's grandness allow it to do next? First off, it is well-positioned to acquire more brands, as illustrated by its October 2019 offer to buy American jeweller Tiffany & Co. for $14.5 billion. While the deal is nowhere near done — Tiffany is likely to field other bids in order to hike up its own stock price and increase shareholder value — the offer shows LVMH’s ability to increase its cash flow. (Tiffany generated $4.4 billion in revenue in 2018.)
“LVMH is in a unique position to lead the next stages of consolidation in the sector,” said Bruno-Roland Bernard, a finance professor at Institut Français de la Mode.
But it is getting too big? After the group’s 2011 acquisition of Bulgari, which valued the Italian fine jewellery house at €3.7 billion, the European Commission investigated whether the consolidation would make it too difficult for others to compete in the category. The group subsequently cleared the merger, although LVMH is a much bigger company now — and Tiffany is a much more expensive purchase. But while analysts expect another antitrust review if the deal does indeed go through, they also think LVMH will once again be cleared.
"Jewellery is highly fragmented, so I don’t expect any problem,” Luca Solca, a luxury analyst at Sanford C. Bernstein Schweiz, said in an email.
If LVMH does remain fairly untouchable, will a competitor ever be able to catch up? A merger between Richemont and Kering could be the answer, although that’s unlikely to materialise. For now, however, the market leader continues to dominate. Until, of course, it doesn’t.
Additional reporting by Laure Guilbault and Zoe Suen.
Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.
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