Chit Chat Stocks - LVMH Moët Hennessy Louis Vuitton (Ticker: LVMUY) Not So Deep Dive

Episode Date: December 12, 2023

LVMH is a multinational conglomerate known for its luxury brands in fashion, cosmetics, and spirits, navigating a dynamic market with a focus on innovation and adapting to evolving consumer preferences in the high-end goods sector. Listen as Brett and Ryan break down the company and its industry. Enjoy the show! ****************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠⁠⁠⁠⁠⁠ibkr.com/info⁠⁠⁠⁠⁠⁠⁠ ***************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: ⁠⁠⁠⁠⁠⁠⁠https://chitchatmoney.substack.com/⁠⁠⁠⁠⁠⁠⁠ Want updates on future shows and projects? Follow us on Twitter: ⁠⁠⁠⁠⁠⁠⁠https://twitter.com/chitchatmoney⁠⁠⁠⁠⁠⁠⁠ Contact us: ⁠⁠⁠⁠⁠⁠⁠[e-mail]⁠⁠⁠⁠⁠⁠⁠ Timestamps Company Background | (4:30) Industry | (18:53) Corporate Structure | (30:39) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome into chit chat money my name is brett schaefer and i'm joined as always by ryan henderson today is our tuesday not so deep dive episode where we go through the basics of a company uh trying to introduce you to its business model ownership financials and future growth opportunities hopefully you can learn something from this episode about the company we cover

and get a better perspective on it as a potential investment for your portfolio, or if you already own it, maybe get another perspective from two other people out there that cover the stock and have done a bit of research. And today, we are talking Mouette Hennessy Louis Vuitton, or otherwise known as, for our American accents, I cannot pronounce these French names very well, LVMH. I should be clear that the ticker is actually not LVMH, which didn't know, should say. So this is our first introduction to the company. If you want to buy it on the French exchange, it is MC, but for our American listeners, it is LVMUY. If you want to find that. Ryan, how are you doing today with researching this company? And are you excited? I know this

is what you've been looking forward to, kicking off the luxury month, or excuse me, not even just month. We're doing three luxury companies in a row as a theme. Yeah. I like the theme. I like the group of companies that we're going to be studying. And LVMH is probably when someone hears the term luxury, it's probably one of the first brands. Well, LVMH itself is not really a brand kind of, but Louis Vuitton is probably one of the first kind of brands that comes to mind. So I was excited for this one. I will say, though, a lot of moving parts here and a lot of different brands, like I think north of 100 brands in the portfolio. Maisons. Maisons.

Yeah, we got to make sure. Basically just brands, right? Yeah, they're good at hyping themselves up and getting a good allure with their businesses, which is probably part of the strategy. I'm going to let Ryan get into it and go on with the intro. But first, a couple of housekeeping items. One, if you are listening to this episode, that means our luxury overview, our state of the luxury market interview with Sleepwell Capital and Leandro from Best Anchor Stocks is out and is going to be a couple episodes before this.

Actually, probably just one or two. That was an hour 50 interview that I did with them. And it's a fantastic overview. if you like this company and you're interested in these type of companies i would go ahead and listen to that as well second uh if you enjoy chit chat money give it a five-star review on apple or spotify and if you want our show notes charts graphics any of the stuff we use as research during the episode subscribe to our free newsletter it's on substack and the link to that is in the show notes okay ryan why don't you introduce lvmh uh what what does this company do which is

basically what i mean maybe a better question is what do they not do honestly yeah it's it's uh they do a lot um i'm gonna steal this quote and i didn't really know where to throw this into the show but i just thought it was a fascinating quote and it was from coco chanel and it says luxury is a necessity that begins where necessity ends. When we think about the businesses that LVMH operates, that does encapsulate most of their brands. It's something that most people don't need, but they are choosing to buy it anyways because predominantly social signaling and the image that it conveys to the people around you. I think another way to put it is it's not about the utility. It's about proving that you can pay for stuff that doesn't have

utility. Yeah. Anyway, so LVMH, manufacturers, distributes, and sells just that, things you don't have, not specifically for utility, but for the social signaling. Basically, they sell luxury goods. And I kind of use that generic tagline to describe the business, but I think it's important to actually look into that. They manufacture, design, distribute, and sell the luxury goods. There was a point in time when LVMH or the brands in LVMH weren't actually selling the goods themselves. They didn't have the storefronts.

They weren't vertically integrated on the supply chain side of things. So they weren't that involved in the process of where they got the materials. that is not where they are today basically one of the big reinventions of this business was i believe around the 70s or 80s when louis vuitton started to build out their own store base which culminated culminated in them generating much higher margins it allowed them to kind of manage the brand better they didn't have to go through the big department stores and kind of other other channels like that. So that's where they are today. And they operate across a bunch of different businesses and they break it into basically five parts. So the first one, and this is the biggest,

most important by far, is fashion and leather goods. This accounts for 49% of revenue. It's basically half the business and it's far and away the most important part. So some of the major brands that are included in this segment include Louis Vuitton, Fendi, Loro Piana, Christian Dior, Marc Jacobs, several others. I'm going to say a couple of brands that I probably don't know myself, but some of those names, even I, which I wear absolutely zero luxury, I think I recognize and probably pretty much anyone in the world would recognize. Side note, do you think our hometown where we are currently living, Seattle, is the most anti-luxury city? Maybe that in Portland, in the entire country, because

it seems like it's not very popular here maybe in the the suburb of bellevue but i don't know do you consider patagonia luxury because we have our own we have our own little niche here yeah patagonia and uh not columbia but all the stuff that the hyatt stuff at rei some osprey backpacks right yeah but no continues and subaru cross treks yeah it's it's that seems to be the kind of seattle get up but um basically in this fashion and weather goods division i kind of talked about it here, but they're designing and manufacturing the bags and the clothing themselves, and they're retailing them throughout their own stores. While these are certainly considered luxury, I think it's important to put into context where this product fits with consumers.

It's expensive. We're talking about $600, $700, upwards of $1,000 handbags, but it's not completely unaffordable. So there was a point where if you look at Hermes, some of their handbags are 20,000 and maybe Louis Vuitton has bags like that as well. But these are ones where the upper middle class could afford it, but at the same time, it screams basically, I'm wealthy enough to afford an overpriced handbag. So them kind of going into that, because previously, I'm not going to get into this in the history, but Louis Vuitton was basically, they were designing trunks for royalty way back when. And so it's kind of shifted over the years to this general consumer product that's really just

at the higher end of the pricing spectrum. When we look at fashion and leather goods, I mentioned that it's 49% of revenue. It is also 41% operating margin business. That is the highest margin business under LVMH's umbrella. I'm honestly kind of blown away when you think about that 41% operating margins on handbags. Estimates are for LV to be at a much higher two on its own at about 55%, according to a research report I read. Okay. And the last thing I'll mention here on the fashion and leather goods side is that it's not, you think about Hermes and apparently Hermes, it might have changed a little bit since it was last reported, but these were

handcrafted bags kind of done one at a time, designed, manufactured all slowly by an individual person. Louis Vuitton has a supply chain, or they have kind of a supply run where they are designing these on computers. They are kind of mass manufacturing them. They're still limiting limiting supply as they don't want this to become... They don't want to just flood the market with inexpensive bags, but it's not as handcrafted as you might think of when you think of Hermes. Let's move to watches and jewelry though. I did this in no particular order, but this accounts for 13% of their revenue. Within this segment, popular brands include Tiffany & Company, Tag Heuer, I hope I'm saying that right, Bulgari, Zenith, a bunch of others

that I didn't recognize. They acquired Tiffany and Company in 2021, $16 billion. It's a big acquisition for them. And it's probably one of the most recognizable jewelry brands, maybe the most recognizable jewelry brand in the United States. And I guess we don't need to go too much further into that because you're going to talk a little bit about Tiffany and Company, I believe, in your future growth opportunity, but that's about a 19% operating margin business, pretty solid all around. Then the perfumes and cosmetics segment, this accounts for 10% of revenue. Some of the brands include Dior, Aqua di Parma, Fenty Beauty by Rihanna. I don't know if that one's Fenty Beauty by Rihanna. I'm not sure that one's that big, but it's a name I

recognize. So I decided to throw it in there, but this is a business where they actually do a lot more retailing through other companies. So we talked about them kind of owning the, I don't know if you want to call it the last mile, but the storefront with Louis Vuitton, where you really own the experience, customers come into the store, they see the different goods. With the perfumes and cosmetics, they're going through a lot of department stores. However, they go about this kind of non-traditionally. So instead of just selling it to the wholesaler or selling it to the department store and having the department store sell it, they're basically paying rent to the department store to have their own store within a store concept. So you'll see

kind of the Dior segment within the Nordstrom's or whatever. So it's really, they are still kind of owning the experience, but at the same time, when it comes to perfumes and cosmetics, most people are going to go to the department stores to kind of get that stuff. So that's the perfumes and cosmetics business, 10% of revenue, only 9% operating margins. I will say I would have expected higher, I think for perfumes and cosmetics, it feels like something that should be a higher margin product, but yeah, just generally doesn't contribute nearly as much as kind of watches and jewelry, or even definitely not as much as fashion and the leather goods. Then the fourth pillar here is wine and spirits. This accounts for 8% of revenue,

but it accounts for half of the acronym of LVMH. So people kind of maybe think it's a bigger part of the business than it is, but really this consists of dozens of different hard alcohol brand. So the popular one, as it says in the name is Hennessy. That's a, I believe it's pronounced Cognac. I don't know. You could be getting that wrong. I think it's Cognac. You could be getting it wrong. Cognac, it sounds like Cognac. We're not connoisseurs of this stuff. So yeah. Anyway, they also have like Belvedere, which is a vodka brand, some wine, wineries, some very popular champagne brands. I'm not a customer for the champagne brands and it's really the higher end stuff. I did find it fascinating though, we talked about Diageo a couple of weeks

ago. The wine and spirits division for LVMH has a lot of the same advantages. So cognac, for example, they are in particular, really capacity constrained in terms of production. So in order to be considered cognac, you have to harvest grapes from a very small region in France called, you guessed it, cognac, or else it's called brandy. So this is one of those businesses that's really kind of hard to compete with. It's built up a lot of mindshare and kind of heritage over the years and it's just- And it's a good brand dominance, yeah. Yeah. And then the winery is obviously more competitive. This really, it's not a huge business for them. It is 30% operating margins though. So kind of stellar on the profitability

side of things. And the last one I'll talk about accounts for a big percentage of the revenue, but not so much profits. So this is called select retailing. In addition to operating the retail stores for brands like LV or Louis Vuitton, and I'm trying to think of some of other ones christian dior this is actually like retail businesses that aren't included in those segments so sephora is one of the big ones here this is i think the other than maybe ulta and i'm not sure if they compete directly with ulta but it's a cosmetics retailer in the united states carries a bunch of uh lvmh's cosmetics brands as well some others and they also have like some other retailing businesses here duty-free starboard cruise services the duty-free things you

shops you see set up across every international airport or but duty-free is good for the distribution of the other brands and you know it's it there's more to the selective retailing than just the the retailing aspect yeah so i will say it's only a five percent operating margin business However, it accounts for 20% of revenue. And then there is this other revenue segment, which is really kind of whatever they want. There's magazines that are included here. I think there's, I want to say there's like a yacht that you can rent or something like that.

It's basically, it seems like fun expenses that the company purchased and generate revenue from somehow. Now, it's really trivial to the business and I think accounts for basically less than 1% of revenue. So we're not going to spend a whole lot of time there. History, I'm going to encourage people, and I hate to do this because I don't want to direct people away from our own podcast, but I'm going to encourage people to listen to the acquired episode.

LVMH's history is long. There's a lot of corporate takeovers. There's a lot of mergers, acquisitions all throughout the years. We're not going to get into all that because I've already gotten a little long on this intro. So I'll give something brief here. Moet Hennessy and Louis Vuitton merged in 1987, basically out of pressure to avoid a corporate takeover. Ironically, this eventually led to Bernard Arnault, who was not the CEO at the time, partnering up with Guinness and ultimately buying enough stock to take over the company.

From there, it begun one of the most impressive track records of acquisitions we've probably seen in the last 50 years. One after another, LVMH would acquire luxury brands, oftentimes through public market corporate takeovers, revitalize the brand, leverage LVMH's scale and basically building this conglomerate and building out the scale himself to globalize some of these what were previously niche brands and juice sales across the globe. I'm going to leave it at that. A lot of corporate takeovers in the history. Bernard Arnault has done an incredible job as kind of a corporate takeover guy. And yeah, why don't we leave it there? You want to talk to the industry and landscape? Okay. We want to take another pause today to talk about our friends, Interactive Brokers, otherwise known as IBKR. We love Interactive brokers ryan and i both use interactive brokers on a regular basis for our investment accounts and the reason we love them is because they have the breadth of asset classes and geographical

diversification you can invest in options bonds stocks and in all sorts of markets that you can't find anywhere else whether it's the nordics where we like to research or down in latin america where we also like to research or in east asia you can find stocks that are listed in all these local exchanges and you can buy them on IBKR plus so many other features that we've talked about before. If you want to check out IBKR, make sure to go to IBKR.com member SIPC. If you are a professional investor, if you like doing a lot of research such as ourselves, which if you listen to our podcast, I think you do, you're going to want to check out IBKR and open and switch your accounts over there today yep and i will say we are going to talk the corporate structure succession stuff

during the ownership section which i think is relevant to shareholders today um but i will know munger always likes to talk about rest in peace or he used to like to talk about how berkshire hathaway never had a competitor for a track record as good as they had for a conglomerate but i gotta say lvmh might be five to ten years from now they might be in the same class there Let's get to the industry though and competition. With so many different businesses, we can't really focus on everything. And clearly, you know, fashion, luxury, spirits, jewelry markets are huge and they span the globe.

They're very ubiquitous, at least in almost every continent region around the world. I would like to, and Ryan introduced a lot of the brands here, but I like to maybe refocus on what is actually going to be important for earnings drivers. There's going to be one, that's the most important, LV, greater than 50% of earnings. And then there's going to be five other important ones that are going to have relevance to earnings, which are going to be Dior, Hennessy, Tiffany, Bulgari, and Sephora. We can focus on all these, and I'm going to look at their geographical sales breakdowns as well as maybe the competitors. So if we look at fashion and leather goods, 40% of the sales come from Asia. I should say, repeat that again, 40% of the sales come from Asia.

And within this region, that includes Japan, China, all the way up to India. 47, yes. I must've said that 24% from Europe, 19% from the United States within this LV and Dior are the leading brands. And then the other competitors people have probably heard of Hermes, Chanel, Gucci and wine and spirits. It's a bit more evenly mixed, uh, 35% from the United States as the leader, uh, 27% from Asia, 25% from Europe competition is pretty vast here. I mean, go listen to our Diageo episode for a full review. Would note though, that Diageo actually owns approximately a third of the subsidiary. So it's a bit strange. They don't own a third of LVMH,

they own a third of the subsidiary, which there's some very complicated stuff that we don't need to go into for this episode. It's not super relevant for LVMH as a whole, but in the spirits industry, Ryan mentioned that Cognac and Champagne have the competitive advantages, but within the entire market if people are transitioning, as we talked about during that episode, to tequila, to rum. I mean, that is a competitive threat for sure. If we look at watches and jewelry, Tiffany and Bulgari are going to be the two most important things here. 45% of sales come from Asia, 25% from the US, 18% from Europe. And then if we look at retailing, which is all Sephora, essentially, from an earnings perspective, you have 28% of sales from Asia, actually only one

in japan and then pretty much the same mix throughout i think the key takeaways here when looking at the industry history kind of across this and most importantly within the fashion weather goods you know the lv stuff as well as dior the size of the luxury markets has grown at a staggering pace the last few decades originally we saw a lot of growth from the explosion of spending from the Japanese consumers, which had a lot of discretionary spending coming out of when that region just grew in wealth in the late 20th century. But in the last two decades- Also coincided with the extreme Japanese equities bubble.

Yes, exactly. Yeah. Yeah. And in the last two decades, growth has come from Chinese shoppers who have gone through the same process. We've seen the huge growth of the middle class over the last few decades as that market has opened up. And I would say importantly, even if we look at the geographical sales, they understate

the exposure LVMH has to the Asian shopper, who are a lot of the luxury shoppers in Europe and the United States making these purchases. They are tourists from Japan, China, et cetera, et cetera. I remember talking with, I can't remember if it was during the recording or after, with Leandro from Best Decker Stocks during that overview we had, which is in our podcast feed on the entire luxury market. He said he lives in Madrid and he says, hey, if I walk by the Louis Vuitton shop or I walk by one of these shops, guests who are in the shops, people from China, people from Japan, all the good stuff. So APAC, Asia Pacific is hugely important here.

Anything to add before I go into a few discussion questions for us? No, I think that makes a lot of sense. Okay. When looking at this company, do you care about competition for these brands? Because I feel like it doesn't matter that much for LV. It's more about them telling the story about themselves. The competition doesn't matter. Yeah. I certainly didn't give it that much thought throughout this episode it feels like there's room for a lot of people to win and if anything whenever i like the fact that there's a lot of competitors out there my initial thought was great so there's more room for lvmh to keep acquiring like yeah it's not the end of they're

not entirely saturated in terms of acquisition targets so that was yeah initial thought i should say that there are some luxury groups including always we get the names wrong richmond i think is how you pronounce it and then caring caring i believe caring owns gucci uh you can go research those as well so there are some people that are buying luxury brands but again there are not that many like okay maybe there's a lot of fashion brands and stuff like that and lvmh just not getting excluded from that they buy those but there's not very many luxury brands out there that LV is actually competing with. There's Hermes and Chanel, not very much besides that.

I think a more important discussion question specifically for this company over the next 10 years, five to 10 years or so is, do you think you have to make some sort of macro bet on APAC in order to have any estimates on LVMH's growth? Yeah, to have estimates on the growth, yes. I do think in general they could grow Even if APAC wasn't growing that quickly, I think the other markets you can expect some growth from, but to have belief that revenue is going to grow 10% plus, organic sales are, I think you have to believe that APAC is going to continue to grow as well.

Yeah, I think if you wanted to know one thing, macroeconomically, you would ask, okay, from basically India to Japan, like that whole market includes some of the smaller countries, basically India, China, Japan are the most important, add Korea in there as well. you would say, all right, what is GDP per capita going to grow? Is it going to be at like 5%? What's the discretionary income growth going to be for these countries? Because that has been the number one tailwind. And if it continues over the next 20 years, well, as Ryan got into, this was a pretty small, not too small, but a fairly small company that has just exploded its revenue over the last few years. All right, management and ownership. So as we mentioned, there are a lot of historical breakdowns in LVMH. They go through all the crazy corporate structures they've done.

They go through all the unique deals they've done or tried to do. I'm going to leave, we'll leave some sources for that in our, you know, further reading section in the newsletter. Definitely recommend people check that out. But today I want to focus on what investors are buying at this moment, as well as the corporate culture at LVMH. First, it should be clear, this is the most important thing, that if you're buying shares of LVMH, you are buying an entity controlled by they are no family. If we look at a graphic I'm

going to include in the newsletter, they have a 48% economic interest, but 64% in voting rights. So they control this thing. Second, there are a lot of complications to the ownership structure. As I mentioned, there's Diageo thing, there's a part with the duty-free business that someone owns. I don't think those small things are exactly relevant to the long-term part of the business, but the most important thing is succession and the guy that's running it now arno so bernard arno is trying to prepare heavily for succession and what happens when he leaves and unlike that tv show a succession that a lot of us liked uh he seems to be doing a great job i'll link to a wall street journal article in our further reading section that goes through the entire process which

or not the entire process, but give some good details on it. He has changed the corporate structure of the holding company that owns the stake in LVMH while also setting up a partnership with his five children that relates to it. Here's a quote about the details that I think is fascinating. Quote, the new company has a rotating two-year chairmanship among the children who can't sell their shares in it for 30 years without unanimous board approval. Once that period lapses, only direct descendants of the elder Mr. Arnault will be able to hold the shares. What do you think about

that? Kind of unique, but I liked it a little bit. Not a little. I like most of that, for sure. Yeah, I think when I am discussing

the children, the succession planning, it feels like it's gone a lot smoother, or it sounds like there's a lot more chemistry and less kind of competition among the the children it doesn't sound like they even though they came from two different uh wives two different families apparently they're all really close and they all kind of uh act as brother and sister not like half brother half sister that was part of the wall street journal article that i thought was pretty fascinating they also all at least seem competent i will say one of the arno kids i think one of the

youngest ones uh took like a picture with buffett on instagram i'm just like the goat or something like that so you know you gotta like him yeah yeah they're likely smart apparently bernard went to this engineering school in france and yeah it's anonymous applications and three of kids i guess got in so you know and they're not getting in because of nepotism so you know i guess that's good but maybe bringing it back more importantly from an ownership perspective for long-term shareholders the number one choice for succession right now is likely his daughter delphine she's age 48 she's worked at the company for many years and was recently made the leader of dior which is the second most important brand at lvmh the corporate culture here seems fairly

decentralized. It looks like, and I guess there's probably other details to it, but it looks like Arnaud focuses on identifying the right brands to buy at the right price. You know, we'll talk Tiffany later as the most recent one. And then basically finding smart people to be put in charge of them, both from a financial perspective and then from a creative perspective, which is quite important for fashion and luxury. It reminds me, maybe you can disagree or not, of constellation software in that way although in completely different sectors what do you think of that in the corporate culture in general i mean doesn't it aside from like gifting the business to your kids it kind of reminds me of like berkshire in some ways yeah a little bit

i mean constellation yeah probably a better but i think more of like the focusing on one sector yeah that's fair because buffett buys stuff doesn't do anything with it generally okay but what are your thoughts on the corporate culture where i didn't i seemed to i liked a lot of it i think it's quite strong obviously you have to follow a company for a long time before you can get a really good comfortability with the corporate culture but any thoughts any concerns here i think it's a really well-run business i don't know if people will be able to do what i don't know if arnold the arnold kids will be able to do what bernard did certainly won't be able to replicate the growth i would imagine on a

percentage basis but at this point the formula and the playbook might be so like simple that they might be able to continue kind of the compounding success that lvmh has had i think yeah you read it in the first like sentence of the annual report he basically says like we had incredible numbers he goes through all of them he's like but that doesn't they're just numbers it's more important the progress of the business internally and what we're seeing don't hold us don't don't measure us purely by the numbers kind of thing so i like that and it's usually companies that are reporting bad numbers that are like don't measure us by the numbers. Yeah. It's easy to say that when everything grows at 10% every

year. Yeah, definitely. With that, let's go through the earnings unless you've got anything else. Okay. So I'm going to try to start speeding this stuff up because I think more people care about what we think about the business and the trajectory of it. So $85 billion in revenue over the last 12 months, roughly 70% gross margin. Astounding, in my opinion. $22 billion in operating income over the last 12 months. Cashflow lags operating income, unsurprisingly. It's a retail business. Basically, as the retail business continues to grow, especially as they're adding new businesses, you should probably expect inventories to grow in line. So cashflow has been a laggard relative to operating income.

All the businesses are still growing organic revenues at basically 10% plus, except for wine and spirits. Wine and spirits has seen some bumpiness, especially over the last 12 months. It seems like we looked at Diageo and it feels like either the world is becoming more competitive on the alcohol and spirits front or, and maybe it's both. there's some waning, waning demand following COVID and potentially inventory glitz. Yeah. Honestly, seeing that it was helpful kind of mitigating or not mitigating, alleviating some of the risks or concerns I had about Diageo. Maybe they're not just making excuses and they probably weren't, you know, I don't think we thought that, but I think it was good to see that and kind of relate to that company, which again, go listen to that or watch

that if you haven't yet. I guess closing thoughts on earnings here. The business has grown really quickly over the last decade, 11% revenue growth annualized over the last 10 years. They're at 26% operating margin. That's steadily increased over the last 10 years. And I suspect that as fashion and leather goods continues to grow as a percentage of the business, you could probably expect operating margins to expand as well. When we look at the balance sheet and liquidity, there isn't that much that's really important here. They have basically $12.5 billion in net debt.

That's about half the operating profit they generated over the last 12 months. So not a huge debt load. And the rates they did get on the debt are probably the lowest I've ever seen. Now it is a European company. I think there was like negative rates for a while. Well, so they issued a lot throughout 2020, but basically almost all their debt was issued throughout 2020 and just ridiculously low rates. There's a couple here that are 0% coupons.

I didn't do the math because I don't think it's that important here, but I'm guessing the weighted average coupon is probably around 1%. So kudos to them. There is some floating rate debt as well, but they entered into some interest rate swaps to basically lock in those lower rates. So I don't think it's worth spending that much time looking at the balance sheet because there frankly isn't that much debt and the businesses are pretty predictable here, or at least the cashflow is. You could imagine them having more than enough cashflow to cover their debt. The only thing I think that's important here is to look at revenues

and over the last decade, or sorry, not revenues, inventories. Over the last decade, inventories have basically grown in line with revenues. Revenue has, like I said, grown at 11% a year, inventories at 10% a year. I don't know. Did you have any thoughts on the inventories here? I mean, it's a retail business. They're going to stock the stores and stock the shelves. Yeah. It's just maybe one of the flaws in the business model. Not a flaw, downside. You're going to have working capital that's stuck there and it's not going to be like those beautiful negative working capital businesses we've covered such as Airbnb, Amazon, et cetera. But it's not like they're actually, the earnings aren't lower, but if they want to return cash to shareholders, if they want to be flexible, yeah, I can create a headwind sometimes.

It's obviously not the end of the world though. That's maybe something I should have added too. They have a 1.8% roughly dividend yield. I know you were about to talk about that, but they've also bought back a little under 1% of their shares outstanding over the last 12 months. So in total, it's like a two, two and a half percent shareholder yield if you combine the dividend plus the buyback. Yep. And the buyback is much more aggressive than historically.

Now, if you look at earnings multiple, 356 billion euros for market cap generated as right, or maybe Ryan had a slightly different number, but I'm using their number from the annual report of 21.1 billion euros in profits from recurring operations in 2022. I'm just going to use that number. that gives them an earnings multiple about 17 based on that number uh taxes are going to be fairly high some of these markets so true pe is going to be slightly higher i think it had something at about 22 23 times so that's really it um a little you know pretty close to the s&p 500 average for the multiple maybe even slightly below so nothing too crazy here unless you believe

they're over earning which i guess some people might have a hot take on that but we'll see let's just say that 2020 2021 and 2022 when we got out once we got out of the first few months of the pandemic were quite phenomenal for physical retailing and luxury goods fashion was a part of them yeah they did see a slowdown throughout 2020 but they certainly rebounded uh and recovered let's go through the anecdote 11 and so i'll go first here i think the brands are all really quite well known i think brands benefit from being associated with lvmh not only because they can get into louis vuitton stores and then it seems like oh it must be a luxury brand but

maybe there's something to the actual lvmh brand as well like being an i think Like Bernard Arnault has, and maybe I care more about him than like the average person, but when he got the designation of being the wealthiest person on earth and people pay attention to that, and then you hear he's like, whatever, the wolf in cashmere, wealthiest person on earth, like he owns LVMH. Suddenly it feels like when something's associated with LVMH, it's more luxurious. Yeah, they got a good reputation. probably good for buying stuff probably help them with some acquisitions probably help them

with tiffany yeah it's hard to tell though like okay they have a good brand in the investing world but honestly i want investors to not like them right so you know true you want it to be in that period where they're not talking like buffett they're not talking about or no like they talked about buffett in 1998 you what i'm talking like when i talked about buffett in 2000 and 2021 yeah the uh i getting back to kind of the brands i do think they've struck a good balance between being on the ultra high end of what kind of the upper middle class can afford but still being affordable people kind of have to compromise on their they're spending more than they'd like so but they can afford it and it's a clear signal of

wealth like if you have a louis vuitton bag i think that that's probably why most women buy the brand is or buy the handbags it's not because it's like functionally that much better of a bag but because everyone sees the lv on the outside i don't think that brand's been tarnished much in fact i think it's probably the strongest it's been in a while been at least i didn't track it that much over the last 10 years but it seems like more and more people kind of see it as like this prestigious wealthy brand yeah well you see it in the numbers uh you know it's quite good i mean i remember back in high school this one girl had an lv bag and i always like it's a bit much for a public high school don't you think and you know it's obviously we're not at some prep school

on the east coast but i bet to her it was absolutely worth it you know and that's the point yeah now there was a point when gucci i thought the brand eroded i thought there was so much fake stuff and it seems like it's improved since but there was so much they talked about that on the acquired episode yep yeah so much uh what do they call them whatever knockoff gucci goods that to me it doesn't really carry the same weight as a louis vuitton bag anymore and i know it's a fine line it's a it's a fine line and that gets to yeah my anecdotal evidence is you know one thing now at the back of my mind is that like are we absolutely certain that lv brand will not be diluted 15 years from now are we absolutely

certain i i would bet that it's fine and they're doing a great job obviously they're doing a great job but it's much riskier than hermes in that standpoint because i think hermes is basically zero risk of that because they say well everything's twenty thousand dollars or not not exactly but that's an exaggeration yeah but fair warning i'm pretty sure hermes is like 40 tons earnings yeah i know i know we're going to talk about ferrari intermez and spoiler alert uh ferrari's going to be one ryan can be upset with me for not being as bullish as he uh he was i say i will have flipped my tune and i'm a lot more bullish now but now the stocks are 50 times earnings which we'll get to on that episode let's go through future growth opportunities ryan kind

of a broad one um what do you think here yeah i mean the the game plan like i said it's quite proven and it's worked for them. And that is to find established, but maybe brands that have been trodden down a little bit. They're valued brands with a lot of heritage, been around for a long time, acquire those, accelerate the marketing, accelerate the distribution, get them into their stores, give them the aura of being an LVMH brand. And they're going to do just fine with that playbook. Now, when it comes to the wine and spirits, here's kind of a growth idea I want to throw out to you what would you think if lvmh sold its spirits division to diageo for context diageo already owns 34 of it yeah i wonder if diageo could have the firepower to fund that

because i know they're already levered a bit maybe they'd have to do a stock deal um or sell some stock you know to a third party yeah i think that makes sense i did this would like ldmh more without it yeah because as you can see it's a bit more cyclical um it's not as growthy this is one of the flagship parts of the name and it's not as big of a part of the business anymore yeah without the spirits business this is a higher quality business i think spirits is a good business but the the handbags fashion leather goods and i would probably argue in my future growth opportunity the potential of jewelry for lvmh is much higher i'd say all right let's get to it then tiffany acquisition yeah so this one looks like a classic lvmh deal that will look

like a steal in five to ten years deal was done about 15.8 billion dollars in usd and it is now the largest contributor to the watches and jewelry division by both revenue and earnings i believe It's already doing estimated $1 billion in profits. And two examples, I guess, of what they've tried to do here to reinvigorate the brand image. One, they did a big deal with Jay-Z and Beyonce, which I believe they already had relationships with commercially. They had one of the top commercials last year where they're like playing the piano stuff. It's like the classic diamond commercial, but with two of the most recognizable people in the world. and that matters to who they're trying to sell for this right those are two very important people

for that and they also combine that with a marketing campaign saying quote not your mother's tiffany which some people were scared about it's a risk but it seems to work that well for them i mean jewelry and diamonds are look they're lindy they've been around for quite a long time they're popular across most cultures, some more popular than others. I can't really speculate on exactly what the brand will do and what they're going to do with this company, but I trust the company to make the right moves. And I would not be surprised if this business is much, much larger five to 10 years from now, if they go on a global expansion. Yeah, I agree. And the Not Your Mother's tiffany i think this was brought up in the acquired episode and it's it was done it's

one of whoever was running the tiffany campaign basically said like yeah it's risky but not really that risky because like the the mothers don't want to be the mothers either they want to be like with whatever's hip they want to be like they want to have the jewelry that's more popular not outdated jewelry so when you say like not your mother's tiffany the moms actually probably respond well to that it's more like oh okay yeah this is a younger more in style type jewelry base anyway um highlights low lights lots of highlights i mean arno is is great uh the succession looks like it's going to be pretty clean i like that they're planning so for our head that's nice to see the brand heritage. 31 of their brands have been around for more than a hundred years. That's

very difficult to replicate. You pretty much have to acquire into a lot of these things. They've got the retailing advantage. When they acquire a brand, they can instantly include them in their existing stores and it gives them a more luxury reputation. And then the other thing that I really like, and we haven't talked that much about it, but I really think they have a marketing advantage because big time celebrities want to work with them. When you become like an NBA player or, I mean, Messi and Ronaldo did that kind of famous Louis Vuitton picture together. It's like these athletes, they want to rep Louis Vuitton. Famous people want to have the Christian Dior brand. They want to be associated with these brands. Hennessy relationship with the NBA. It gives them an advantage. Yeah.

It's not like, it's not like them taking a Coca-Cola advertisement, you know, a famous athlete might be a little like whatever they'll take the money, but they might be reluctant to really care that much about the brand. When someone's associated. I would say it's not really athletes though. It's music.

It's creatives. And yes, it feels like every single time someone's rolling up to a game, whether that's NBA, NFL, they're carrying their Louis Vuitton bag and they're so proud of it. yes yes they're wearing it but as i peruse the annual report it's much more musicians actresses look at the end of the day this is a marketing boy that has worked for what centuries you get

attracted people to wear your things you get right and for them they have the hand pick of doing contracts with the most beautiful people in the world you put on a tiffany diamond you wear a have a Todd bag. It's quite simple. It really is. Yeah. The other thing I was going to say, I think there are ways away from saturation. Like we talked about looking at the competition, it seems like there's a lot of brands out there that are also doing well. They're all showing strong growth. The upper middle class or the number of wealthy individuals in the world continues to grow. So that provides kind of a tailwind for them. So it seems like, I don't know, they've got room to grow the top line and they've got potential acquisition candidates.

low light for me. Following the Diageo episode, I had a couple of people reach out to me and I think they brought up some good points. I've done a bit of a 360 on the alcohol business. I think competition is coming in thick and fast. Celebrities all over the place are launching their own tequilas. Cognac might be a little bit resistant or impregnable, but we're seeing not only demand wane but some i think market share erosion due to celebrity brands having success yeah we don't need to go into that discussion again but i'd say i'm not as concerned about it but we did if we did like a five ten minute discussion on that in that episode we don't need to get into but i will agree that hennessey is probably one of the least exposed

to this but that's not their entire uh business my highlights are just the last thing they own a lot of wine, champagne brands, wine and champagne consumption in general is not growing nearly as much as spirits. Yep. Yep. All right. My highlights, let's see if I have anything different. We talked about culture. We talked about the heritage, you know, heritage. And I think maybe to reiterate on that is having the 200 year history or whatever it is as a part of your story as a part of your brand which is something like lv is right you know the same brand that kings and queens were wearing back in the day when we had those it's impossible to have an upstart compete with that because you have to be around for 200 years before you can tell the

same story now do you exactly have to be around for 200 years no but you have to have probably decades and decades of uh whatever uh of a history there other highlight that i think we is clear for anyone that studies the industry but i think we should remember is that they do have pricing power that's a lot of it is latent pricing power that they don't take on like they could really juice prices for three four years and just blow out earnings and yeah that's what they don't want to do that because they risk ruining the brand, but they have an easy time raising prices ahead of inflation. Very, very easy time. I mean, that's just great. It's why the business is so damn profitable. Lowlights. I worry about the China risk.

Look, if the doomers on China are right, China closes off its economy again. I'm not sure what's going to happen, but look, they definitely will be hurt by this. Uh, second one is I worry about, are we betting on future global GDP growth in Asia outside of Japan and China for kind of the next leg of growth? You're like, has the Japan and China tailwind run its course? I remember here's kind of what concerns me is I've seen these facts thrown out somewhere. Something like half of the women in the Japanese workplace have an LV bag. Okay, great.

Well, it doesn't sound like there's much room for growth there outside of pricing power. Other thing is like, I threw out a tweet. Hey, what's the best way to research LVMH or the luxury stocks? And someone said, go to the streets of Miami. Everyone who wants to look like they're rich is wearing, has an LV bag. Okay, that's great. But look, the business is quite big and just the sector tailwind. I think it was quite a fantastic combination of factors where opening up globalization, the emergence of China and Japan, and then the execution from LVMH.

I mean, it just led to phenomenal growth. Is that going to continue over the next 10, 20 years? Maybe, but I don't know if it's the same sort of ingredients for such a good outcome. Yeah, something else that we haven't really talked about that I think might have been a big advantage for them or maybe a big growth tailwind and maybe still could be is just social media helping. We talked about with makeup brands and cosmetics seeing really strong revenue growth over the last decade, wanting to seem wealthier, seem more attractive, and being judged on a regular basis through social media has probably led to a lot of purchases of bags that people don't need, shirts that people don't need, stuff like that. So I don't know, maybe that's a long-term tailwind help for them, but I would also say that's probably been a predominant driver of the last decade's success.

Yeah. And they've been hesitant to go on online shopping. They've, they don't like that. TPD, what will happen? I don't think it's a giant risk because it's kind of, they're in a unique spot where I think people still want to go to the stores for, for these types of purchases. but during the pandemic they had to make that transition they've talked a bit if there's anything that i am a little was like either hesitant or maybe concerned about is the way

they address the online market where they kind of go well we were forced to do this and it's like okay well what actually is your strategy going to be here it didn't seem clear to me in the annual report all right let's wrap things up bull case bear case ryan this is kind of a simple one but kind of not i mean what are your thoughts here yeah i think the bold case is that a lot of the tailwinds they've seen they've seen over the last maybe call it decade or two persist so number of people in the upper middle class continue to grow the wealthy class continues to grow they're able to continue pushing sales they can continue raising prices they can periodically acquire some brands and kind of juice sales by getting them into the lvmh distribution system

and then maybe margins can continue to tick up it's hard to see i don't see why louis vuitton specifically why their margins would decrease if revenue continues to grow it doesn't seem like that's very likely. I don't know. There's a lot of tailwinds for the business. And I think basically if they can grow revenue 10% plus annually over the next five years and margins grow, I think they're in a good spot at this earnings multiple. I think you probably get similar equity returns. It seems achievable, right? yeah yeah i mean look apac is important so what if we go what if apac has just a big huge recession depression like look that could happen we don't know but it does yes it seems

achievable to me um i mean yeah the two questions that you're looking at at the end of the day are continued growth of lv and dior which are the vast majority of earnings that's really what matters And as well as, you know, the cash coming in and what does the corporate culture that Arno has set up do with it? You know, you're about slightly over 20 times earnings on a net basis. It's not hard to see, as Ryan mentioned, how you can make money on owning this thing over the next 10 years if they get anywhere close to their past historical growth rates. It's now on a percentage basis, it's going to be lower because they're so big now. But this market's pretty attractive for a reason because you can price stuff up. It grows with GDP per capita.

I mean, look at the growth of GDP per capita in places like India and the surrounding countries. It's been phenomenal. Could there be another 10, 12, 20 million potential customers coming out of that region over the next 5, 10 years? maybe uh but what's the bear case ryan what like what could go wrong here because i tried to throw that out as a tweet and honestly got a lot of crickets yeah i don't know it's hard to see why this business wouldn't be able to keep growing its sales aside from that risk of asia it feels like they could really raise prices kind of not at will but at a healthy rate for quite a long time and this is also a pretty resilient category people that are rich don't have their

budgets pinched as much and they continue to spend even when let's say we hit a recession Like, it's not going to be quite as impacted as the low-budget shopper. So I imagine sales will continue to grow. If there was something to tarnish the brand, if there was some sort of big brand issue, which seems unlikely considering that it's like 100 different brands, maybe that could hurt. If there's a slowdown in Asia, maybe that could hurt them. if i don't know i'm throwing stuff out there but i don't really believe in a lot of these things

like it doesn't seem that likely i have my guess is as good as anyone else's around the asian like economy the local economies in asia my japan seems like they're in a pretty good spot china i really don't know um i think they're in a good place i mean the only bummer is it's 35 40 times cash flow So kind of high teens, probably low 20 times net earnings, because we've got to think about the tax rate too. It's not that attractive. And you really got to expect that they're getting like double digit growth. What do you think?

Yeah, I will say China GDP numbers don't look good. The consumer stuff there doesn't look great. Like you're just not reporting them. and the yeah exactly that i would say that the youth unemployment number is not good either the sentiment around the country is not great but again you know we don't live there who knows what's going to happen over the next five ten years yeah there's the brand potential for bad execution but i don't think i would bet on this because they seem to be such good long-term thinkers with the corporate culture and managing the brands and getting the right creative directors

in there they they hyped up hiring pharrell williams as their lv creative director now it's like i don't know but it sounds like they've spent a lot of time and it was super important for them but here's one thing i would think about are we sure that lv and do we're not over earning in 2021 and 2022 because if you look at the long-term charts the sales grow well that's what i mean but like they're still growing okay yeah but if you just look at the long-term sales charts like it just kind of goes up linearly and then once we hit this period of basically no one can travel anywhere just boom like they talked about your i think tripling sales in five years some look almost every company that did this during the pandemic was over earning yes we

found that out now these could be special but that's just something i would be concerned about i think that's probably what is dragging the stock down a little bit people concerned about that i agree we have seen that a lot and every time we've done one of these shows where there was some sort of like big surge in growth but i look back on them and i tried to rationalize them and say like oh yeah here's why that can be sustainable but they came back to earth and mean reversion is probably the most likely outcome for a lot of these businesses. The only thing I would say, maybe I'm rationalizing it again, that happened for all these businesses coming out of COVID.

Well, this business also came out of COVID and they're still growing organic sales mid-teens. One thing that could be different is that China, their most important customer, was locked down until the end of 2022. And now these customers are able to go to Europe, to go to the United States, to go to Hawaii, to go to Australia. And they're in their home market. So I think it might be delayed a bit because that customer is so damn important. But we'll see over the next couple of years.

All right. More or less interested? I mean, definitely more interested. Look, clearly good businesses, good management teams. If people start panicking about this sector Ever And this corporate culture is still intact Which I think may have happened Late this summer

The stock kind of looked decently cheap It still looks decently cheap today It's not that much higher I mean it could be a fantastic buying opportunity With minimal risk But you know, such a large business That I'm trying to go for smaller stuff now It seems like it would be hard to lose money

Owning this thing It's like something I would love to own if I was 50, 55, 60 years old. Yeah. I'll be honest. I came into the show only having heard about LVMH thinking like, okay, I'm going to say it's a really good business. And then I'm going to say, well, too bad it's 40 times earnings. Well, it's not 40 times earnings.

So I'm definitely more interested than when I came into this. for some reason i get this weird feeling that growth isn't sustainable i don't know it could totally be wrong but there's something holding me back here and i just i don't really know what it is yet maybe i just need some time to digest this like business look into it a little bit more but when everything checks the right boxes when everyone talks really positively about the management team and even the kids of the management team I mean, it just feels like it's too loved that maybe I don't have any sort of edge here.

Chances are I'm going to probably buy some really bad business that I think has asymmetric returns and wish I bought LVMH 10 years from now. But I digress. What do all the astrology women say? Don't manifest bad returns, Ryan. We don't want that.

But that's going to be a good way to close things out. next week is ferrari quite an interesting company uh that ryan has been following for a long time so that's going to do it for this episode thank you everyone for tuning in as i should as a reminder newsletter subscribe it's free get the show notes charts graphics all the resources that we have in the episode and if you enjoyed this episode which if you're listening now it means you clearly did give us a five-star review on apple or spotify we are not financial advisors Anything we say on the show is not formal advice or recommendation. We are general part.

That was the old one. Ryan and I may hold securities discussed in this podcast at any time. I guess we just say now, past, present, future. Thank you everyone for tuning in and we'll see you next week. Bye.