Latest / The Dutch Investors / #50 | LVMH Deep Dive | True luxury or premium? w/ Secret Sauce Investing

Transcript

#50 | LVMH Deep Dive | True luxury or premium? w/ Secret Sauce Investing · The Dutch Investors

0:00
SPEAKER_01: Welcome back to another exciting episode, a fundamental analysis by the Dutch investors, and I'm thrilled to have Sonny from Secret Sauce Investing joining me once again.
0:11
SPEAKER_01: And I can already tell this is going to be an episode that you don't want to miss.
0:16
SPEAKER_01: We're diving deep into one of the most fascinating topics, if you ask me, luxury.
0:22
SPEAKER_01: And we are doing it by analyzing the luxury company LVMH.
0:28
SPEAKER_01: So grab some champagne or a sip of Hennessy and let's dive deep into the world of luxury.
0:34
SPEAKER_01: Let's go.
0:40
SPEAKER_01: Alright, Sunny.
0:42
SPEAKER_01: Last time we talked about Games Workshop and FIVA Tree, and now we're talking about something completely different.
0:50
SPEAKER_00: Hey Steam, thanks for having me back on.
0:52
SPEAKER_00: Yeah, LVMH is significantly larger than both of these companies, and a lot more fascinating, I think, not just because of its size, but also because of the business segment it operates in.
1:05
SPEAKER_01: Absolutely.
1:06
SPEAKER_01: There are a few companies that intrigue me as much as luxury companies because they operate in such a strange and completely different industry if you look at it based on marketing, for example, economics, uh, even psychology.
1:21
SPEAKER_01: Basically, everything I'm interested in combines itself into this luxury company like the one we are going to talk about today.
1:30
SPEAKER_00: So, see, over the past few weeks, we've both researched LVMH.
1:34
SPEAKER_00: Um, why did you decide it was a good business to analyze in the first place?
1:39
SPEAKER_01: Yeah, that's a great question.
1:41
SPEAKER_01: I mean, it's the world's largest luxury group, and it's pretty hard to ignore uh to begin with.
1:48
SPEAKER_01: We already did a few deep dives on caring, the parent company of Gucci, uh and Richmond, the parent company of Carce.
1:57
SPEAKER_01: And I mean, this kind of completes the trilogy.
2:00
SPEAKER_01: Uh, there are a few more, uh, Hermes, for example, Brunello Cuccinelli, so many more.
2:05
SPEAKER_01: But I was I'm a I'm a shareholder of Dior, which we'll talk about later.
2:12
SPEAKER_01: And I was just curious if um, with the declining share price, I think I am down about 26% on Dior, um, which is fine, but I was curious if the investment became more attractive now for a cheaper valuation.
2:28
SPEAKER_01: And yeah, besides, I've always been fascinated by luxury, and LVMH pulls off something most other companies can't.
2:39
SPEAKER_01: I mean, they scale luxury without making it feel mass produced.
2:44
SPEAKER_01: But we're talking about a$250 billion company, and making things luxurious without feeling the feeling of mass production is very difficult.
2:58
SPEAKER_01: It's a it's a tightrope almost uh between growth, um, pricing power, exclusivity, and somehow they've managed to do it.
3:09
SPEAKER_01: And the key question I had in the key question I had going into the analysis was should I hold the company, should I double down, or should I sell the company?
3:21
SPEAKER_01: So that was my main question going in.
3:24
SPEAKER_01: Do you own any luxury names yourself?
3:27
SPEAKER_00: No, I don't, although LVMH is a company that I've tracked for a number of years, and it's really fascinating, and I think it's within my circle of competence.
3:37
SPEAKER_00: One question I'd have for you as we start is why did you choose to invest in Dior rather than LVMH directly?
3:44
SPEAKER_01: Yeah, I think we'll talk about that a bit more once we reach the valuation as well.
3:50
SPEAKER_01: But by investing in Dior, you're basically buying LVMH with a discount.
3:57
SPEAKER_01: And there are some things to consider before buying Dior just because it's cheaper.
4:03
SPEAKER_01: But that was the main reason.
4:05
SPEAKER_00: So we've seen a lot of or heard a lot of excellent podcasts, uh, business breakdowns and acquired have covered LVMH in in detail.
4:14
SPEAKER_00: And for anyone who's who's wants to research the company more, they're well worth a listen.
4:19
SPEAKER_00: So, very briefly, can you take us through the founder of LVMH in a couple of minutes?
4:25
SPEAKER_01: Yeah, sure.
4:26
SPEAKER_01: Let's try to keep it under two minutes where um Acquired did uh about two hours on the history.
4:32
SPEAKER_01: I'll I'll I'll I'll do it in two minutes.
4:34
SPEAKER_01: So set the timer.
4:36
SPEAKER_01: It really all starts with Bernard Arnault.
4:40
SPEAKER_01: He didn't even grow up in fashion, his family was in construction, pretty similar to Kering's um early beginnings.
4:48
SPEAKER_01: And I mean, it's pretty far from the world of champagne and handbags.
4:54
SPEAKER_01: Then in the 1980s, he saw something very interesting.
4:58
SPEAKER_01: He saw an old luxury brand called Christian Dior.
5:04
SPEAKER_01: And he thought that it still had a pretty strong brand, even though they weren't doing well at all.
5:13
SPEAKER_01: Arnaud figured if you brought in the right structure and leadership, he could bring back Dior to life, and so he bought Dior and it worked.
5:24
SPEAKER_01: And that was the beginning of well, LVMH.
5:28
SPEAKER_01: A few years later, in 1987, he helped merge Louis Fueton with Moet Hennessy.
5:38
SPEAKER_01: One made bags and the other sold champagne and cognac, and together they formed what we now know as LVMH.
5:47
SPEAKER_01: And from that point on, Arnaud just kept on buying other brands.
5:52
SPEAKER_01: He bought names like Fendi, Bulgary, Tiffany's, and the strategy was pretty clear.
5:59
SPEAKER_01: Find great heritage brands that lost their way and rebuild them from the inside out, and that's basically very briefly how LVMH became to what it is now, not really through a big idea, but through decades, really decades of acquisitions one after the other, and then just doing his thing as Arnaud does.
6:27
SPEAKER_01: He's a great CEO and founder in a way.
6:30
SPEAKER_00: So I think what's interesting as we talked about LVMH has this fascinating history where Bernardo Arnault essentially turned about$15 million worth of capital into what LVMH is today.
6:43
SPEAKER_00: So beyond that, how has LVMH transitioned its business model over time?
6:48
SPEAKER_01: Yeah, that's a that's a great question.
6:51
SPEAKER_01: And it's crazy to think about 15 million into a 250 billion dollar company it is today.
6:57
SPEAKER_01: I mean, just just think about great compounding, right?
7:01
SPEAKER_01: But um it's pretty simple.
7:03
SPEAKER_01: LVMH is like the holding company, the parent, and that owns over 75 luxury brands.
7:13
SPEAKER_01: They call it Masons, and each one operates independently, well, pretty independently.
7:20
SPEAKER_01: That means a Louis Vuitton, for example, isn't running Dior's marketing, and and Hennessy's not running Dior's, I don't know, the the acquisitions or uh or or marketing, or what grapes to pick for uh for Hennessy, I don't even know.
7:38
SPEAKER_01: But behind the scenes, they all benefit from LVMH parent company, its size, things like logistics, store locations, a legal support, and the big picture strategic direction comes from the group and not from the individual brands itself.
8:02
SPEAKER_01: So that's how the holding company, LVMH, helps support its masons, although they operate pretty independently, like I said.
8:13
SPEAKER_01: And in terms of how they make money, it kind of depends on the category, of course, but broadly they sell pretty high margin luxury products.
8:25
SPEAKER_01: Think of handbags, champagne, watches, perfume, all priced well above production cost, because what you're really buying is not the product, but more the brand, the story, the exclusivity, and the feeling it it gives consumers.
8:44
SPEAKER_00: So is it fair to say that LVMH is almost the Berkshire of the luxury sector?
8:51
SPEAKER_01: Um yeah, you could make that comparison.
8:54
SPEAKER_01: I I would make the comparison to Constellation Software, where they buy all these individual companies, although software and luxury are not very similar, but they all operate independently, and just the Holden company helps out in the in the marketing with funding, uh, with uh legal support.
9:19
SPEAKER_01: So yeah, uh Berkshire is uh is a good comparison too.
9:22
SPEAKER_00: So let's jump into the business model.
9:24
SPEAKER_00: LVMH has 75 maisons or or brands and reports against these in five different segments.
9:32
SPEAKER_00: So we've already talked a little bit about how much um or how they how they make money, but let's jump into this a little bit and understand how profitable each of those five segments are.
9:42
SPEAKER_01: Yeah, absolutely.
9:43
SPEAKER_01: Yeah, their biggest cash cow is by far fashion and leather goods.
9:48
SPEAKER_01: So think of Louis Fueton's leather bags and Dior.
9:54
SPEAKER_01: That one division alone brings in more than half of the company's profit, and the margins here are very high.
10:03
SPEAKER_01: Last time I checked, it was about 40% to 45% operational margins, so e-bit margins, because these brands have almost unmatched pricing power.
10:16
SPEAKER_01: They could raise prices tomorrow and they'll still have a waiting list.
10:20
SPEAKER_01: And the waiting list actually increases if you increase prices as long as your brand stays strong enough.
10:28
SPEAKER_01: Then you've got your segment, Sonny, wines and spirits.
10:32
SPEAKER_01: So um Hannesy, Moet and Shandon, um, Don Perignon.
10:39
SPEAKER_01: These are slower growth recently, but the margins are pretty healthy.
10:46
SPEAKER_01: Um, that business writes mostly on heritage, and yeah, a fancy word you see going around nowadays is premonization.
10:56
SPEAKER_01: I think Diaggio and even uh Pernod Ricard are throwing that word out um many times, and it's basically people are drinking less but are paying more for a better drink.
11:10
SPEAKER_01: Then you have watches and jewelry, and it's a smaller piece of LVMH, but it it is growing.
11:18
SPEAKER_01: They recently acquired Tiffany's, they have Bulgary, uh Takhoyer, and they're pushing pretty hard here, especially in emerging markets like India.
11:31
SPEAKER_01: Then we have perfumes and cosmetics, and a good way to think about this segment is it's kind of like a gateway drug to the LVMH ecosystem.
11:43
SPEAKER_01: It is not really profitable, it is, but not if you compare it to the other segments.
11:49
SPEAKER_01: But it is very important because it actually brings in the younger buyers into the brand and luxury universe at a more accessible price point, and Fenty Beauty is a pretty good success there.
12:04
SPEAKER_01: And then you have selective retailing, they call it.
12:07
SPEAKER_01: So think of Sephora, DFS, even luxury hotels like Belmont.
12:14
SPEAKER_01: It's pretty low margin, uh, they're more operationally heavy, but it supports the brand exposure and it offers growth in volume.
12:24
SPEAKER_01: And I think Sephora is um pretty interesting to look out for the coming years.
12:31
SPEAKER_00: Absolutely.
12:31
SPEAKER_00: And if I can just offer some context around the numbers around each of these segments, so if we just run very briefly back through them, we've got Wines and Spirits, which makes up about 7% of group revenue, the Fashion and Leather Goods, which is just shy of 49%, perfumes and cosmetics, which is 10%, watches and jewellery, which is over 12%, and then selective real retailing, which makes up 21.7%.
12:57
SPEAKER_00: But I think what's really fascinating about each of these segments is yes, you can see that they're very much dependent on fashion and leather goods, but the operating margins from which these segments generate, wines and spirits uh generate around a 23% operating margin, fashion and leather goods about 37%, perfumes and cosmetics about 8%, watches and jewellery they're about 14%, and in selective retailing is about 7% operating margin.
13:24
SPEAKER_00: So when you take that into account for the total operating income of the group, fashion and leather goods are is actually responsible for about 75% of total operating income.
13:36
SPEAKER_00: And I'm sure we'll come on to this in a section in a second, but with uh the likes of Louis Vuitton, there's no doubt that the company itself or the conglomerate is so reliant on that brand.
13:49
SPEAKER_01: Yeah, if anything goes wrong with Louis Vuitton or even Dior, the company should not be worth 250 billion.
13:59
SPEAKER_01: I think most of that is probably Louis Vuitton and Dior, and everything else just adds to the portfolio, and who knows whether there's going to be a a great new emerging brand in the portfolio.
14:15
SPEAKER_01: But I don't want to really bank or put my money on that because who knows, right?
14:24
SPEAKER_00: Absolutely, and we've seen recently LVMH has started to innovate with partner with celebrities, and no doubt we'll come on to that in a second when we talk about the essentially the rules of luxury, which I know you've covered in a previous podcast.
14:37
SPEAKER_01: Yeah, definitely.
14:38
SPEAKER_01: Let's talk about it uh in a second.
14:41
SPEAKER_01: Um, what I also wanted to add here is that um I think Sephora, like I mentioned, is pretty interesting.
14:48
SPEAKER_01: Uh, I think our analyst Luke recently analyzed Ulta Beauty, a Sephora competitor.
14:55
SPEAKER_01: Ulta Beauty has about 1400 stores in the United States.
15:00
SPEAKER_01: Sephora has just 600 stores there.
15:04
SPEAKER_01: I think Sephora, with the funding of LVMH in the back, can really disrupt Ulta Beauty, and I think that is something to look out for and perhaps a growth engine for LVMH and especially getting in the younger generation into the luxury environment, I think is very important for the future.
15:29
SPEAKER_00: Yeah, couldn't agree more, and I think as part of my research, I came across the fact that potentially if you take Sephora out of it, LVMH controls about 95% of the retailers, that's how they reach their consumers, with only another 5% going into wholesale.
15:46
SPEAKER_00: So if we move uh move on from that, I'd like your take on what do you think makes the luxury industry so compelling for long-term investors?
15:56
SPEAKER_01: Ooh, yeah.
15:58
SPEAKER_01: Um, I'm a bit biased, of course, so don't take everything with a grain of salt, I guess.
16:04
SPEAKER_01: But there's something special about luxury, especially when you look at it through a long-term investor's lens, and I mean long-term, not five years or ten years, but 15, 20, 25 years out from now.
16:20
SPEAKER_01: First and foremost, pricing power is something that makes it very attractive.
16:26
SPEAKER_01: Like true luxury brands can raise prices almost at will.
16:32
SPEAKER_01: Not because their costs go up, but because their brand gives them permission to, it makes them more exclusive, more desirable if you're a real true luxury brand.
16:42
SPEAKER_01: And that's very rare.
16:44
SPEAKER_01: I mean, Sonny, you don't see Apple double down the price of an iPhone every few years and still grow.
16:53
SPEAKER_01: But Hermes and Louis Vuitton, it's a different story.
16:56
SPEAKER_01: It's about scarcity, it's about craftsmanship and yeah, status that lets uh lets them do that.
17:06
SPEAKER_01: Another element I find very interesting is um luxury is durable.
17:12
SPEAKER_01: Luxury tends to be a lot less sensitive to economic cycles than you'd actually expect.
17:20
SPEAKER_01: Um, sure, the aspirational buyers might tighten up in a recession, but the very wealthy people, they usually don't stop buying from true luxury, especially when the brand feels very exclusive and timeless, like an Hermes, like a Brunello Cuccinelli, like a Louis Vuitton.
17:39
SPEAKER_01: I think the other brands will get hurt in the short term.
17:43
SPEAKER_01: I think they don't have quite that resilience.
17:47
SPEAKER_01: And then there is the fact that these businesses play the ultra long game, which I personally really like.
17:53
SPEAKER_01: These companies are thinking in decades and don't really focus on the margins on the short term, and once you're past the fixed cost, design, marketing, stores, each additional handbag or bottle of champagne is so profitable.
18:13
SPEAKER_01: Yeah, but Sonny, I am generally curious with all this tailwind, um, is it possible that too many investors are piling into luxury?
18:27
SPEAKER_01: I mean, it's kind of crazy that a we're talking about a luxury company, but it's almost one of the biggest companies in the world.
18:34
SPEAKER_01: I mean, how exclusive is it then?
18:37
SPEAKER_01: So are we assuming perhaps that it's safer than it really is?
18:40
SPEAKER_01: Because in this industry, brand equity is everything, and once a brand loses its edge, it's a pretty steep fall.
18:51
SPEAKER_01: What do you think?
18:52
SPEAKER_01: Is luxury becoming a bit too mainstream, or do you think the fundamentals are just that strong?
18:58
SPEAKER_00: I think companies that are in the luxury sector, their share prices generally rewarded based on how truly luxury they are.
19:07
SPEAKER_00: All we have to do is compare Hermes, LVMH, and then Kering.
19:13
SPEAKER_00: You run through these companies and you see the likes of Gucci in 2024, they suffered about an 18% drawdown.
19:21
SPEAKER_00: LVMH is absolutely reliant on Louis Vuitton as a brand, and if that ever happens, what has happened with Gucci, the share I'm I've no doubt the share price would would decline.
19:33
SPEAKER_00: In regards to your question to do with whether the fact that is Louis Vuitton or is this sector sort of truly luxury, and I've no doubt we'll come onto this when we talk about maybe the bear case, but one of my concerns I've got around Louis Vuitton is the fact that are they truly luxury?
19:52
SPEAKER_00: As part of the research, I went online and had a look through some of the Louis Vuitton products and I saw things like the Neverfool was available for sale.
20:01
SPEAKER_00: And that for me is a bit of a red flag because if you consider the the Birkins or the Kelly's from Hermes, these are generally about a year to two-year waiting list.
20:11
SPEAKER_00: Whereas the fact that that Louis Vuitton's£1,500 bags are readily available online, for me, there's a risk there that Louis Vuitton is slipping from being a truly luxury brand and perhaps falling down into that premium sector.
20:28
SPEAKER_01: Yeah.
20:29
SPEAKER_01: Good point.
20:31
SPEAKER_01: I think they are in different tiers.
20:34
SPEAKER_01: I think Hermes and even Brunello Cuccinelli are like ultra luxury.
20:40
SPEAKER_01: And I would put LVMH a tier below it, actually, even Louis Vuitton.
20:45
SPEAKER_01: Perhaps like a like a very small brand, like a low, is in the same tier, but I mean it's it's not the same size.
20:54
SPEAKER_01: But the word that comes up is mastige.
20:56
SPEAKER_01: Have you heard of it before?
20:58
SPEAKER_00: If not, you're gonna have to educate me.
21:01
SPEAKER_01: Well, they don't talk about this, of course, but I think LVMH kind of relies on mastige.
21:08
SPEAKER_01: It's a it's a blend of mass and prestige, and it kind of refers to products that offer a sense of luxury and prestige, but are priced are priced and marketed in a way that appeals to a more broader audience.
21:26
SPEAKER_01: So mastige products typically maintain a pretty premium image while being more accessible in terms of price and distribution, like you just mentioned.
21:37
SPEAKER_01: And I think it's a bit different from say in a Hermes and uh a Brunello Cuccinelli or a Ferrari.
21:44
SPEAKER_01: So if you're looking for true luxury, I think LVMH is not the company for you.
21:49
SPEAKER_01: I think they're better luxury companies.
21:52
SPEAKER_01: But you're not really banking on the I think there's there's a lot of money to be made in like the Luxury tier instead of the ultra luxury tier, and yes, it's going to be painful in slower economic times, but you're also going to sell more during very good times.
22:13
SPEAKER_01: But there are also a lot of risks associated to Mesh D's.
22:18
SPEAKER_01: For example, if your brands lose the luxurious image, yeah, L VMH is going to struggle.
22:28
SPEAKER_01: Yeah.
22:29
SPEAKER_01: It's a double-edged sword.
22:32
SPEAKER_00: Absolutely.
22:32
SPEAKER_00: And we've seen that perhaps with the likes of Gucci recently, as we've mentioned, and the share prices obviously suffered with that.
22:40
SPEAKER_00: So just on trying to give the brands some valuations, and I know we've got some we're going to sort of look at some of its parts valuation, but if you consider Interbrand's 2024 list, LVMH actually had three brands in the top 100 most valuable in the world.
22:56
SPEAKER_00: So Louis Vuitton came in at number 11, which were with a valuation of just over 50 billion.
23:04
SPEAKER_00: Tiffany came in at number 89 with a valuation of 7.3 billion.
23:08
SPEAKER_00: And Sephora then came in at number 90 with a valuation of 7.2 billion.
23:12
SPEAKER_00: So there's absolutely no doubt regarding these brands that there is quite considerable brand equity within them.
23:20
SPEAKER_01: Yeah, I don't really know how they value these companies.
23:24
SPEAKER_01: I mean, they purchased Tiffany's for what what 15 billion, and I don't know how they value the brand at seven.
23:33
SPEAKER_01: The same goes for Louis Vuitton.
23:37
SPEAKER_01: What does it say?
23:38
SPEAKER_01: 50 billion.
23:39
SPEAKER_01: I don't know.
23:39
SPEAKER_01: I mean, that's 20%, if I did my math correctly, of the total market cap.
23:45
SPEAKER_01: I mean, I guess that makes sense, sort of.
23:48
SPEAKER_01: Some yeah, but take it with a grain of salt, I guess.
23:51
SPEAKER_01: I don't really know how these people value these brand values.
23:56
SPEAKER_01: Um, I don't know.
23:58
SPEAKER_00: And I think it's a good point because they did purchase Tiffany for about 15 billion.
24:04
SPEAKER_00: And I think based on how LVMH have improved that business, it's now putting out about a billion of earnings.
24:12
SPEAKER_00: And I think it was Bernard Arnault who was quoted as saying it'd be worth about double what they paid for it now.
24:17
SPEAKER_00: So, yeah, certainly not worth um the nine or so billion intra brand or sorry, the 7.2 billion interbrand are valuing it at probably closer to about 30 billion.
24:26
SPEAKER_00: Um, however, I think there is certainly evidence there that the brands and the brand equity have some real valuation behind them.
24:34
SPEAKER_01: Yeah, definitely.
24:36
SPEAKER_01: I think it's a good time to talk uh competition.
24:39
SPEAKER_00: Yeah, let's do it.
24:40
SPEAKER_00: So let's jump on to the sector and the industry and who are the main competitors of LVMH.
24:47
SPEAKER_01: I think it's pretty clear.
24:49
SPEAKER_01: Uh, there are many luxury companies, of course, but I think since LVMH is a holding company and owns many brands, I think it would make sense to look at similar companies.
25:01
SPEAKER_01: Um, but I don't think you can exclude her mess, although it's not a holding company or even a Chanel, uh, which is not publicly listed.
25:12
SPEAKER_01: Luxury companies are hard to explain sometimes if you if you're talking about competition.
25:19
SPEAKER_01: Although luxury companies would say there is no competition, I I tend to disagree.
25:26
SPEAKER_01: Because you can buy a brag from Louis Vuitton or Hermes, and depending on where you buy it, someone else is probably not selling it.
25:37
SPEAKER_01: So, in a way, there is definitely competition, I guess.
25:41
SPEAKER_01: But I think what they mean is when they say we have no competition, is that they're not influenced by other brands or strategy and ideas, and that makes sense.
25:53
SPEAKER_01: But to come back to your question, I think it's about the big three: Hermes, Kering, and Richmond.
26:01
SPEAKER_01: Uh you could include Chanel as well, but I mean there's not a lot of information about that company out there, and perhaps any rising names and I don't know, beauty and jewelry in the future.
26:14
SPEAKER_01: Let me ask you something.
26:16
SPEAKER_01: Do you think I was struggling with this this one a little bit?
26:20
SPEAKER_01: Do you think luxury adds anything to society?
26:23
SPEAKER_01: Do you think it's a net positive or net negative for society?
26:28
SPEAKER_00: I suppose we could spend the whole episode talking about that one question alone.
26:32
SPEAKER_00: But I think with when it comes to luxury, in a rational world, luxury is irrelevant.
26:39
SPEAKER_00: However, humans and humanity are not rational.
26:44
SPEAKER_00: In an irrational world, it makes complete sense.
26:46
SPEAKER_00: You've talked about um luxury in previous episodes.
26:50
SPEAKER_00: Luxury has been around since the dawn of time.
26:53
SPEAKER_00: Humans were buried with with shells or jewels, consider the pharaohs.
26:58
SPEAKER_00: There was always an element of luxury within this world.
27:01
SPEAKER_00: I read luxury strategy a few years back and revisited it for this episode, and my takeaways were that luxury has an element of heritage and history, so it can't be you can't create it today.
27:15
SPEAKER_00: You could not create a luxury brand on day one.
27:18
SPEAKER_00: It needs decades, if not centuries, behind it to be to be luxury.
27:22
SPEAKER_00: In the present, it's got true craftsmanship behind it.
27:26
SPEAKER_00: So you've got an artisan who has spent perhaps decades perfecting their craft, and then if you consider the future of luxury, what you're doing is you're creating a dream for the customer.
27:38
SPEAKER_00: And I think one of the key takeaways is you cannot destroy the dream once the product has been purchased.
27:44
SPEAKER_00: That dream has to continue.
27:45
SPEAKER_00: So with that product, there come becomes a status with it.
27:49
SPEAKER_00: And I think sort of to reference back to one of your previous episodes, it's if you know you're in the know, and some luxury products can be so subtle that only the wealthy or those who can actually afford them tend to know what they are.
28:03
SPEAKER_00: And I think lastly, we'll just finish on as well: luxury and LVMH has benefited a lot from this, tends to be driven by a bit of the mad geniuses.
28:12
SPEAKER_00: This is the Alexander McQueens, the Gallianos, this is people who Bernard Arnault has managed very well and effectively extracted their talents to deliver truly luxury and dictate how the luxury market moves forward.
28:30
SPEAKER_00: Um you know, what LVMH is now at that scale.
28:33
SPEAKER_00: My final point would just be that luxury for me is there's an element of the brands or the sorry the products can be purchased for a valuation that leaves value on the table for the customer, so that essentially if somebody buys, as we've as we've seen with Kelly's and Birkin Bags from Hermes, they tend to have a resale value that's higher than what has been purchased.
28:57
SPEAKER_01: Yeah, sometimes I struggle with um I I'll get this question every now and then, and I do think in a rational world, I think luxury companies add nothing to society besides people performing their passion and craftsmanship.
29:15
SPEAKER_01: I mean, these people get paid and they do what they love to do, and we can appreciate that.
29:22
SPEAKER_01: But I I do think, I mean, if you just want to carry groceries from the from your home to the store, it doesn't make any sense to do it in a in a fifty thousand dollar bag or in a plastic bag.
29:33
SPEAKER_01: Um so in a functional, if you look at it functionally, it it doesn't make sense.
29:39
SPEAKER_01: Emotionally, it doesn't really make sense, but I don't know.
29:45
SPEAKER_01: So far it has worked, it hasn't stopped me from investing in luxury companies, but uh it is something I I think about every now and then.
29:54
SPEAKER_01: But I'm sorry, I was a bit off track.
29:56
SPEAKER_01: Uh, you you asked me about the competition.
29:59
SPEAKER_01: I think um if you look at it revenue-wise, the the the total market was valued at around 360 billion euros in 2024.
30:12
SPEAKER_01: Revenue-wise, LV Mage holds about 25% of this market.
30:18
SPEAKER_01: LV Mage operates in almost all luxury segments except for luxury cars and yachts.
30:26
SPEAKER_01: Historically, Kering was considered the biggest competitor because they're also a holding company.
30:34
SPEAKER_01: But they are, I mean, the gap is closing, sort of.
30:38
SPEAKER_01: Gucci is struggling big time.
30:41
SPEAKER_01: It's one of the reasons I sold Kering.
30:44
SPEAKER_01: Um, Hermes is now emerging as a very strong rival.
30:50
SPEAKER_01: Incredibly, Hermes is actually worth more than LVMH now, although revenue-wise, it's it's crazy.
30:57
SPEAKER_01: I think uh Hermes is at like a 50 or 60 PE at this time, but so far they've proven they deserve it.
31:06
SPEAKER_01: Hermes commands about a 5% market share if you look at it revenue-wise.
31:12
SPEAKER_01: Richmond is a pretty direct competitor to LV major brands like Tiffany and Bulgarie, or even Tag Hoyer, they hold a market share of about 6%, and then there's Chanel, although not publicly traded, it is a pretty big player.
31:30
SPEAKER_01: And according to Forbes, it was valued at about 20 billion euros in 2023, or about 6% of the luxury market.
31:40
SPEAKER_01: So, I mean, if you account for all these companies together, there's about the same size market share-wise as LVMH.
31:50
SPEAKER_01: So that just shows you how ridiculously large LVMH actually is.
31:54
SPEAKER_00: Do you think there's strength in being mono-brand like Hermes or Shernel, or do you think there's more strength in being diversified like LVMH?
32:04
SPEAKER_01: Who that's a good question.
32:08
SPEAKER_01: I think if you do it really well, really long term, like an Hermes, I think that's stronger.
32:20
SPEAKER_01: Although the risks, the risk is a lot higher, because LVMH will not go to zero if Dior loses its brand power because it has all these other companies that can kind of hold it up.
32:37
SPEAKER_01: Yes, it'll drop by I don't know, 30%, say, but if her mess does something wrong, they're screwed.
32:45
SPEAKER_01: I mean, they have just one brand, so they gotta do everything right.
32:50
SPEAKER_01: And LVMH can kind of make some mistakes here and there, and then just fund another brand and boost another brand, or it's a difficult question.
33:03
SPEAKER_01: What would you say?
33:04
SPEAKER_01: Would you rather own like a mono brand or a or a holding company?
33:07
SPEAKER_00: Almost applies to life.
33:09
SPEAKER_00: Just you know, what are you better to own a single share or an index?
33:13
SPEAKER_00: Yeah, and perhaps in the long term, an index is better, but as we've seen with Hermes, they've done very, very well.
33:20
SPEAKER_00: And in that in this scenario, the the mono brand has done better than LVMH, but that's probably not going to be the scenario most of the time.
33:29
SPEAKER_00: I think LVMH has quite a significant competitive advantage, and with that comes or is built around their diversified portfolio.
33:38
SPEAKER_00: So, with that, same, can you talk us a bit more or talk to us a bit more about the competitive advantage?
33:44
SPEAKER_01: Yeah, absolutely.
33:46
SPEAKER_01: Um like I said before, you you gotta hear me out.
33:50
SPEAKER_01: Like I said, I I made the comparison between Constellation Software and the luxury world, and before you either agree or disagree with me, just hear me out for a second.
33:59
SPEAKER_01: Constellation software buys niche software businesses and leaves them alone to do what they do best.
34:05
SPEAKER_01: It's kind of what LVMH does too.
34:08
SPEAKER_01: But behind the scenes, both Constellation Software and LVMH support the brands and software companies.
34:16
SPEAKER_01: And I think this system, the capital, the strategy, the funds, the expertise, the discipline, is a huge advantage for each brand that gets acquired.
34:31
SPEAKER_01: And although one could argue that LVMH on its own, as the holding company doesn't really have a brand, although they are pushing it a little bit more now.
34:40
SPEAKER_01: If you watch Formula One, for example, you'll see the LVMH name pop up every now and then.
34:45
SPEAKER_01: I think they're trying to boost the LVMH holding company as well.
34:49
SPEAKER_01: But the individual competitive advantages comes down to each brand, I guess.
34:56
SPEAKER_01: And each brand, whether it's Louis Photon, Takhoyer, Fenty Beauty, Dior, it's it's it's like its own small business.
35:06
SPEAKER_01: It's got its own creative team, it's got its own leadership, it's got its own CEO, it's got its own identity.
35:14
SPEAKER_01: And just like Constellation Software, LVMH doesn't try to micromanage them.
35:21
SPEAKER_01: They don't try to make Bulgary run like Dior or Kenzo behave like Low.
35:27
SPEAKER_01: Just like Constellation Software doesn't force every software business into the same mold.
35:32
SPEAKER_01: So I think that's um a huge advantage.
35:37
SPEAKER_01: But when a brand really needs help, maybe it's expanding into Asia, launching a flagship store in Tokyo or revamping the entire supply chain.
35:48
SPEAKER_01: I think LVMA, LVMH stepping in with its global infrastructure and expertise is yeah, it's it's so good for these smaller brands.
35:58
SPEAKER_01: It's a central platform that makes even smaller brands punch way above their weight.
36:03
SPEAKER_01: And um, I don't know, Hermes can do it all on their own as a mono brand, but before you reach that size, it's very hard to succeed as a as a luxury company.
36:15
SPEAKER_01: Now, like I said, where this analogy really shines, I think, is in resilience.
36:27
SPEAKER_01: Is that it doesn't bet the farm on any one product, same with LVMH.
36:33
SPEAKER_01: They're not Hermes, they're not Brunello Guccinelli, they're not Gucci dependent like Kering, they're not banking on this single formula, and they're kind of spreading their bets across decades, across categories, across different consumers, actually.
36:52
SPEAKER_01: And of course, that comes with its own risks too, which we'll talk about later.
36:56
SPEAKER_01: I think it's also a pretty big advantage.
36:59
SPEAKER_01: So brand power is the moat, if you ask me, but it has to be actively maintained.
37:07
SPEAKER_01: So yeah, um, in my view, LVMH is running the constellation playbook, just with champagne, leather, and runway shows, I guess.
37:18
SPEAKER_01: What what do you think?
37:19
SPEAKER_01: Do you do you think do you agree?
37:21
SPEAKER_01: Do you see things differently?
37:23
SPEAKER_01: Did I forget about a moat, maybe?
37:26
SPEAKER_00: No, I would agree.
37:26
SPEAKER_00: I think there was a term that was used quite commonly about two years ago in the investment community, which was the flywheel effect.
37:33
SPEAKER_00: And it seems to nobody seems to use this term anymore.
37:36
SPEAKER_00: But I think LVMH almost has a bit of a flywheel effect or a playbook where they have taken or they've found profitable companies like Clou Vuitton, and they've taken the profits and reinvested those profits to acquire smaller luxury companies, scaled those companies up, created more profits, and then used the same playbook time and time again.
37:58
SPEAKER_00: It's funny we talked about Games Workshop and we talked about the likes, you know, a completely vertically integrated company, didn't have our discount, they uh tended to have uh smaller output than there was demand for.
38:11
SPEAKER_00: And I think now we've really delved into the to what a luxury business is.
38:15
SPEAKER_00: Yeah, Games Workshop for me, I know this this is a uh it was a separate podcast, but if we apply a lot of these lessons to LVMH, I think with what LVMH are doing and the scale they're at, it'd be very difficult to to compete with them.
38:29
SPEAKER_01: Yeah, I mean nothing to add there, I I agree.
38:32
SPEAKER_00: So let's jump in a bit more to obviously the architects behind everything.
38:37
SPEAKER_00: Bernard Arnault, he's has he's not the founder of the brands, but he is certainly the man behind LVMH.
38:45
SPEAKER_00: So what's your view on him?
38:47
SPEAKER_00: And I'll just add to that, he's now I think I believe he's 75, he's now just extended that he can remain as CEO to until he's 85, and perhaps we can even jump into there could even be comparisons with legs of Warren Buffett.
39:02
SPEAKER_01: Ooh, ah Warren Buffett has a special place in my heart.
39:06
SPEAKER_01: I don't know if I'm ready to make that comparison, but who knows in uh in a in a few years.
39:12
SPEAKER_01: To me, the management, and especially Bernardo No, is where LVMH really separates itself from most public companies, and it's honestly why I sleep well owning the company.
39:31
SPEAKER_01: Although one could argue management is not a mode on itself, it probably isn't.
39:37
SPEAKER_01: I think in the very, very long term, management is a lot more important than the current mode, and Bernard I know has proven over decades that he is one of the very best CEOs in the world.
39:54
SPEAKER_01: He is a visionary, no doubt.
39:56
SPEAKER_01: You can trust him.
39:57
SPEAKER_01: I mean, just look at what he's done so far.
39:59
SPEAKER_01: So it wouldn't make it wouldn't make any sense if he's going to screw up the company now by doing the wrong things.
40:09
SPEAKER_01: But what's more impressive is how he slowly and deliberately handed out responsibility.
40:17
SPEAKER_01: His five children all hold very serious roles within the group, they rotate through different brands and divisions.
40:26
SPEAKER_01: If you look at their um annual reports and uh and and and um proxy statements, they they have a different name for uh for the proxy statements, but they change roles like a lot, and I kind of like it.
40:41
SPEAKER_01: I mean they're kind of learning every layer of the business, and I think it's actually the succession plan in motion.
40:49
SPEAKER_01: I don't know who will take the reins, but I'm pretty sure Arnaud will make the right decision and stay on the board.
40:55
SPEAKER_01: It's like you said, kind of you're you're banking on Warren Buffett to make the right decision, um, putting Greg Abel um as the new CEO.
41:07
SPEAKER_01: Although we don't really know him, I think we we all trust Buffett in making the right decision, and I have the same feeling with Bernard Hano.
41:16
SPEAKER_01: Uh, besides the family owns 50% of shares, they have 64% of voting rights, so they are in control.
41:26
SPEAKER_01: The operational leadership is very strong, too, if you ask me, especially at Louis Vuitton and Dior.
41:34
SPEAKER_01: And incentives are tied to yeah, performance, although they're a bit I don't know, it's a bit of a grey area.
41:44
SPEAKER_01: I'd say alignment is pretty solid here.
41:47
SPEAKER_00: So time's gonna tell whether nepism is the right choice or not.
41:52
SPEAKER_00: Am I getting any succession vibes with Logan Roy extending his stewardship of the company until he's effectively dead, or is what Bernard Arnault is doing with his five children the right choice?
42:05
SPEAKER_00: What's your thoughts on incentives and skin in the game and how do things play out from here?
42:10
SPEAKER_01: Well, I wish I knew uh Sonny, but um I do think one of the five children will take the reins eventually.
42:19
SPEAKER_01: If I really we can make uh we can make a a guess.
42:25
SPEAKER_01: I would say let me think about this for a second.
42:30
SPEAKER_00: I'll jump in then with just to say is it fair to say that investors are investing alongside the owners of the company?
42:41
SPEAKER_01: Yeah, they are.
42:43
SPEAKER_01: I mean, like I said, the incentives are a bit murky.
42:48
SPEAKER_01: Most of the compensation is structured around performance-based share grants and multi-year vesting, which is good, I guess.
42:56
SPEAKER_01: But LVMH doesn't really break down exactly which performance metrics drive those rewards, uh, which I would have liked to know.
43:04
SPEAKER_01: I think Hermes is a lot more transparent about it.
43:08
SPEAKER_01: I think Hermes, and don't blame me if I'm wrong, but I think it's tied to organic growth and cash flow, so it's more investor-aligned.
43:19
SPEAKER_01: That said, skin in the game is not an issue, so I don't really worry about the incentives because the Enor family owns about 50% of the company, like I said, and so they control the ship if the real wealth is in the equity, and if LVMA succeeds, they win.
43:36
SPEAKER_01: And if it doesn't, they'll lose more than anyone else.
43:40
SPEAKER_01: So, I mean, talk about alignment, I guess.
43:45
SPEAKER_01: I would I would say either Delphine Arnault will take the reins, or um Alexander Arnaud.
43:53
SPEAKER_01: I I don't but um I don't think someone outside the Arnaud family will take the reins.
43:58
SPEAKER_01: I I don't think Bernard will.
44:00
SPEAKER_01: Would want that.
44:01
SPEAKER_01: But who knows, right?
44:03
SPEAKER_00: I'm gonna jump in with a curveball here that I've not heard anyone else talking about during my research.
44:09
SPEAKER_00: So again, could be totally wrong.
44:11
SPEAKER_00: And I also pronoun uh apologize in advance about the pronunciation.
44:15
SPEAKER_00: So LVMH is former CFO has moved to become the president and CEO of the Wines and Spirits division.
44:24
SPEAKER_00: So uh Jean-Jacques Guyoni, again, apologies about pronunciation.
44:28
SPEAKER_00: He joined as CFO in 2024, and he was in that position until about uh sorry, it in 2004, and he's moved into in 2025.
44:39
SPEAKER_00: And I just thought that was interesting that he's been the CFO for for such a long time and he's moved to head up the effectively the Wines and Spirits division.
44:48
SPEAKER_00: Is it the case that he's he's been tasked with going to get him some practical experience or hands-on experience?
44:55
SPEAKER_00: And is he either the first choice or potentially a backup CEO once Arnold does step down?
45:02
SPEAKER_01: Oh, I I I didn't know.
45:04
SPEAKER_01: Um that's uh that's some good input.
45:07
SPEAKER_01: I'll I'll I'll check.
45:08
SPEAKER_01: Uh did this change?
45:11
SPEAKER_00: Was it recently?
45:14
SPEAKER_00: Yeah, so I think he's just stepped down as as um CFO on the first of February 2025.
45:21
SPEAKER_00: I see, I see.
45:22
SPEAKER_00: Yeah, it's pretty recent.
45:23
SPEAKER_00: I also think he was in that in that position for um about yeah about two decades.
45:28
SPEAKER_00: Uh and and I think age-wise, um, yeah, he was only born in 1961, so he's certainly got got a lot of time ahead of him.
45:35
SPEAKER_01: Good point.
45:36
SPEAKER_01: Good point.
45:37
SPEAKER_01: Yeah, maybe.
45:39
SPEAKER_01: I think we'll be uh this would be a good time to talk about the numbers of uh LVMH because I mean at the end of the day that's what it uh comes down to.
45:49
SPEAKER_00: So can you give us a sort of quick um update on on the financials and just a quick summary for the listeners?
45:55
SPEAKER_01: I'll try to.
45:56
SPEAKER_01: Um let's keep it short, like you said.
45:59
SPEAKER_01: Uh following numbers on uh in audio form is always difficult.
46:02
SPEAKER_01: So revenue has been tripled in a decade, which is impressive.
46:10
SPEAKER_01: Um, but that does include acquisitions.
46:15
SPEAKER_01: Strip out some of that acquisitions and organic growth is still good, but it's not mind-blowing.
46:24
SPEAKER_01: Margins are very solid.
46:27
SPEAKER_01: I would personally always look at operating margins.
46:30
SPEAKER_01: They expanded from about 18% to 23%.
46:34
SPEAKER_01: They even hit 27% during COVID, but I don't think they'll um they'll they'll they'll reach that again.
46:43
SPEAKER_01: Capital allocation is a pretty mixed back, if you ask me.
46:47
SPEAKER_01: They've paid out more dividends than I think is necessary, especially when buybacks could offer better long-term value at today's multiple.
46:56
SPEAKER_01: Acquisitions have generally been very high quality.
47:01
SPEAKER_01: Tiffany could be the standout.
47:05
SPEAKER_01: 15 billion is a lot of money.
47:07
SPEAKER_01: Um, so we'll have to see how that plays out.
47:09
SPEAKER_01: But so far, I mean, I I I have my faith in uh Bernardo No.
47:14
SPEAKER_01: Return on incremental invested capital is about 5%, which is not great for a luxury group.
47:22
SPEAKER_01: It tells me that new investments, especially outside the mega brands, aren't really generating exceptional returns.
47:29
SPEAKER_01: Not yet, at least.
47:31
SPEAKER_01: I guess it's a bit of a yellow flag, and they're spending more to get less incremental return.
47:38
SPEAKER_01: So, my honest take is LVMH is an incredibly well-run business with very solid fundamentals.
47:47
SPEAKER_01: Growth is slower, capital efficiency is under pressure, you could say.
47:55
SPEAKER_01: And the financial engine isn't really quite firing at the Hermes level, just look at the stock price uh difference.
48:01
SPEAKER_01: And I think LVMH is a great company at the right price.
48:07
SPEAKER_00: If we consider the the growth, especially in likes of the revenue, LVMH has grown to such a size that it's almost more difficult to move the needle.
48:16
SPEAKER_00: But actually, revenue growth is maintained at double digits.
48:20
SPEAKER_00: At what point, in your opinion, do you think that falls off, or do you think they can maintain that for a lot longer?
48:27
SPEAKER_01: Yeah, this was um this is what I struggle with the most because who knows?
48:36
SPEAKER_01: Um revenue can grow 50% in a year, it can go 20% in a year, and it could decline 10% in a year.
48:47
SPEAKER_01: I don't know what's going to happen with Trump.
48:50
SPEAKER_01: I don't know how long China will be in trouble.
48:56
SPEAKER_01: I don't know how much LVMH is investing in emerging markets, so there are many unknowns here.
49:04
SPEAKER_01: So I think you really gotta play the long term and take like an average revenue growth you think they can average over, say, 20 years or a 10-year period.
49:14
SPEAKER_01: I would say they should be able to increase revenue by perhaps a declining volume but still increasing prices.
49:31
SPEAKER_01: I don't know, man.
49:32
SPEAKER_01: What's your what's your view here?
49:34
SPEAKER_01: What would you say on um revenue growth in the future?
49:39
SPEAKER_00: Bernardo knows seems to get constantly questioned on this, and this seems to be a sticking point for a lot of investors.
49:44
SPEAKER_00: They feel that at one point um revenue growth and will will just tend to naturally slow down due to the size of the company.
49:51
SPEAKER_00: But one of his comments was he was asked that in the 90s, he's been asked that in the 2000s, he's asked that still today, and they have proven any doubters wrong.
50:02
SPEAKER_00: Now, there's no doubt LVMH have been supported by huge um tailwinds with the likes of the Chinese market, the world just naturally becoming or consumers becoming more affluent.
50:15
SPEAKER_00: From my own perspective, I think it'd be interesting to see how obviously China recovers, the economy is uh in a difficult place just now, and is there other opportunities that I mean sure we'll come on to, but in the likes of India, in the likes of Nigeria, what about Latin America as well?
50:34
SPEAKER_00: I do appreciate that China is is or has such a scale of population that it's difficult to replicate, but how much growth and wealth is there going to be in the likes of India?
50:46
SPEAKER_00: Where will perhaps that the next China come from?
50:49
SPEAKER_00: Or or I've heard it mentioned numerous times in my research that the next China remains China.
50:55
SPEAKER_00: So at this point, I I'd really be sceptical and and to write LVMH off.
51:00
SPEAKER_00: I I just can't see any considerable slowdown unless they make some sort of disastrous mistake.
51:07
SPEAKER_01: Yeah.
51:09
SPEAKER_01: Yeah, I mean this is really um dependent on the investor and the outlook you have.
51:15
SPEAKER_01: Yeah, the global supply chains, the global the global economy.
51:22
SPEAKER_01: I think there's still a lot of growth possible.
51:27
SPEAKER_01: I think if you are a luxury brand trying to scale, trying to build your brand, there is only real really one option to sell to where you can still maintain the same brand, the stay the same independency, stay independent, get the funding and the backing and the marketing and the expertise from LVMH.
51:55
SPEAKER_01: So yeah, I think there's still a lot of potential here.
51:58
SPEAKER_01: Um I I just don't know what kind of and I I didn't really use revenue growth in my valuation anyway, because I think it's just too uncertain.
52:10
SPEAKER_01: I it it can go no growth for the coming two years, they can decline growth for the coming three years, and then start growing again by 10, 20, 30%.
52:22
SPEAKER_01: So who knows?
52:23
SPEAKER_01: I I I think um yeah, it's difficult.
52:26
SPEAKER_00: Do you think they can squeeze any more growth out of their operating margins?
52:30
SPEAKER_00: Is that possible?
52:30
SPEAKER_00: Or do you think we've sort of reached the limit, especially around their gross margins?
52:35
SPEAKER_01: I think there is more to gain if they heavily invest the coming years and decades into building a stronger brand.
52:46
SPEAKER_01: At the end of the day, I mean luxury is uh is a lot different from other companies, and the more desirable you are, or even the higher the prices become, the more desirable you become, the more exclus exclusive you are.
53:03
SPEAKER_01: So yeah, I think increasing margins is still possible.
53:07
SPEAKER_01: Um the more they scale, probably comes with some efficiencies too.
53:13
SPEAKER_01: I've heard them talk about AI, um perhaps reducing headcount in the um mostly in the um legal department or even in like um sales and administration.
53:29
SPEAKER_01: So yeah, I think um margin-wise, there is more to gain.
53:34
SPEAKER_00: Perhaps it's the case as well.
53:35
SPEAKER_00: You know, we've seen growth in particular Sephora, and is that the next growth story within the company?
53:42
SPEAKER_00: If we reflect on something like Nike, Nike tends to have slowed down, but internally it's the likes of Jordan that's growing within that company.
53:51
SPEAKER_00: Is it going to be something that perhaps investors aren't it's not as obvious just now that will come out and sort of be the growth driver that perhaps leave it on the brand remains, but something else comes out of the company to to bolster sales and sort of bolster operating income as well.
54:08
SPEAKER_00: Um if we take a take a sort of pause there and think we've we've covered a lot of the financials, but beyond that, what do you think are LVMH's biggest risks?
54:19
SPEAKER_01: Uh I think there are a few, and um let me let me let me tell you the risk I see, and let's see if you want to add or agree with me.
54:30
SPEAKER_01: The first one being managing debt, they have quite some yeah, they have pretty significant debt.
54:39
SPEAKER_01: They have pretty significant uh debt, about 10 billion is short-term debt, 12 billion in long-term debt, and they even have about 15 billion in leases, they do generate a lot of free cash flow, so I think they can pay it off in about two years if uh free cash flow stays the same, but it's something to pay attention to.
55:03
SPEAKER_01: I think overexposure to China and macroeconomic risks.
55:08
SPEAKER_01: I mean, the luxury sector, if you're not in like the ultra tier, is pretty cyclical, and I would say LVMH is not ultra luxury.
55:18
SPEAKER_01: Um, a few brands might be, but most of them are not.
55:22
SPEAKER_01: Some are even premium, like a Kenzo.
55:25
SPEAKER_01: I would say Kenzo is pretty close to like a Nike, a more expensive Nike, I guess.
55:33
SPEAKER_01: Yeah, as LVMH does attract a lot of aspirational luxury consumers, so I think that is a short-term risk in tough times, economic times.
55:43
SPEAKER_01: Yeah, one more point I would uh I would like to add is uh brand's reputation damage.
55:48
SPEAKER_01: I think this is the biggest risk.
55:50
SPEAKER_01: The value of LVMH and the brands is intrinsically linked to every single brand it owns, its reputation.
55:59
SPEAKER_01: Incidents like the sale of counterfeit products, ethical missteps, animal welfare, labor conditions, even struggles in the supply chain, loss of creative vision at a major mason is pretty bad if that happens.
56:20
SPEAKER_01: I think that's probably the biggest risk, and everything else is kind of more short-term risk focused.
56:28
SPEAKER_01: Uh, the geopolitical tensions, macro factors, supply and chain supply chain disruptions is more short-term to midterm.
56:36
SPEAKER_01: But I think brand reputation damage is the biggest risk long term.
56:41
SPEAKER_00: Yeah, so just to extend on that, I think from my perspective, one risk factor for me is this huge reliance on Wolf Vuitton, the brand.
56:49
SPEAKER_00: And I know we've talked about uh L VMH being diversified, but certainly if there was that pullback that we've seen in the likes of um Gucci, if there was an 18% revenue decline with Wolli Vuitton the brand, obviously the company would be affected.
57:08
SPEAKER_00: If we also consider that LVMH tend to have broken the rules of luxury, and it perhaps feeds back into your point about about brand equity, but we've seen the likes of Beyoncé, Rihanna, Jay-Z all partnering with LVMH in some capacity.
57:26
SPEAKER_00: And just beyond that, if we if we sort of consider that Jay-Z has has pretty tenuous links to P Diddy and everything that's going on there, a lot of this can can push back on LVMH and just the companies that these celebrities are associated with.
57:41
SPEAKER_00: We saw it with with Adidas and Kanye West when there was a large fallout, and it it really has taken Adidas a few years to recover from that.
57:50
SPEAKER_01: Yeah, I even think in one of the luxury books I read, I don't know which one it was.
57:54
SPEAKER_01: I have like seven books in the back on luxury industry.
57:58
SPEAKER_01: I think one of them mentioned that as a true luxury company, you don't want famous people in your marketing.
58:07
SPEAKER_01: Hermes, from what I know, doesn't have any ambassadors for the brand because you don't control these celebrities, they can do whatever they want, and that can really hurt like this mono brand.
58:23
SPEAKER_01: And I think it kind of can work for L VMH since they have more brands.
58:29
SPEAKER_01: This allows them to have like pretty unique selling points and niches inside LVMH for a for a and reach a different audience, a different consumer, I guess.
58:40
SPEAKER_01: But there is a risk, like you mentioned, if these people go uh rogue, just look at Kanye.
58:45
SPEAKER_01: I mean, I don't know if you've heard about his latest song, but I mean crazy.
58:50
SPEAKER_00: No, I've not I'll have to listen to it after the podcast.
58:52
SPEAKER_01: Uh I think I sort of I I will not mention it here, but uh I'll tell you after the podcast.
58:57
SPEAKER_01: But uh it's pretty ridiculous and uh has something to do with World War II.
59:00
SPEAKER_01: Okay.
59:01
SPEAKER_00: Yeah, I've uh no, I've stopped listening to Kanye, but that's that's maybe I'm just a sort of generic consumer, so uh I never fortunately never ever bought Yeezys.
59:10
SPEAKER_00: So if we take a more uh positive outlook and think, well, what are the opportunities for LVMH, can you lead us through those?
59:17
SPEAKER_01: Well, let me flip the question to you.
59:20
SPEAKER_01: What do you think are the biggest opportunities?
59:22
SPEAKER_00: Uh so I think first and foremost, if we consider there's there's further expansion opportunities, you've you've already talked about this, but LVMH are sort of the only player in town when it comes to a lot of their competitors that we've discussed, and think you know, okay, maybe her mes are too big, but if you consider the likes of Chanel, these are the players that who else are they going to approach if they if there is some sort of buying opportunity, even caring, you know, they're they're relatively small in comparison to LVMH.
59:50
SPEAKER_00: I I don't know the intricacies of of MA and how how it works, but there is this a scenario where LVMH can acquire these large operators.
1:00:00
SPEAKER_00: I think if you if you put the question to Bernard Arnault, I have no doubt that um and obviously I don't think he can get because of the company structure, but Rolex would probably be his dream acquisition as a brand.
1:00:12
SPEAKER_00: Um I have no doubt of that, but I don't think that one will come.
1:00:15
SPEAKER_00: Chanel, uh with the other brands that we've talked about, perhaps there's there's more of an opportunity there.
1:00:22
SPEAKER_00: If we then sort of reflect back on the fact of you know what we've talked about already, LVMH own the chain, they're completely vertically integrated, 95% of their retail happens in their own shops.
1:00:34
SPEAKER_00: They remind me through sort of my research, I've noticed that they've been buying up tanneries and they remind me a little bit of ASML, one of your homegrown countries, because ASML has tended to, if they're not happy with what they're receiving, they've gone out and purchased their supply chain.
1:00:50
SPEAKER_00: And I think perhaps in the future as well for LVMH, there's always the opportunity that they can go out there, purchase their supply chain, and perhaps squeeze more margin through that.
1:01:00
SPEAKER_00: When it comes to brand equity as well, we've we've talked about a few times, but the Lindy effect, LVMH is some of the oldest brands have fallen to about the 14th and 15th century.
1:01:12
SPEAKER_00: Most of these brands typically fall, you know, are maybe more recent, with the likes of LVA or Holy Vuitton and DR, but they have huge heritage and strip away everything else.
1:01:21
SPEAKER_00: But these brands are impossible to replicate on any given day regard because of when they were when they were launched.
1:01:30
SPEAKER_00: Um and then if we just come on to again, we've already talked about it about the scale of this company.
1:01:35
SPEAKER_00: When it comes to LVMH, the fixed costs tend to get lower because of the scale.
1:01:42
SPEAKER_00: Um they save money when it comes to their advertising, when it comes to negotiations on their leases, and it means that the stronger the company gets, you know, again, we'll revert back to that flywheel effect, it becomes stronger in securing customer awareness awareness.
1:01:58
SPEAKER_00: Um you know, they can negotiate when it comes to purchasing any any good any any required goods.
1:02:05
SPEAKER_00: And I think for me, it's I I just can't see competitors getting to this or or re or catching up to LVMH unless they make some you know some sort of mistake that that perhaps you know that takes a while to recover from.
1:02:21
SPEAKER_00: So with that, I'll maybe pass the question back to you.
1:02:24
SPEAKER_00: What do you see as the as a the opportunities for for LVMH and and how does it maybe the next decade, like in your opinion?
1:02:33
SPEAKER_01: I think you m mentioned most I would agree with.
1:02:38
SPEAKER_01: I think they are the to-go holding company.
1:02:41
SPEAKER_01: I don't know if Chanel or Rolex would be passed by regulators.
1:02:46
SPEAKER_01: I think L VMH would kind of be um a semi-monopoly, then.
1:02:54
SPEAKER_01: I mean, what else is there to buy?
1:02:55
SPEAKER_01: Maybe Patek Philippe.
1:02:58
SPEAKER_01: I think it for L VMH it all comes down to emerging the customers in their storytelling, in their dreaming.
1:03:09
SPEAKER_01: So I think going more digital can really enhance the brand's value in the future.
1:03:18
SPEAKER_01: Just imagine being able to witness the entire process of a craftsmanship item being made or virtually walking through an atelier in the metal in the metaverse, or this, I mean, it's it's something fun to think about.
1:03:35
SPEAKER_01: I think it should be about enhancing experiences and reinforcing heritage for LVMH.
1:03:44
SPEAKER_01: Just think about, for example, I like to speculate a little bit here, but think about integrating technology into products like smartwatches or leather bags with hidden tech.
1:03:55
SPEAKER_01: Think of using a fingerprint ID to open a bag.
1:03:59
SPEAKER_01: Um, I mean, this can really blend like tradition with innovation, AI to streamline operations, reduce unnecessary headcount, improves efficiency, all while enhancing customer engagement.
1:04:14
SPEAKER_01: I mean, that's pretty fun to think about.
1:04:18
SPEAKER_01: But I I I I I I think there is just a long runway for L VMH, not with explosive growth, not say 50% per year, but I think a very steady, well above inflation pricing power.
1:04:35
SPEAKER_01: I think that's um that's the biggest opportunity for L VMH.
1:04:40
SPEAKER_01: I I don't really look at Dior or L VMH for the coming five or ten years.
1:04:45
SPEAKER_01: I really look at it as like a cornerstone for my portfolio.
1:04:49
SPEAKER_01: And as long as Bernard Arnault does the right things, I wouldn't mind holding this company for 25 to 50 years if needed.
1:04:59
SPEAKER_01: If everything stays the same, if they keep doing the same thing very well, if they keep doing the same things very well, I wouldn't mind holding this company for decades.
1:05:11
SPEAKER_00: Well, LVMH today is valued at about 240 billion euros market cap wise.
1:05:18
SPEAKER_00: What's your thoughts on this?
1:05:19
SPEAKER_00: Some of its parts of valuation.
1:05:21
SPEAKER_01: Yeah, this was um the fun part, I guess.
1:05:24
SPEAKER_01: This is where we get to play around with our assumptions a little bit.
1:05:28
SPEAKER_01: Usually I like to do like a scenario analysis and estimate the revenue growth and the margins, and I don't really think that's the right way to go about it for a brand like LVMH.
1:05:39
SPEAKER_01: It just I mean, there's it can go everywhere.
1:05:44
SPEAKER_01: I think all the outcomes and estimates will not be right anyway.
1:05:48
SPEAKER_01: So I did a sum of the parts based on each segment they report on.
1:05:54
SPEAKER_01: I I wish I could do it on the brands, like Kering does, where I can estimate.
1:06:00
SPEAKER_01: The Gucci brand value and the Bottega Fanata brand value.
1:06:03
SPEAKER_01: But LVMH unfortunately doesn't report like individual brand revenue and profits.
1:06:09
SPEAKER_01: So I had to go about it as like the Wine and Spirit segments, the Fashion and Leather Good segments, and just value that way.
1:06:16
SPEAKER_01: It's a bit more difficult because all these different brands kind of overlap as well.
1:06:21
SPEAKER_01: So it was a bit difficult, but what I did, and if you want to see like the some of the ports image, that makes it a lot clearer.
1:06:31
SPEAKER_01: I'll make sure to um it's in the you can find it on the TDI dashboard on the Dutchinvestors.com.
1:06:39
SPEAKER_01: Uh scroll all the way down to the valuation.
1:06:43
SPEAKER_01: So I think most value, I think like 80% of all value in of LVMH is fashion and leather goods.
1:06:55
SPEAKER_01: The operational profit was about 15 billion euros.
1:07:00
SPEAKER_01: Apply an exit multiple of 18 on it.
1:07:04
SPEAKER_01: They have the highest margin, they have they tend to have the the best growth rate, the best brand power.
1:07:11
SPEAKER_01: So that arrives at a 274 billion dollar market cap, and that's more than the current market cap.
1:07:20
SPEAKER_01: So you could say if fashion and leather goods deserves an exit multiple of 18 on the current profit, everything else is free in the LVMH um stock price.
1:07:38
SPEAKER_01: Although everything is a lot less valuable.
1:07:41
SPEAKER_01: I came up with about wines and spirits of about$13 billion, perfumes of about$5 billion, watches and jewelry about 18 billion dollars, the retailing side about$8 billion, and I didn't even value everything else, the uh the other um part of the business.
1:08:00
SPEAKER_01: So I arrive at a total estimated value of about 320 billion euros, and the current market cap is about 240 billion, so a 30% discount, which is pretty significant.
1:08:16
SPEAKER_01: Um, although one must say that the sum of the parts is very dependent on your assumptions of each segment and brand.
1:08:29
SPEAKER_01: So what's your uh opinion here?
1:08:33
SPEAKER_00: Yeah, so I did a uh a DCF and got give or take where the valuation is sitting just now.
1:08:40
SPEAKER_00: Um I don't think it's to your point particularly fair to just say that this is a DCF valuation because I think as a company there's a lot more strengths underlying LVMH than than say even our last conversation on Pivotree.
1:08:53
SPEAKER_00: What I would be curious to get your opinion on is investors who purchased LVMH shares, they just prior to the pandemic, they've only made about a 15% uplift in that time, having held them for about five years.
1:09:07
SPEAKER_00: Obviously, if we ignore dividends.
1:09:09
SPEAKER_00: Do you think this is a relatively good point to buy into LVMH, or are you considering buying more shares?
1:09:17
SPEAKER_01: Currently, I'm actually holding.
1:09:20
SPEAKER_01: Uh, I am down.
1:09:21
SPEAKER_01: Um, it's not the my largest position by far.
1:09:24
SPEAKER_01: It's I think it's about um eight percent of my portfolio, something like that.
1:09:30
SPEAKER_01: If I did my math correctly, I arrive at about a 8% IRR, um, excluding dividends and buybacks.
1:09:40
SPEAKER_01: So perhaps 10%, say.
1:09:42
SPEAKER_01: I think LVMH is like a great company for sustained growth.
1:09:52
SPEAKER_01: Um, I think it'll deliver you about ten to fifteen percent over the coming ten years, if I had to make a guess.
1:10:04
SPEAKER_01: But that does bring me to what I said earlier the Christian Dior um holding, because L VMH let me see how I if I can explain this in uh simple terms.
1:10:25
SPEAKER_01: Christian Dior SE is the holding company controlled by the Arnault family.
1:10:33
SPEAKER_01: So by investing in Christian Dior, you're essentially buying LVMH at a discount.
1:10:41
SPEAKER_01: And as of May 13th, 2025, that holding discount relative to LVMH is an additional 18%.
1:10:52
SPEAKER_01: So add that to the estimated 30% undervaluation of LVMH if my sum of the parts is ballpark close, then you're actually, I think it's Dior is a pretty good buy for 12 uh 12% IRR.
1:11:12
SPEAKER_01: But of course, there is no guarantee that the discount in a holding company will ever close.
1:11:17
SPEAKER_01: There are many examples of holding companies that have discounts that so far have never really closed.
1:11:26
SPEAKER_01: Uh, think of Process with 10 cent.
1:11:30
SPEAKER_01: Um, and besides, I mean, if you own Dior, you're kind of giving up your voting rights.
1:11:38
SPEAKER_01: It's basically you're letting Arnaud vote for you, which I am more than happy to do because he knows a lot more about luxury than than I do.
1:11:50
SPEAKER_01: But historically, there have been movements where the discount between Dior and L VMH has narrowed.
1:11:57
SPEAKER_01: And over the past 15 years, and I think you'll find this interesting, LVMH has delivered a kegger of 14.6%, while Christian Dior has outperformed slightly with 15.3%.
1:12:12
SPEAKER_01: And it sounds like a minor difference, but over that same time period, a$10,000 investment would have grown to$75,000 in LVMH to$82,000 in Christian Dior, and I mean there is an even bigger discount now than it was 10 years ago, so kind of interesting if you ask me.
1:12:35
SPEAKER_00: So just as we start to reach the conclusion, what would make you sell your Dior shares?
1:12:42
SPEAKER_01: If I start to see things decision making by management that does not align with like the long-term brand increasing long-term brand value for L VMH, if they start to focus more on like really focusing on revenue growth, instead of I don't mind them lowering the margin in the short term to enhance the customer engagement a little bit, focus on brand building.
1:13:22
SPEAKER_01: I would love to see the them lower dividends and actually buy back more shares, which would really give me more confidence in the management team even more.
1:13:38
SPEAKER_01: It's difficult for me to say what will make me sell because I don't really see any reason so far to sell.
1:13:51
SPEAKER_01: Something that really hurts like the brand long term.
1:13:54
SPEAKER_01: And I don't really know what it is now.
1:13:59
SPEAKER_01: I don't really know what it could be, but that would make me second guess if I made the right decision.
1:14:08
SPEAKER_00: So as the as the shareholder in this conversation, what's your conclusion with LVMH?
1:14:13
SPEAKER_00: What are you planning on doing?
1:14:16
SPEAKER_01: I see no reason to change course for now.
1:14:19
SPEAKER_01: I'll continue to hold my position.
1:14:22
SPEAKER_01: I mean, the company has really proven time and time again that it can adapt, it can execute, it can do pretty well through tough cycles.
1:14:32
SPEAKER_01: I trust a management team, which is my main thesis for this company.
1:14:36
SPEAKER_01: I trust Bernardo know his expertise.
1:14:41
SPEAKER_01: I hold Christian Dior because it basically is L VMH with a bigger discount, so it gives me an even bigger margin of safety.
1:14:53
SPEAKER_01: I am not blind to the downsides.
1:14:56
SPEAKER_01: I mean, there are quite some risks.
1:15:00
SPEAKER_01: I do if you if if I could choose between Hermes or L VMH, and they have the exact same valuation, I would go for Hermes.
1:15:10
SPEAKER_01: Same goes for Ferrari, same goes for Brunello Cuccinelli.
1:15:14
SPEAKER_01: I think there's more upside there, but I don't think there's more upside there now due to the valuations of these companies.
1:15:24
SPEAKER_01: I think it comes down to if LVMA stays on course, not chasing short-term gains, focus on brand equity, capital discipline, the KPIs I personally track, execution must remain consistent, which it has been so far, then I think the opportunities still far outweigh the risks, and until that changes, I'll remain a patient holder.
1:15:58
SPEAKER_01: I'm very curious what you think of the uh of the analysis so far, and if it changed your view on the company and perhaps what you're going to do next.
1:16:10
SPEAKER_00: For me, as we've mentioned, I'm not not a shareholder in LVMH, but it's a company I've I've watched quite closely for a number of years, and I'm really, really grateful that we've we've sort of taken the time to on to undertake this uh investigation of the company.
1:16:23
SPEAKER_00: I think probably you know, looking at the both the positives and negatives, for me, I'd say there's an ongoing debate around how much of LVMH's brands are true luxury.
1:16:34
SPEAKER_00: Unlike Hermes, where there's scarcity, there's craftsmanship.
1:16:38
SPEAKER_00: I think as we've already talked about, things like uh the Neverfool or I think the other brands that uh pouchette is those being readily available online.
1:16:47
SPEAKER_00: For me, that's a bit of a red flag because I don't think that's the sign of a true luxury company.
1:16:53
SPEAKER_00: Um however, I think it's it's quite obvious that LVMH dominate the global luxury market, they dominate that sector based on the scale and all the reasons behind that that we've discussed.
1:17:04
SPEAKER_00: I I think they'd be very difficult to catch.
1:17:06
SPEAKER_00: I think that there's still opportunity in the addressable sectors in China, possibly India as well.
1:17:13
SPEAKER_00: There's obviously macroeconomic headwinds, there's challenges with the with the tariffs, and I think if we consider that you sort of I think about 17% of China's population are basically considered upper middle class or above sort of as of 2023, there's still room for growth there, especially within China.
1:17:32
SPEAKER_00: Um, and I think the luxuries is you know, it's only a fraction of China's and India's good, you know, their growing populations who actually buy into it.
1:17:42
SPEAKER_00: So then, as we've already talked about, there's there's obviously opportunities in markets like Nigeria and potentially South America as well.
1:17:50
SPEAKER_00: So I I think if we we've obviously repeated it a number of times in this podcast, but it seems to be a question mark still around LVMH being a mono brand or diversified around you know just Louis Vuitton being the driving force.
1:18:05
SPEAKER_00: But as we've mentioned, they seem to just be taking the profits from Louis Vuitton and reinvesting it into mergers and acquisitions and acquiring new companies.
1:18:15
SPEAKER_00: And it's obviously played off uh uh paid out for them because of where LVMH is today and obviously the scale that it's reached.
1:18:22
SPEAKER_00: I really like the fact that you're investing alongside owner operators, as we talked about, there are no family owner about 50% of the company, give or take.
1:18:31
SPEAKER_00: And I think there's there's definitely going to be unseen opportunities, there's no doubt unseen risks that perhaps you know if if that is a pullback in the the Louis Vuitton brand, for example, but it's certainly the case that I think there'll there will be other opportunities that are not seen and not obvious just now, but because LVMH is such a well-managed business, as long as they can maintain that, those opportunities will come around, and it could be in the short term or it could be a decade from now.
1:18:57
SPEAKER_00: I think the only thing I would really finish on as a as a non-shareholder, and perhaps one for you as a as a shareholder, is where does Arnold go from here and what does the succession plan look like?
1:19:10
SPEAKER_00: Because ultimately he is the architect behind LVMH, and what are we seeing in the public, but what are we not seeing behind the scenes?
1:19:19
SPEAKER_00: I've no doubt that perhaps the Arnold family are best placed to run it, and he seems to be doing everything he can to ensure his children will have the best skill sets, but is that the best option for shareholders?
1:19:33
SPEAKER_00: I mean, they have obviously all their wealth essentially invested in the company, so it looks like it will be, but the next 10 years, especially as Arnold nears that 85 and possibly 90, just uh it'll be an interesting time for shareholders.
1:19:49
SPEAKER_01: I mean, I still got like 10 years before he uh can raise the age again.
1:19:56
SPEAKER_01: But I agree, I think um the succession plan is something to follow.
1:20:00
SPEAKER_01: And I mean, let's say they promote a new CEO.
1:20:06
SPEAKER_01: I have no clue who it is.
1:20:08
SPEAKER_01: That would be a reason to sell the company.
1:20:11
SPEAKER_01: Um if I don't know the news the new CEO and I don't really can't really do my research on him.
1:20:20
SPEAKER_01: And on another point you mentioned, and we'll wrap it up then, I would like to reiterate that quality comes at a price.
1:20:29
SPEAKER_01: Like I said, I am not ashamed to admit that I would rather own Hermes, I would rather own Ferrari, Brunello Cuccinelli, maybe even another luxury name.
1:20:43
SPEAKER_01: But I think your returns will be horrible if you buy it for the current price.
1:20:49
SPEAKER_01: Well, maybe not horrible, it might be it might be inflation beating.
1:20:55
SPEAKER_01: But I think the risk you're taking, it's probably better to put it in an index fund.
1:21:01
SPEAKER_01: And I think LVMH is not the highest luxury company you can buy, but I think at the current valuation, and I hope it continues to drop so I can get it even cheaper, because I will be adding if it gets even cheaper.
1:21:19
SPEAKER_01: I think you'll get better returns in the coming 10 years at the current valuation, and um, I think that would be my my ending thesis for uh LVMH and uh a wrap for today.
1:21:37
SPEAKER_01: Uh a big thanks to you, Sunny, honestly.
1:21:39
SPEAKER_01: It was a pleasure having you on again.
1:21:42
SPEAKER_01: It won't be the last time, of course, because um we'll keep doing this for what we planned about every uh every month from now.
1:21:50
SPEAKER_01: And uh appreciate you taking the time to come on the show again and talk to well, talk about one of my favorite companies, and we'll see what we're going to talk about next in uh in uh four weeks from now.
1:22:04
SPEAKER_00: Great.
1:22:05
SPEAKER_00: Thanks again for having me, and I've I really appreciate you taking the time to educate me on LVMH.
1:22:10
SPEAKER_01: Absolutely.
1:22:11
SPEAKER_01: If you want more on Sunny, I'll make sure to put the links in the description.
1:22:16
SPEAKER_01: Check out Secret Sauce Investing on Substack, and especially if you're a drinker, it it'll be a great place for you to check it out.
1:22:25
SPEAKER_01: More on that soon.
1:22:27
SPEAKER_01: Thank you so much, Sunny, and uh talk to you later.
1:22:31
SPEAKER_00: Thank you.