Louis Vuitton (LVMH) Investment Analysis

Rubik Portfolio Management

Moet Hennessy – Louis Vuitton (LVMH) Investment Analysis

Emmanuele Luca Varrati Filippo Bonani Francesco Lorenzi Francesco Giovanni Paganin Lorenzo Paliotta Federico Panariello

Overview: ...... 3 Industry analysis: ...... 3 Countries (see exhibit n.1): ...... 3 Markets: ...... 3 Wines & Spirits: ...... 4 Fashion & Leather goods: ...... 4 Perfumes & Cosmetics: ...... 4 Watches & Jewelry: ...... 4 Selective retailing: ...... 4 Porter's five forces analysis: ...... 5 Industry Rivalry: Moderate...... 5 Bargaining power of customers: Low...... 5 Bargaining power of suppliers: Low...... 5 Threat of new entrants: Moderate/Low...... 5 Threat of substitutes: Moderate/High...... 5 Company analysis: ...... 5 Board and executives: ...... 5 Products and services’ competitive advantage: ...... 5 Corporate culture: ...... 6 Investment case: ...... 6 Key performance indexes: ...... 7 Appendix: ...... 9

Moet Hennessy – Louis Vuitton (LVMH)

Overview:

LVMH, also known as Louis Vuitton Moët Hennessy SE, is a French multinational luxury goods conglomerate with main headquarter in Paris, France. The firm was formed in 1987 thanks to the merger of the fashion house Louis Vuitton with Moët Hennessy, a company previously formed in 1971 as a result of a merger between the champagne producer Moët & Chandon and the cognac manufacturer Hennessy. It nowadays controls around 60 subsidiaries, each of which currently manages independently a small number of prestigious brands. In fact, the firm owns a portfolio of luxury Houses and its business activities are divided into several different segments: Wine and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewerly, and Selective Retailing. LVMH is the largest market capitalization holding in France, and now in the Euro zone, with a record of $220 billion on January 17, 2020. The corporation has gained more than 50% in its shares’ value during 2019, after the acquisition of the luxury brand Tiffany. With more than 200 billions of euros, LVHM ranked 4° among the biggest capitalization in EU, behind Nestlé, La Roche e Royal Dutch Shell: 34° globally. It is also the first french company to exceed the € 200 billion capitalization threshold in the stock market. The LVMH group ranks as the first value of the CAC 40 index, ahead of L'Oréal and Total hovering around 400 euros in 2019. Industry analysis: Countries (see exhibit n.1): LVMH group, being a multinational luxury brand, operates all over the world. By looking at the chart, we can notice how the Asian market is becoming always more relevant and larger, gathering about 40% of the revenues of LVMH group. The importance of this market, especially the Chinese one, is driven by the Chinese propensity to spend on luxury clothing, perfumes, watches brands. However, Europe is still a market with excellent revenue relevance and it is proved that, thanks to the globalization, the social media tools and the social phenomenon of influencer marketing, demand for LVMH’s products will boost even more in the next future and, therefore, the supply will do the same. Markets: The activities performed by the group are highly diversified, divided and organized by categories of products offered and by area into which the firm operates. The different business groups are: Wines & Spirits, Fashion & Leather Goods, Perfumes & Cosmetics, Watches and Jewelry, Selective retailing and Other activities. To best analyze the different markets in which LVMH operates, because of its diversified structure and culture, it is useful to analyze each business group separately. Wines & Spirits: The wine and spirits market is extremely competitive because of the variety of products present. LVMH group managed to reach a global leader position in luxury premium wines and spirits, thanks to its worldwide presence and its exceptional “Maisons” based in the most prestigious wine areas. The premium and high- quality target is, in fact, essential to underline: consumers are focused on the quality rather than on the pricing, since the consumption of luxury wines and spirits is often associated with events of significant importance in the consumer’s life (celebrations, anniversaries, …). Distribution to large masses and increased worldwide expansion, which determined an important increase in terms of disposable income, is boosting the consumption up to the point of well-established status symbols names. This is what LVMH group has done with its diversified most famous brands: Moët & Chandon, Dom Pérignon and Veuve Clicquot.

Fashion & Leather goods: The fashion & leather market has grown in a significant way in the past three years. The importance of the goodwill and brand recognition, the rise of the general demand for prestigious luxury clothing, and the larger diffusion of a globalized market gave a impactful boost to the clothing industry. Revenues, profits and investment in this field grew significantly asserting a dominance role in the total revenues of the group. In addition, the prospects of the market are incredibly positive, with very ample growth margins. Despite of competition being rather high, LVMH is giving more attention to the best designers in the industry, gathering, with numerous acquisitions, some of the most famous names which embody the high standards of the group (Dior, Givenchy, Kenzo, …). Perfumes & Cosmetics: Recently, the “Perfumes and Cosmetics” industry has grown at the same pace as the “Fashion and Leather” one. The two industries are extremely correlated: in fact, famous brands in the fashion branch lately decided to diversify their market target producing cosmetics as well. The importance of a recognizable brand-name is essential in this field because of the fierce competition. LVMH's goal is to gain an ample market share, enhance product quality and increase innovation investments. The market is moving towards online retail shopping as well, with a relevant and still increasing market share in Asia. Watches & Jewelry: “Watches & Jewelry” market is one of the most dynamic markets of the group and is expected to witness strong demand in the next future. For instance, analysts suggest that people in Asia are willing to spend more and more on luxury watches and jewelry. Despite of being a very competitive market, it is tough for new entrants to gain a relevant position within it. Developing brand awareness, producing quality products and increasing social media presence has been the key for the holding to gain a meaningful market share in the afore-mentioned market. Selective retailing: Selective retailing is a complex market because of the entrance of huge online retailing groups (think of Amazon). However, LVMH managed to increase its growth in this field as well, offering a complete in-store experience in order to react to the development of online purchases. Competition is, however, still very fierce in this market. Porter's five forces analysis: Industry Rivalry: Moderate. Generally, since it is quite difficult to enter the industries in which the group operates, it is consequently very harsh to become a leader or to gain a substantial market share. The industry often blocks the presence of the best stylist (e.g. Marc Jacobs for LVMH). The need to maintain the so-called “intangible assets”, reputation and goodwill, and the high quality required, decrease the possibility of having many competitors in the market. Bargaining power of customers: Low. The firm-s target is the high-class society, with consequent high disposable income. People nowadays are generally willing to spend a larger amount of money on luxury and high-quality products. Bargaining power of suppliers: Low.

LVMH often controls directly the suppliers, combining vertical integration and in-house production. These strategies lead to lower costs and high quality standards, thanks to the phenomenons economies of scale and enhanced quality of the products. Threat of new entrants: Moderate/Low. New luxury products and brands can enter the market if assisted by very talented stylists. However, the newest firms often end up being acquired by leading and more prestigious luxury brands. In addition, people also tend to develop a higher preference for established names. Threat of substitutes: Moderate/High. Being fashion something extremely intangible and because people’s preferences and tastes can switch quickly, threat of substitutes is moderately high. However, both high-quality products and the difficulty of entering the market reduce the risk of products substitution. Thanks to economies of scale, producing high- quality products allowa both to mantain high prices and high profits since the customers’ bargaining power is rather low.

Company analysis: Board and executives: According to LVMH’s 2019 annual report, the only declared major shareholder of the holding is Arnault Family Group, founded by Bernard Arnault, LVMH’s CEO and chairman. The Arnault Family Group owns 47.35% of the holding’s shares and has 63.40% of the voting rights. This makes Bernard Arnault a prime figure of the company, wearing the suit of major shareholder, member of the border and CEO. He became CEO in 1989 and has achieved great results in the last 30 years (LVMH’s stock price on 11/05/1993 was €19,84, while on 01/17/2020 was €439,05), proving great managerial skills and acquiring shareholders’ trust and making himself irreplaceable. Another factor that gives even more power to Arnault is that two other members of the board are part of the Arnault family. Even though it may seem as though LVMH’s structure is centralized, the holding has adopted a global product structure: this means that the business’ diverse product categories are managed separately. This brings advantageous economies of scale: LVMH can expect to save up to 30% of its commercial costs each time it doubles in size. Products and services’ competitive advantage: As previously said LVMH’s products are divided into five main categories joined by a common denominator: luxury. The most important brands in the luxury narrow are part of the holding, making it the number one in the market (in 2017 its revenues were almost three times greater than Kering’s, its direct competitor). The biggest competitive advantage of the company, before every tangible advantage, is the strong brand image and high brand value. Its products are synonyms of high quality and elegant design, which allows to increase customers’ willingness. This perception implies that a reduction in costs (i.e. producing in low-cost countries or using lower quality materials) would affect the customers’ willingness to pay more than proportionally. Their target customer would rather spend more in a high-quality product then saving money buying a lower quality product. Given this target, the holding increased its profits, with extremely high margins, by increasing the perceived value of the product. In addition, thanks to a superior craftsmanship and excellent customer service, LVMH not only adds value to its products, but also to the experience of buying them. Arnault has been one a pioneer in understanding that luxury is not merely material: it’s all about the product and what surrounds it. This implies, for instance, that when a customer wants to buy a garment, they’re paying for item, as well as the attention they receive in-store,

characterized by the refinement of the inside space, and onsite, in which are carefully described the materials and designs adopted for the products. The widespread geographical presence, especially in the areas where demand is higher, is another relevant aspect. Despite of some weaknesses, such as increasing fake imitations and threats like the rising advocacy against using of animal skin, the large financial capabilities of LVMH allow the allocation of large money amounts in those areas that are underperforming, giving strength and growth balance. Last but not least, the use of marketing is relevant as well: given its dimension and influence in the luxury market, the holding’s marketing channels are doing a great job in shifting customer preferences to their products, instead of changing them according to customers’ tastes. Vertical integration within LVMH is not total, but over every link of the value chain, allowing the company to have a better control of the overall quality of its products. Corporate culture: The three main values shared within the group are: creativity and innovation, excellence of the product and entrepreneurial spirit. Creativity is in the foundations of the holding: the constant renewal and exploration result in a strong dynamism and give rise to new products that attract customer curiosity and interest. Furthermore, excellence of the product is a stronghold of LVMH: each employee knows that the holding he’s working for has a meticulous focus on the quality of the final products. A high level of attention is paid to manufacturing processes in order to maintain high quality standards required by the brands. Given its global product structure and decentralized organization, the firm gives a lot of opportunities to its employees in terms of initiatives and corporate social responsibility. This stimulating and flat environment, where each employee feels free to suggest new ideas, gives each business area a strong possibility of development and growth from within. What characterizes the group is long-term vision: LVMH is a well-established company, not only in the luxury market, but worldwide. As such, its objectives must be calibrated for the long-term, possibly sacrificing projects that could bring large amounts of capital in the short-term, that would, however, underperform over longer periods. Precisely because of this long-term vision, it may be senseful to recommend, in parallel, to invest on a long-term basis, as this vision is supposed to keep the share prices increasing. Investment case: The personal luxury goods market achieved astonishing growth during the new millennium. Major driving forces like the democratization of luxury fashion, social media advertising and an uprising Chinese middle class led a 6% CAGR growth from 1996 to 2018. The increasing wealth of the Chinese population is creating a new middle class, with a very high propensity to consume luxury goods for social status. The new Chinese market drove substantial growth in the last decade. It now accounts for 35% of total annual sales in personal luxury goods. By 2025, Chinese consumers will make 45% of the global market. The global market for personal luxury products is projected to grow from 2% to 5% CAGR till 2025. LVMH is the biggest conglomerate of luxury brands. Since 1990, under the leadership of Bernard Arnault, the company has had a very strong performance. Through numerous acquisitions of very strong brands and enhanced demand for luxury products, revenue went from $5 billion in 1989 to $53 billion in 2019 (8.2% CAGR). Operational effectiveness has kept up, with net income growing from $500 million in 1989 to $7 billion in 2019 (9.2% CAGR). The company is well managed and has very strong competitive advantages. Thanks to its scale, it can better leverage its products' global image of quality, luxury and status symbol. It has been able to capture a substantial part of growing markets like Asia, now accounting for 30% of the total revenues. Brands under the company 6

have timeless appeal and will continue to symbolize success and wellbeing for future generations. Effective marketing, management, acquisition and diversification (LVMH has 75 brands widely distributed across 5 different segments) will secure a substantial part of the growth of the luxury sector. LVMH's balance sheet is in very good shape, with a debt to equity ratio of 0.92 and an interest coverage ratio of 20. The company has a lot of room to take on other very cheap debt, for acquisition purposes. Price to book among luxury companies is very high, around 5, due to the appeal for such strong brands. The current P/E is 21. Under normal market conditions, it would be very appealing. However, due to a potential global slowdown and to Coronavirus' effects on consumptions and travels, a more reasonable ratio would be under the 20 threshold. Price to Free Cash Flow ratio is 24, lower than some smaller competitors thanks to better operational effectiveness, but still considerably high. The company's FCF yield is thus 4%. The personal luxury goods market is set to grow from 2% to 5% CAGR until 2025, according to analysts. LVMH is well positioned to grow accordingly, both in revenue and in Free Cash Flow. The management already proved to be able to increase the two at the same rate. So, the expected growth and the company's competitive advantage can justify a higher valuation. LVMH has allocated capital very efficiently for years, through important acquisitions for the sake of diversification, and increasing dividend distribution. While Free Cash Flow has doubled since 2010, dividend payment has more than tripled. In this context is useful to remind that the CEO Bernard Arnault is a major shareholder: this fact will make sure that capital will be allocated efficiently also in the future. The current dividend yield is 2%, the payout ratio is 50%. The dividend is sustainable and will likely increase as profits will increase. LVMH is a very good company, with very strong competitive advantages: the management, the appeal for its brands and its global scale. The company is meant to achieve a good performance in the years to come. An investment in the company at the right price would be safe and rewarding. Key performance indexes: The aim of the following paragraph is to show the financial performance of LVMH Moët Hennessy Louis Vuitton SE for the three-year period from fiscal year 2016 to fiscal year 2018 and provide a brief evaluation of the financial figures related to the managerial choices taken in the period before mentioned. During this period, the role of president and CEO was covered by Mr. Bernard Arnault, appointed back in 1989. Evolution of LVMH’s financial performances for the three-years period 2017-2019: After the analysis of the financial statement of LVMH and the computation of the key liquidity, profitability and solvency ratios for the three-year fiscal period 2017-2019, it is possible to draw the following considerations and suggestions. From an asset allocation point of view, financial evidence shows LVMH rigid for 73% and so flexible for the remaining 27%. This index is partially justified by the manufacturing nature of company’s core business, which requires a complex web of production facilities in order to guarantee the optimal capacity level without compromising the quality of final products. However, the administration might encounter issues in adapting quickly to market demand and changes, especially concerning trends in the fashion industry in which LVMH acts as a major player. Thus, it would be advisable to consider the externalization of phases of the production process which do not require strict quality standards in order to adapt quicker to customer needs and wants without compromising LVMH products’ strengths. Moving on to the financial structure, the company experienced in the long term a substantial transformation during the fiscal years considered. Starting from 2017 with solid Debt to Equity (1.33) and Leverage (2.38) values, then, from late 2018 the strategy pursued by the administration implied the gradual exploit of new debt position opportunities for financing planned investments and avoiding shareholders dilution bringing D/E to 7

1.59 and Leverage to 2.64 in 2019. However, these last figures are influenced by the solvency reflection of the takeover operations of Repossi and Tiffany & Co in Q2 and Q4 2019 which were mainly financed through debt. Then, as far as short-term equilibrium is concerned, the company appears reliable with a positive Working Capital of 3,887,000, meaning that all current liabilities are covered by short term assets as showed by the current ratio of 1.17 in 2019. Although, by considering only liquidities, through the quick ratio, the coverage falls down to 0.57, highlighting the important role played by the inventory in short term assets, which, by definition, is not an available resource in the short-term. This generally points up issues in responding to suppliers expiring credits in the short run, especially when their due dates are not consistent with those of the current debtors. However, given LVMH’s international reputation, in case of necessity it should not be difficult to ask for banking services such as advances on invoices or renegotiating with creditors new contract terms and payment deadlines. Moving to profitability ratios, the company achieved brilliant results during the three year fiscal period considered, financial documents show that in 2019 LVMH achieved increasing margins of EBITDA at 16,267,000 and EBIT at 11,352,000 with an outstanding ratio EBIT/EBITDA of 0.70 stating the minimum impact of the atypical area of the income statement, underling the positive results of brilliant asset investment choices carried out in past years by the administration. The success of LVMH’s management strategy was also confirmed by the main profitability index, the ROE which from 17.78% of 2017 reached an excellent 19.60% in 2019. This index was influenced from a positive leverage effect of ROI (16.22%) and ROA (11.76%) on ROD (8.74%). Although this last ratio registered an increase, which is mainly due to cost of debt implications regarding the financing of the takeover operations of Q2 and Q4 2019, the administration managed to overtake these negative financial components in the income statement with a rise of the performance of the company especially in terms of cost efficiency with an admirable ROS index of 21.16% in 2019. Lastly, as far as Market ratios are concerned, on 13 March 2020 the dividend yield index of the company (1.87%) highlight the propensity of the administration, despite company’s capitalization and reputation, to reinvest net income in order to increase the performance of the company by exploiting own resources. This choice is part of LVMH’s philosophy of giving primary importance to research and development with the aim of delivering an advanced quality product always updated to the latest fashion trends. Once again, the Price to Earnings ratio of 23.09, remarks the excellent reputation of LVMH among customers, investors and financial institutions who value the company as an industry leader, stable and reliable on the financial side while showing constantly growing economic results, which are possible thanks to a brilliant management pursuing a successful strategy so far.

Appendix:

• Exhibit n.1:

LVMH REVENUES BREAKDOWN WORLDWIDE (2019)

Exhibit n.2 (all numbers in thousands):

RATIOS 2017 2018 2019 Rigidity 0.69 0.68 0.73 Leverage 2.38 2.30 2.64 Dependence 0.56 0.54 0.60 Debt/Equity 1.33 1.25 1.59 Own Coverage 0.60 0.63 0.52 Asset Turnover 0.62 0.63 0.55 Inventory 3.91 3.75 3.91 Turnover Current 1.41 1.40 1.17 Quick 0.68 0.66 0.57 Acid 0.28 0.31 0.28 Working cap 6,079,000 6,718,000 3,887,000 ROE 17.78% 19.68% 19.60% ROI 17.42% 19.63% 16.22% ROA 12.06% 13.41% 11.76% ROS 19.40% 21.28% 21.16% ROD 1.63% 2.78% 8.74% D/Yield 1.87% P/E 23.09 EBIT 8,267,000 9,962,000 11,352,000 EBITDA 10,419,000 11,949,000 16,267,000 EBIT/EBITDA 0.79 0.83 0.70 Net income 5,129,000 6,354,000 7,171,000 Revenue 42,604,000 46,803,000 53,650,000

• Exhibit n.3:

All stock price data were obtained at: https://finance.yahoo.com/.