It’s been surprising to see the luxury goods juggernaut LVMH Moët Hennessy Louis Vuitton (OTCPK:LVMUY)(OTCPK:LVMHF) experience uncharacteristic softness in its shares, delivering a roughly negative 6% total return over the last 12 months. This trend is occurring amidst concerns about a broader slowdown in the global luxury market.
While those fears may hold some truth, it’s important to recognize LVMH as a top-tier operator. It’s likely to withstand the storm better than most. With shares currently standing at 21.5 times trailing twelve months earnings per share (TTM EPS), the anticipated long-term growth should justify the current investment, hence meriting a Buy rating for the stock.
The LVMH Landscape
LVMH boasts an empire of luxury brands, including the esteemed Louis Vuitton, Moët, Hennessy, Christian Dior, Bulgari, TAG Heuer, and Guerlain. The Fashion & Leather Goods segment accounts for over 70% of the group’s operating profit, followed by Wines & Spirits, Watches & Jewelry, Selective Retailing, and Perfumes & Cosmetics.
LVMH doesn’t officially break down sales by specific brand, but information hints that Louis Vuitton is a €20 billion business, contributing approximately 25% to the group’s sales. The Fashion & Leather Goods segment already touts the strongest margins among the group, with Louis Vuitton likely to surpass these margins. Consequently, Louis Vuitton is likely to play an even more prominent role in the group’s earnings.
Notably, LVMH manages the entirety of both production and distribution for the Louis Vuitton brand, choosing not to utilize wholesale channels. Although this approach has its pros and cons, the company’s focus on controlling sales through its stores underlines the importance of maintaining exclusivity and perceived scarcity. Additionally, the alcohol segment, despite its cyclical nature, serves as a stabilizing force for the fashion arm of the business, providing a unique strength relative to its peers.
Moderate Sales Growth Amidst Concerns
Though concerns loom over a potential slowdown in the global luxury market, it’s crucial to note that LVMH continues to deliver respectable performance. In the latest available quarter (Q3 2023), the company reported a 9% year-on-year organic revenue growth at constant exchange rates. This figure, while not exceptional, still places LVMH above some peers, albeit below others. Despite a considerable slowdown from the 17% growth reported in previous quarters, the numbers are far from discouraging.
Delving deeper, the performance in the United States reflects some softness, with organic sales up just 3% year-on-year. However, given the extraordinary growth experienced in the wake of the COVID-19 fiscal stimulus, this moderation in growth is understandable. On the brighter side, the Chinese customer base remains a promising segment, with Asia ex-Japan sales showing encouraging signs, even as some sales have shifted back to Europe due to a resumption of travel post-COVID.