We Study Billionaires - The Investor’s Podcast Network - TIP645: The King of Luxury: Bernard Arnault & LVMH w/ Christian Billinger

Starting point is 00:00:00 You're listening to TIP. We've all heard about and studied the likes of billionaires like Warren Buffett, Jeff Bezos, and Elon Musk, but my guess is that many in the audience haven't heard too much about Bernard Arnault, who is just as successful of a businessman as all of these individuals. Mr. Arnault has a net worth of over $200 billion, and he's quietly built the luxury conglomerate LVMH out of France, which has a market capitalization of over 350 billion euro. which makes it one of the largest companies in Europe.

Starting point is 00:00:33 To learn more about Mr. Arnault and the empire he's built, I've invited back Christian Billinger, who's followed the company and been invested with them for a number of years. During this episode, Christian and I cover the similarities and differences between Arnaud and Buffett. What attracted Christian to invest in LVMH? The role the Chinese marketplace for LVMH and their growth story. How well LVMH follows the luxury strategy laid out by luxury experts?

Starting point is 00:00:58 LVMH's capital allocation decisions, valuation, risks, and much more. This was a fun chat and a good continuation of last week's episode with Christian, where we discussed how luxury companies are able to break all of the rules of capitalism, and yet they still thrive year after year. With that, I bring you today's episode with Christian Billinger on Bernard Arnault and LVMH. Celebrating 10 years and more than 150 million downloads. You are listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:01:38 We keep you informed and prepared for the unexpected. Now, for your host, Clay Fink. Welcome to the Investors Podcast. I'm your host, Clay Fink. And today I'm very happy to welcome back, my friend Christian Billinger, to pick up right where we left off with last week's conversation. Christian, I really appreciate you joining us again here today. Thank you. Great to be back and talk about some company specifics in the space. So for those who missed last week's episode, Christian and I dove into the lessons from this wonderful book called The Luxury Strategy to really better understand what makes some of these luxury companies tick.

Starting point is 00:02:23 Christian actually owns a few of these luxury names in his fund. And today we're going to discuss one of them primarily, which is LVMH. So LVMH, it's a fairly well-known company. My co-host, Stig Bratterson, actually. pitched it in his mastermind discussion back in a Q4, 2023. That was episode 586, for those that would like to check that out. So LVMH, they own 75 luxury brands. They have a market capitalization of 350 billion euro. They're led by Mr. Bernard Arnaud, who shockingly is worth around $200 billion. So to start this discussion on LVMH, I thought the best place to start would be with Mr. Arnaud. And I'm reminded quite a bit of Warren Buffett when studying this individual. We've spoken plenty about Buffett on the show.

Starting point is 00:03:13 Some of the traits that sort of stick out to me about Buffett are incredibly patient, exceptional capital allocator, and then just an extraordinarily high level of just ethics and honesty in the way he does business. Similar to Buffett, Arnaud has this massive conglomerate that he's built, except he focuses specifically on the luxury industry. What are some of the unique skill sets you think Arnault has that have just made him such a successful business person and entrepreneur? So in some ways, it's more difficult to answer than for Buffett just because we know less about

Starting point is 00:03:49 Arnold or certainly we know less from, you know, interviews and public appearances and he's a very private man. And so I think you have to look at what he has done in building LVMH over the last, say, four decades in answering that question. I think there are a few unusual or unique features about Arnaud that have contributed to that success. I think one of them is that he's an unusual combination of an engineer and an artist, so his training is out of an engineer. And I think when you look at the way he has gone about building LVMAG, it's certainly, there's certainly a sort of an engineering precision to that process. But equally, clearly, you know, he's very involved in and

Starting point is 00:04:31 interested in the creative side of and the art side of things. So I think you have that unusual combination, which strikes me, and I think that's been important. I think you also have another interesting, not necessarily contradiction, but sort of combination of short term, I think he calls it short term paranoia and long term optimism, or short term pessimism and long term optimism, where he talks about managing risks on a short to medium term basis, right? So whether it's looking at the balance sheet or diversifying the portfolio brands and businesses and all these. these things, or investing sufficiently in marketing and brand building, that equally having a sort of long-term view to the opportunities, allowing yourself to be exposed to the long-term growth

Starting point is 00:05:13 trends that have been driving LVMH and the industry for so long. So the short-term pessimism, long-term optimism thing, I think is very important. And I think you see some of that with Buffett as well, where he's all about, you know, having a fortress balance sheet and all these things, right? but at the same time, he is fully invested in, you know, owning great businesses, right? So that these guys are happy to live with the volatility over time, but they do everything they can stay in the game. And then I think he's been lucky. Clearly, some of the deals he has done, and especially, I think, early in his career,

Starting point is 00:05:43 you know, he was the right person at the right time and the right place. And so some of these deals came to him early on. They still come to him, but I think these days it's because of who he is. So there are some of the unique features. And maybe a third or a fourth one would be this idea. that he seems to combine an obsessive attention to detail, certainly at the personal level, as in he exercises that with his brand managers and lots of other people in the group, on the one hand, and on the other hand, you know, very high degree of autonomy and decentralization.

Starting point is 00:06:14 So you could argue that's a feature of the group as opposed to a sort of a characteristic of Mr. Arnaudorne, but I think that in a business like this, one is an extension of the other. So there are probably a handful of things that I would say have contributed. to do that success. Sticking with the theme of comparing Arnaud to Buffett, Arnaud and LVMH similar to Buffett, he's taking a lot of this cash and redeploying it into new opportunities or potentially even taking cash

Starting point is 00:06:41 from one of the subsidiary names and maybe even allocating it to another one that has attractive opportunities to reinvest. But Arnaud, obviously, is much more focused on the luxury industry whereas Buffett, more so is willing to go in a lot of different industries. What are some of the high-level ways that LVMH might be different than Berkshire and the ways they're similar seem pretty obvious.

Starting point is 00:07:04 What are some of the ways you think they're different? Yeah, so apart from what you touched on, the fact that LVMH is clearly focused on one vertical, although they have sort of broadened their exposure over time. So they're now increasingly moving into experiences, for instance, including hotels and other things. So I think that's becoming a, you know, they're less focused than they were, but still, I think one important difference is that Arnaul seems. to have or clearly has dynastic ambitions, whereas Buffett has built Berkshire and he is now in the

Starting point is 00:07:33 process of, you know, the people who are sort of left to oversee the business when he is no longer there, you know, the money will be going to charitable purposes, right? As he says, that money will go back into society. Mr. Arnold clearly has a different idea of what he wants to do with the sort of incredible amount of wealth he has generated. So he is very intent on passing that on to his children and building a multi-generational business in the same vein as an Hermes or others in this space. So I think that's one important difference. You know, although Buffett is very long term, he clearly sells businesses or at least financial holdings from time to time.

Starting point is 00:08:09 And I think we've seen perhaps more of that in recent years. Mr. Arnault almost never sells anything. He's a real collector, right? So when people say Buffett is long term, you know, you should really look at Arnaud, because he is incredibly long term. And in fact, I think part of his sort of philosophy is that he holds on to the good and the bad businesses because the bad businesses sometimes become good businesses or come back in fashion. So we've seen that at the personal level, clearly they're very different types of personalities.

Starting point is 00:08:36 Buffett is very, or comes across as very accessible and very sort of Midwestern in the way he communicates. And he's very open about how he runs the business and how he thinks he's a real educator. And I think Mr. Arnold has an entirely different persona. He's very private. he's very steely. He doesn't like to speak in public. And when he does at the results announcements, it's usually relatively sort of scripted. And so he leaves the communication side of things to CFO and some of the brand managers. So, you know, you could argue that's at the personal level.

Starting point is 00:09:07 But I think it probably, it does reflect in the way that, for instance, the people who work for him running the brands, I think have somewhat more apprehension in dealing with him than the people who work for Buffett. So, you know, in many ways, there's strikingly similar. In some ways, they are strikingly different. My understanding is that they're good friends, and I think they clearly respect and admire each other, but I think it's an interesting case study in how you can do things quite differently. And we see so much of this in the investment world, right? You can come at things from so many different angles and run so many different types of strategies and portfolios and still achieve remarkably similar outcome. So I think he's a manworth

Starting point is 00:09:45 of a study. And certainly in the last few years, there's been much more light Sean. him, but he's not documented in the way Mr. Buffett is certainly. Yeah, and it's quite interesting when I think about these two. Buffett's in his 90s, whereas Bernard's 75, yet their net worth is in a similar ballpark. Yet to me, you know, I see like Buffett so much more in the limelight and so many more people talking about him, whereas Arnault, I think due to him just being more of a private person is just kind of compounding silently, you know, building this massive conglomerate. But maybe that's me, you know, I'm from the Midwest, whereas, you know, you're from Europe

Starting point is 00:10:19 and maybe it's the opposite over there where Arnaud is sort of this business titan over there. He's become more visible in recent years, right? With his wealth, you know, reaching the kind of levels where it is now. And I think certainly with the Olympics, which we may get back to, but I think with the Olympics, the whole group is becoming much more visible. Certainly in the investor community, Mr. Buffett is certainly even as a European, you know, there is much more attention made to him. And I think that's probably the way Mr. Arnault prefers it. So when was it that you first purchased shares in LVMH? And talk a little bit about what made it a compelling investment for you.

Starting point is 00:10:56 So we've been invested for six, seven years. I had been familiar with the business for a number of years. But the timing of it was that there was an opportunity sort of valuation-wise. There was a bit of a sell-off and we started buying. I've always thought it's a very attractive space for a long-term investor because we talked about the luxury business model last time, right? And I think when you execute it well, it's the kind of. of business model that can generate what long-term investors are looking for, which is high returns

Starting point is 00:11:22 for sustained periods of time. So you have tried and tested brands with significant pricing power. You've also had very healthy organic growth rates, as opposed to most consumer goods sectors or categories. It's a space where you've seen much higher organic growth rates, certainly for the likes of LBMH and MS and the sort of strong or quality players in the industry. It's a combination of high returns, durability, healthy growth rates, very strong governance, right? So some of these groups, including LVMH are family owned and controlled. On the one hand, they take a very long-term view and they get exposure to all of these growth opportunities. And on the other hand, as we touched on already, they're very good risk managers. So for someone like myself, who's looking to buy these exceptional

Starting point is 00:12:05 businesses and hold on to them for hopefully for decades in the hope of generating well over 10% returns, this just sort of fit those criteria and we could buy it at evaluation, which at the time was actually very attractive. Certainly, if you look at where it's gone today. So diving more specifically into the business model here, I have a number of questions to talk through. How about we just start with a broad overview of what they do, what industries are in, and what that looks like for LVMH. So I think the way to think about LVMH is there's a holding company, because they operate something like 75 or 80 brands. And so the brands you need to analyze at brand level or possibly at category level.

Starting point is 00:12:47 And they operate these 75 brands within a handful of categories to most important being fashion and leather goods. And then you have wines and spirits, watches and jewelry, you have retailing, and you have some other activities in there. And you also have perfumes and cosmetics. So those would have to be analyzed at the brand level. Now, two of those account for a very significant proportion of revenues and earnings. So the LV brand, which is in fashion and leather goods, is almost half of group operating earnings.

Starting point is 00:13:13 And then Dior is another meaningful number. So if you look at the two of those, you're probably at something like two-thirds of earnings or something. And then you have a long tail clearly of brands. But I think if you look at LVMH at the group level, you can, you know, coming back to Berkshire, you should think of LVMH at the group level. And that's what you're buying if you invest in LVMH, you know, the listed company. you are buying into the holding company where capsule allocation takes place and where Arnaud exercises influence through very sort of direct engagement with the people

Starting point is 00:13:45 who run these businesses. So that's sort of, I would think of LVMH group as I think the Berkshire analogy is very useful, right? They make decisions on clearly acquisitions or clearly major acquisitions. You know, if you look back at the Tiffany acquisition or Belmont or Bulgary, if we go back a bit further. Clearly, in terms of organic CAPEX, so they're spending very heavily, especially on real estate, and that's accelerated in recent years. So those types of decisions are, there's clearly involvement at group level. And then of course, less importantly, but still,

Starting point is 00:14:20 when you look at dividends and share repurchases, which are not significant, but certainly when you look at those types of decisions, they're also taken at that level. And I think also the group is super important in terms of the culture. So attention to detail, long-term vision. You know, we often talk about Jeff Bezos and his, you know, the idea of being obsessed with the customer or the customer experience, but Arnaud is obsessed with the idea of brand equity and nurturing and developing that for the long term. So there are a number of things you're getting at group level in addition to the quality of the underlying businesses, such as LV or Dior or any of these other assets. And finally, I think as an investor or from an investor's point of view, one important aspect of this is if you, if you

Starting point is 00:15:00 you're buying into LVMH, you're getting a very diversified set of businesses, or you get a diversified exposure to luxury goods more generally, as opposed to if you buy into Almes or some other groups in the sector. Now, people would often argue LVMH is very dependent on LV and Dior. True, but if you look at Caring with Gucci or if you look at Richemont, with Cartier or some of the other groups in the industry, they are even more or much more dependent on one or two brands. So it's a one-stop shop in a way. You get very broad exposure to lots of these trends in the industry and you get great management and governance at group level. It was interesting in researching LVMH. It seems that a lot of people in France almost see Bernard almost as an American, even though he's not

Starting point is 00:15:45 American, and it sort of turns them off. But he's still been able to acquire all these various luxury brands. So that leads me to the question, you know, why is he seen as almost like an outsider, but he's still been able to buy these. Like, what's the motivation for someone to sell the LVMH, especially in the early days when he was maybe perceived a lot differently then? It's a great question, because if you look at the parallels to Berkshire, of course, I think it's clear to most people why you would sell to Berkshire, right? If you worry about the sort of ultimate destiny of the business you're selling,

Starting point is 00:16:15 Berkshire is possibly one of the best places to leave that business. You're leaving that business in very good hands. I think most people have this sort of intuitively trust Buffett to do the right thing. I think with Arnaud's different, certainly. Now, we should keep in mind that he has also had a couple of very high profile failed attempts at acquiring businesses in the case of Gucci and in the case of Almes, right? And that has certainly, I think, contributed to his reputation. I think the idea that he is more American than the rest of the sort of the French establishment

Starting point is 00:16:46 or certainly the luxury establishment is partly because he's not an insider. So he did not grow up in a family that were in this industry, right? he moved or shifted money into this industry when he had already been running a couple of other businesses. And he also spent some time in America. But I think even apart from that, I think clearly his personality and his business sort of tactics are perceived as quite American. I mean, to your question, why would you sell to LVMage? There's a few reasons. But if you look at some of the Italian businesses they've acquired, for instance, so Bulgaria is a good example. I think in their case, they clearly had a very good or great brand, but they did not have the resources in terms of

Starting point is 00:17:24 of financial resources or human resources to expand the brand internationally. I think often these companies have constraints in terms of building out the store base, which is still super important in this industry. And so LVMH at group level can provide the financial resource and other resources to accelerate growth, which I think is very important. It should also be said that in some cases, it's been very hot. So if you look at Tiffany, for instance, you know, it's unlike Berkshire in that sense. And I guess going back to your earlier question about some of the differences, clearly Buffett is less likely or highly unlikely to employ those sort of tactics. Arnaud has been very happy and ready to do so.

Starting point is 00:18:02 And so in the case of Tiffany, for instance, there was a lot of tension before that deal ultimately closed. So I think in some cases, people do not choose to sell to him, right? He comes in anyway. And certainly in the early days, I think he was also perceived as being misleading in the way he acquired shareholdings in some companies, almost against the wishes of some family members, or certainly without people having the full picture, right? And so he would secretly sort of build stakes in some of these businesses

Starting point is 00:18:29 and he would use derivatives and what have you. But I think in the cases where there's been a sort of conscious decision to sell to Arnault, it's because he has been able to provide resources that usually family on businesses haven't got themselves. And I think if you take the case of Bulgari, clearly, you know, he's done incredible things with that business. And the early evidence is they're adding a lot of value to Tiffany by taking the business off the market and providing resources and also a lot of breathing space in the way that Buffett often does,

Starting point is 00:18:57 right? So I think there's a couple of things they do that can create enormous value in these businesses, which often have great brands, but they're undermanaged. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of

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Starting point is 00:23:22 And I've heard some people call Arnaud, the Terminator. You would never see Buffett, you know, just quietly acquiring shares on the open market. And then using these various entities to acquire more shares just to hide the fact that he's buying into the company. And I believe I heard that he had acquired like essentially all of the free flow of Armes. And to get full control of the company, then need to pick off the sixth generation of family members one by one. It's just like to have the guests to try and do that with the company that size. I mean, man, it's just like such an interesting character when I hear that story. It's just so fascinating.

Starting point is 00:23:58 Agreed. I mean, it makes for a great story. And I think there's such a sharp contrast between the family behind Hermes, Dumas family, because of course, they're sixth generation and they've been in this business for a long time. And they clearly, they're much more French, right? And so it becomes this sort of almost good versus bad kind of narrative. Now, having said that, clearly they've been incredibly successful in what they do. I don't think that they're over that still.

Starting point is 00:24:22 But they're two interesting case studies in how you can build a successful business, right? We may get back to these differences. But, you know, one clearly being a very organic development and the other being sort of aggressively acquisitive. So Arnaud's managed to acquire around 75 luxury brands since the 1980s. And part of the appeal for him, I think, is being able to buy them. Maybe it's distressed. It's a good business, but it's distressed to some degree. Or he sees some ways in which he can improve the business.

Starting point is 00:24:51 But he's certainly not looking to turn something around and trying to buy a dud, so to speak. So maybe he could talk about sort of his track record in doing this, because one could think, you know, if he's so consistent in being able to buy these, others would try and replicate that strategy. So talk more about this strategy of purposely making acquisitions. maybe seeing opportunities where he thinks he can improve the business to some degree. I think certainly in the early days, he bought not very good businesses at all because they were bargains. So in a way, like similar to Buffett in a way, I think there's been a real, I wouldn't say transition, but there's been a gradual sort of evolution of his thinking and the way he implements his sort

Starting point is 00:25:31 of empire building. I think in recent years, he has been looking more, as you suggest, and more at better businesses. So take the case of Tiffany where clearly there's a very strong brand and, you know, there's a very strong distribution network, but it's under managed. In their case, possibly partly or largely because it's in the public trading in the public markets and, you know, the governance isn't there and everything. So I think there has been an evolution there, which is important to keep in mind. And actually, that's possibly another parallel to Buffett, right? I think as the whole business has grown and as the stakes have become higher, I think he's become increasingly focused on quality and robustness and, you know, building something durable,

Starting point is 00:26:11 building something multi-generational. But Bulgrey is a good case study where, you know, when they acquired the business, that was a very good brand. But as we touched on earlier, the resources and possibly the sort of know-how just wasn't there. Certainly when it came to making the business truly international and sort of improving the retail experience. And so I think at the time of acquisition, the EBIT of that business was 60 million or something euros. And I think 10 years later, that number was up to something like half a billion. Now, you could argue earnings were depressed at the time of acquisition. But of course, the multiple on the way it looked expensive. And I think he was challenged at the time, similarly with Tiffany, but 10 years later, you know, you've done 10x on the earnings.

Starting point is 00:26:53 And so, of course, the multiple no longer looks expensive. And hopefully we'll see something similar with Tiffany. But yes, I think generally he buys good quality assets that are undermanaged. Now, in some cases, he buys good quality assets that are already well managed. So, for instance, if you look at Wine and Spirits, for instance, they own things like Chateau-Dekem or Colgan Sellers in California or these are incredible assets that are also well managed. But I think when you look at the large deals, I think there's been money left on the table for him. And I think that evolution is also important to keep in mind when you try and analyze the sort of acquisition. track record. I also wanted to mention China here. It seems like you can't talk about so many of these

Starting point is 00:27:34 luxury names without talking about China. It's both a major part of the overall conglomerate today, but it's also a major part of the gross story. What are your thoughts around China and sort of their strategy around that country and how they're looking to grow in China? So China has been, and it's super important, right? So I think Chinese consumers account for if you look at the overall market, say about a third or a little bit over a third of spending. So that's Chinese consumption within and outside of China. And I think over the last two decades, China or Chinese consumption has accounted for something like two-thirds of growth in the industry. So clearly, hugely important. Now, that has become less of a driver in recent years. I would argue in some

Starting point is 00:28:19 ways that it's a real show of strength that LVMH and LMS and some of the other quality or sort of top end players in the industry like Chanel have continued to grow so strongly throughout that period, right? You could argue on the one hand it's a real issue that China's is not growing at the rate it once was, but you could argue on the other hand that it's a real sign of strength that, you know, at the group level they can carry on growing at a very healthy rate despite the fact that China isn't growing at the rate at once was. So I think that's very important to keep in mind. speak to these companies, they will tell you that the next China is still China. I mean, that remains to be seen, and will now remain a very important market. Of course, a lot of people

Starting point is 00:28:59 are excited about India, possibly some markets in Africa, like Nigeria, you know, some parts of Latin America, but I think for the foreseeable future, we will have to worry about what happens in China because it's become such a significant part of the business. But I'm encouraged by the fact that they have this sort of robustness. And I think in the case of LVMAH, they are also consciously diversifying the business at so many levels, whether it's geographically or in terms of categories or in terms of price points or any of these things. So I think they're less exposed, certainly than they were, although it's become a bigger part of the business, but I think the risk profile is probably I'm more comfortable with than I might have been, say, 10 years ago.

Starting point is 00:29:38 Just the international markets, looking at that landscape is sort of what really intrigues me about the luxury space, because not only is it difficult to replicate some of these brands under LVMH. I heard the phrase once, selling Europe to the world. It's not like Chinese company can start like LVMH 2.0 or it's just a copycat essentially with different branding and whatnot. I find that just so fascinating. And I also heard in Japan, this market just loves Louis Vuitton and some of these other brands. Like, I think I heard a stat that almost all women in Japan just love the Louis Vuitton bags. And it's just like, so fascinating to me how Europe is able to sell these products to the world. Yeah, I don't know if you have any comments around that and just how well

Starting point is 00:30:20 these brands travel. The only comment I would make there is that certainly compared to some other or most other consumer goods sub-sectors, luxury goods when they are true luxury goods businesses, I think are more resilient and are better protected against, you know, the threat of new entrance. So if you look at cosmetics over the last, you know, until three or five years ago, you look at S.A. Lauder and L'Oreal, and I think they, clearly, there are growth rates in China and Asia more generally sort of camouflage the fact that he saw a lot of new entrants in that space, certainly at the sort of lower end of the market. But I think the dynamics are potentially changing there a bit now with, you know, domestic brands becoming much more important. I think in luxury goods, so far,

Starting point is 00:31:04 we haven't seen nearly as much of that, or actually very little when you look at the kind of products we're referring to here. So that's probably the only thing that I would add that the sort of heritage and the legacy or the sort of fact that these are such enduring brands really matters here. And that provides real protection. We've seen in Cognac, for instance, in the US market, you know, in recent years with Deuse, that you can move into these markets and take significant share. But I think so far, I think certainly you compare to almost any other consumer goods category, the idea of selling Europe to the world. And actually in LVMH's case, sometimes selling the U.S. to the world, if you look at Tiffany, for instance, seems to be a very successful and

Starting point is 00:31:43 enduring strategy. So turning back to the luxury strategy here, Capfer, he laid out what we can call the playbook to succeed in the luxury space, which we covered extensively in our previous conversation. You know, certain luxury companies follow these rules to luxury more than others, and to some degree, if companies are thinking too short term and not following these rules too well, than it can come to bite them over the long run. How well do you think LVMH follows the playbook capfer laid out for us? So I think with LVMH, you have to look at this at the brand level, right? Because they own 75 or 80 brands.

Starting point is 00:32:20 So, you know, unlike Chanel or L.Mess, you actually have to analyze the brands individually. So some of the brands, I think, follow the playbook closely. So if you look at L'Opiana, for instance, you know, that is a brand that is much more EMS-like in its DNA and the way they run the business. So I would argue there, they probably follow. that playbook quite closely. If you look at some of the other brands, like in Mark Jacobs, clearly, you know, some or many would argue it's more of a fashion brand in some respects. I guess the important thing is to look at the big brands. So if you look at LV, especially,

Starting point is 00:32:52 there are some rules that they seem to be breaking. Now, they may very well argue otherwise. And in addition, I don't think they care if they're breaking Kaffir's rules as long as they're growing the business, right? But if you look at things like keep the non-enthusiasts out or dominate the client or, you know, only distribute on the internet very selectively or at the margins. You could argue they are breaking those rules to some extent or to a large extent, right, because it's become, in some ways, relatively easy to access these products. If you look at the way they advertise the products, or certainly they don't advertise the product, but the way they advertise to brand, the idea of not involving celebrities

Starting point is 00:33:30 in your advertising, you know, no longer holds true. And certainly the Olympics is an interesting case study and how in some ways, you know, it seems like this is now beginning to look a little bit more like a more traditional consumer goods model, right? And so I think to me it seems like they may be breaking some of these rules. Does it matter? I don't know. And it's too early to say, I think. For some of the brands, it's easier. So if we go back to Lorapiana, I, there I think is more a question of current growth rates aren't sustainable because we've gone through a face of what people call quite luxury having been sort of really in vogue. And, you know, I think some of the other brands, and similar to Lorapiano, have benefited from that as well, if you look at Chanel or Elmes.

Starting point is 00:34:11 I find it more difficult to assess the future of a brand like LVE, especially, and because it's such a big chunk of earnings and the value of the business, and that is something I worry about. It sort of remains to be seen. I mean, in some ways, like, you know, I was a Bufferonger who said about Bezos, I wouldn't want to bet against Jeff Bezos. And similarly, you know, who might to say that Bernard Arnault hasn't got it right this time as well. But I think it's one thing to keep a real close eye on because certainly according to the playbook we discussed last week, Clay, this is beginning to look slightly different from what it probably has done historically. I'm glad you mentioned the Olympics there. The 2024 Olympic Games are in Paris. I want to mention

Starting point is 00:34:50 one of the key aspects of luxury brands is to avoid ubiquity or to avoid essentially just being everywhere because it sort of loses its exclusivity and it loses some of its appeal. LVMH, premier partner for the 2024 Olympic Games, which to some degree makes sense because it's in Paris. I took a look at the anti-laws of marketing, CAFER laid out to see if maybe some of these anti-laws were broken. I wanted to mention number nine and ten here. So number nine states that the role of advertising is not to sell. And then number 10 states to communicate to those, you're not targeting.

Starting point is 00:35:27 So it seems like, you know, to some degree, it might look like it's breaking some anti-laws, but it could also apply that they're following the luxury playbook to some degree in other ways. And I think that's a very good point, Clay, because I think that's been their response, actually, from the family. I think their response has been it's all about sort of keeping that dream alive, and it's all about not necessarily visibility, but awareness. It's not about selling, right?

Starting point is 00:35:51 You know, I think the idea is that you increase, we talked about this last week, you increase awareness at a higher rate than you increase sales of your products. And that's how you keep that sort of dream equation. working for you. So I think it's possibly a fair argument, but I think it's too early to say what the impact on brand equity and desirability will be in the long term. So I had taken a look at the stock performance of a number of different luxury companies over the past 20 years or so. And I think it helps me sort of distinguish who are the true luxury players and who falls in what we can call aspirational luxury. So to share some numbers here,

Starting point is 00:36:29 Hermes, they compounded at over 21% per year over the past 20 years. LVMH has compounded at over 16%. And then Caring and Burberry have really had lackluster overall performance relative to these other two names. And then when you zoom into the past couple of years, we've especially seen quite a wide divergence in the performance of the stocks at least. Other than simply saying Hermes and LVMH are just better businesses, better brands and whatnot, what do you think are some of the drivers of this divergence. I mean, partly it is the fact that they're just better businesses and better brands, right? I think ultimately, that's what it comes down to.

Starting point is 00:37:06 And obviously, a lot of things go into that. But I think in some ways, it's a very fair reflection of the divergence in performance. And the fact that clearly L.V.M.H. and L.M.S. have been much more true to this luxury business model we discussed last week. You could argue that at some point, that might revert, at least partially. And certainly, you could see periods when, these so-called turnarounds, potential turnarounds like a Burbri or a swatch, may do better, right? So ultimately, so what has driven that? I think the governance has been a real key difference.

Starting point is 00:37:37 If you look at the family, what the family, and it's not necessarily families, but the sort of shareholder structures of the likes of LVMH and LMS have enabled them to do is to really take a long-term vision, to care about brand desirability, to do what's right in the long-term interests of the business, and they've been much less concerned about short-term financial delivery, right? And of course, it also means they've been much more true to the model we've discussed as compared to a, say, a burberry, which I think in many ways would be regarded as much more of a fashion business than much of what LVMH has in their portfolio. You know, if you look at the organic growth rate, and this is reflected in the financials,

Starting point is 00:38:17 so if the overall market grows at, say, low to mid-single digits, you know, LVMage has grown organically at something like 10% over the last, certainly if you look at the decade, between the financial crisis and the pandemic. So if we'd sort of take some of the volatility or noise out that we've seen in recent years, but they averaged about 10% organic growth. I think they ranged between 5 and 14. You know, they've seen meaningful margin. Well, for a long time, they saw very little margin expansion. But in the last three, four years, they've seen meaningful margin expansion. And so their earnings growth rates are vastly superior to some of the other names we've mentioned. So now, of course, when you talk about a 20-something percent total shareholder return

Starting point is 00:38:56 Kager, the starting point in terms of the rating was clearly much different, right, for both of these businesses. So that is not to be repeated. But similarly to Berkshire in a way, we don't need a 20% plus Kager from these types of businesses for them to be attractive investments, I think. It makes a lot of sense to me. Similar to Berkshire, one of the problems with LVMH is just the complexity with the number of brands and all the different markets they're getting into. What are some of the key metrics or KPIs you're tracking to assess the performance of LAMH over time? I guess ultimately, in terms of shareholder returns, what you need to look at are same kind of

Starting point is 00:39:33 metrics you look at for any business. That will drive, you know, free cash flow growth. So you would look at organic growth. You would look at margins and underlying EPS growth and what have you. But I guess that's just asking a different question. What drives these metrics? What drives organic growth? margins in this case. And so the things I would keep an eye on here are often more difficult to quantify.

Starting point is 00:39:53 So certainly culture is one. And that becomes increasingly important as we sort of get close to some kind of a succession event in this business, right? But culture, I would certainly try and understand and I would try and assess how that might evolve in terms of what is their willingness to invest up front. What is there, as you might say, capacity to suffer, right? And then of course, the other key aspect related to the culture is brand desirability. So you really need to understand, you know, how they manage these individual 75 or 80 brands. One way of looking at it is to employ the luxury playbook we talked about last week. Now, some of these, it's dynamic. It's not static, right? So some of those rules might fall out or some of the things that used to characterize the luxury

Starting point is 00:40:38 business perhaps not longer do. But I think on the whole, there are probably the two aspects of the business that I would really pay attention to. Some of that is difficult to put numbers on, but ultimately that should be reflected in the higher organic growth rates and the margins and the returns and all of those metrics. You had mentioned some aspects on culture and secession there. Bernard today is 75 years old. Do you have a sense of what the secession plans are when he does eventually retire and pass the torch to a new CEO? I don't think anyone knows. I don't even know if he knows at this point. All right. And certainly the expectation is that one or more of his children will be running the business. I think there are, you can make a sort of qualified guess to who it will not be,

Starting point is 00:41:22 but, you know, I think there are one or two of them are seen as more likely candidates. Having said that, I think he's very pragmatic, right? And ultimately, he cares about preserving the business, the empire he has built. So I think he is also in principle open to the idea of someone coming in as an outsider to run the business, or at least outsider to the family. This, you know, I would expect that to be someone who's already sort of working within the group. But I think that's as much as we know and as possibly he knows. And once again, if you look at or make a comparison with Berkshire, there's a good chance the acquisition side of things will be less exciting and add less value over the next 10 or 20 years. But that's not to say that it can't be a good investment, right? So it may certainly change

Starting point is 00:42:01 character somewhat. So some people, for instance, speculate about the fact that the whole group is too difficult to manage for anyone other than Mr. Arnold himself. It's become a very sort of diversified, sprawling group of brands across so many categories. And so there's a possibility that you could see a partial or sort of largely a breakup of the group into different divisions. We'll have to see. I think just like in the case of Berkshire, you might also see a change in the way they think about returning cash to shareholders, right? It's been a very high growth, high reinvestment rate business, just like Berkshire. And I think in both cases, you may very well see a high higher cash returns in the form of dividends or share buybacks. But I think it's far too early for that.

Starting point is 00:42:43 And on top of that, Mr. Arnold could be around for a long time. I think he increased the retirement age to 80 years, but I wouldn't put it past him to do that again. So I think we may very well see him running this business for a while. And I would be delighted as a longstanding shareholder. Yes, very, very similar to Buffett in that aspect and that we can expect him to be around for a while. Given LVMH's massive size, you talked about capital, there. In 2023, they generated nearly 90 billion euros in revenue, 23 billion euros in operating income.

Starting point is 00:43:16 How does he manage to put this capital to work? How does he approach capital allocation? Yeah, so they had a very high reinvestment rate. Certainly, if you look at the last time I did the exercise, I looked at the period between the financial crisis and the pandemic, once again, to sort of take out some of the noise or volatility we've seen. And on my calculations, he deployed something like 20 billion. billion euros of incremental capital and earned a 20% return on that, which I think is very

Starting point is 00:43:44 impressive for a business this size. And so some of that is organic capics. And I think certainly the real estate sort of aspect or the physical retail aspect has been consuming increasing amounts of investment recently. But of course, much of it is also acquisitions. Tiffany was a very big chunk of that. But you also had things like in that time frame like Laura Piana and Belmont. So I think the 20% number is very impressive when you look at the overall amount of CAPEX being redeployed. So it's really acquisition spend, it's a store network to some extent. And then, of course, they do pay a dividend. And share repurchases have been at least insignificant or sort of immaterial.

Starting point is 00:44:24 So I don't think anyone at this point at least buys into LVMage for the dividend payout, right? So, you know, he clearly he's looking for more deals. That's how they deploy the sort of excess cash flow they have. and I hope he can find a few more sizable deals before he steps back because when you look at the record, that's how much of the value is being created, taking good assets and buying them at a good or very attractive price and then improving the way they're running. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect

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Starting point is 00:48:00 This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Turning to the valuation, I just pulled up chart of just the P.E. multiple just to get a broad overview of how that's sort of changed over time. It looks like 2016 or 17, around the time you purchase is around 20-ish, maybe slightly lower or

Starting point is 00:48:25 higher, depending on what month you're looking at exactly. And it seems like it's averaged around 25 ever since then and now it's around 23. Yeah, and that seems pretty reasonable given the reinvestment rate, given the return on capital. I'm curious, your thoughts on the valuation. I think you have to look at the earnings. Where are we in the earnings cycle, right? So because a low valuation could either, or seemingly, if you look at 20,

Starting point is 00:48:48 I think they're trading at, say, 20 times earnings, 5% cash flow yield. You know, in some cases, that's because investors have concerns around the business model or the growth outlook or in some cases it's because it's for another reason, which is that earnings are seen as being sort of unsustainably high at the moment. I don't necessarily think that's the case here, but clearly they've had an incredible run. And by they, I mean, the industry, LBMH and LMS specifically, the strong have been getting stronger in this industry. So they've clearly outperformed, but the industry as a whole have had a very good three to five years. And certainly through the pandemic and coming out of the pandemic, earning growth was, you know, exceptionally strong. And so I think that needs to be, you need to sort of take that into account when you look at where they're trading, where the rating is currently. Because I think some investors might have concerns.

Starting point is 00:49:37 Certainly we saw that over the last 18 months or longer in the US, you know, luxury spending in the US, the recovery in China. So that's one thing to consider. I still think that certainly in the case of LVMH, trading at, say, 20 times earnings, that we could argue if the earnings are slightly above or below trend. But to me, that seems like a perfectly reasonable or even somewhat attractive valuation for a business of this quality. When I do a sort of full valuation, you don't need to assume anything like the 10% organic growth rate they've had over the last decade to get upside here. You can assume mid-single-digit organic growth and mid-to-high single- digit underlying earnings growth. And it still looks relatively fair. Now, we can perhaps get back to some of the risks or uncertainties. There are a few things that I'm sort of concerned about or a few significant question marks, but when I look at the business today, it just seems to be that the valuation, you don't need to make aggressive assumptions here. And of course, there's a very wide range when you look at LMS trading at 45 or 50 times. And then on the other hand, you look at Burbary and the likes trading in the low teens or 10 to 15 times.

Starting point is 00:50:44 you would expect, you know, high level, you would expect LBMH to be somewhere in between the two because it's a very high quality asset you're buying. But of course, it's diversified and it's large and all these things. So it probably means that the sort of growth upside when it comes to growth is perhaps not quite the same as it is for some of the smaller players or some of the turnaround cases here. But I haven't been buying this for a while. We sold a little part of our holding, but I'm perfectly happy holding on to most of it. So I wanted to talk a little bit about the cyclicality piece you mentioned there. When I think about, okay, what's driving sort of this huge growth in 2021 that's declined

Starting point is 00:51:20 ever since then? I think about all the government support and stimulus that was given to businesses post-COVID. I would think that would maybe drive some of these business owners going out and purchasing more from the likes of LVMH and Hermes. In 2020, these two are still growing. I see revenue growth of 15% for Hermes in 2020. LVMH is around 9% top line revenue growth. Are there any other factors at play here within the cyclicality, the luxury space, or what else should investors be thinking about?

Starting point is 00:51:51 I think they should keep in mind that it is a cyclical industry, right? Because it's easy to forget that. One, I think because it's part of the sort of wider consumer goods space, and one might think that there's sort of robustness there. Certainly luxury goods companies are cyclical. I think if you go back to 2020, now that was a very unusual year. That's not necessarily the cycle. That was the pandemic, right? But because the other thing to consider is that when you have a down cycle, there's also meaningful operating leverage in these businesses. So I think in 2020, AlvMage revenues were down 14 or 15 percent and EBIT was down almost 30 percent because there's a lot

Starting point is 00:52:25 of fixed costs in these businesses. So yes, I think you want to keep in mind, one, that they are cyclical. Two, that there's meaningful operating leverage. So if you get a downturn, that can be quite sort of noticeable in terms of earnings. And thirdly, there's a lot of divergence. So when you refer to Hermes and LVMH and their growth rates in 23, they did incredibly well. And so I mentioned earlier the strong having getting stronger in this industry. And that has remained the case, actually. So the likes of Chanel, Hermes, LVMage. And so even in a down cycle or in a softer market, they tend to perform better. Now, that's not to say that you're always better off investing in the likes of LVMH and LMS, but I think it's important to understand what you're buying into, right? Are you buying

Starting point is 00:53:08 more or less earnings volatility? And maybe finally on that point, yes, there is a cycle, but if you look at something like LVMage, they're so diversified and so large, and there are cross categories and geographies and price points and distribution channels that you would probably expect less earnings volatility over time than you would for, say, a caring or a richmond. And so depending on, you know, how comfortable you are with that volatility and also what type of investor you are. Do you have permanent capital, right? Do you rely on distributions? All of these things. So it's not just about, is this a good business or not? But does it sort of fit my portfolio and my return objectives and my risk sort of tolerance and all these things?

Starting point is 00:53:48 I also wanted to touch on the risks here. At this point, you know, it does remind me, given, you know, how big and diversified there are very much like a Berkshire type entity. So, presumably the bigger risks are have passed them by to some extent. I'm curious to get your take on this. I see probably a couple of key risks. As always, you know, the most important risks are probably things that we can't imagine at that point. But if we look at the ones that I think a lot of people are sort of looking at, well, these two are related. One would be brand equity. So if you look at the individual brands, especially the big drivers, LV, D, or maybe one or two other ones, and especially B LV, coming back to what we sort of discussed earlier. I'm not necessarily saying that I have

Starting point is 00:54:30 major concerns, but I think it's a real question mark because it's so significant in terms of scale and because it's become in some ways quite different from the way some other brands in the industry are run. If you compare LV to an M.S, for instance, they are relatively different these days. And so that would be one of my concerns. Can they maintain desirability? Can they protect and grow brand equity? You know, when you sort of come up against the whole growth, paradox that we've discussed. And of course, Arnold would say, you've been saying this for the last 10 and 15 and 20 and 25 years, but of course, at some point it will become a real sort of restriction. He often says, all I care about is desirability. And actually, as an investor in the business,

Starting point is 00:55:12 that's what I care about as well. And so let's hope it gets it right there. The second one, related to the first one, is succession, of course. And in a way, similarly to the question around brand equity, it's almost impossible to say today. one, what it will look like and two, whether that's the good or a bad. So even if you had the answer, even if you knew who was taking over the business, will that be good or bad for us as investors?

Starting point is 00:55:35 It's hard to say, I think the one thing we can say will probably change the profile of the business, if nothing else due to the sheer scale and sort of maturity of some parts of the business. But that doesn't necessarily mean that it's not an interesting place to invest, right? So it may be that you're getting distributions. There's other ways of creating value in a business

Starting point is 00:55:53 than being highly acquisitive. we'll have to see. But there are the two things that I worry about. Now, most of what you hear relates to things like, you know, what's going on in China, what's going on with U.S. consumption. Of course, in the short to medium term, that really matters. I keep an eye on that. But in the long term, I think we probably adopt a similar mindset to Mr. Arnold himself, although the difference being he's actively sort of influencing those sort of dimensions of the business and we're looking in from the outside analyzing them. Another question came up in my mind related to capital allocation, given the just the strength of many of these brands and the growth in the luxury

Starting point is 00:56:31 sector overall and how it's expanding to new markets, I would think that, you know, he'd be able to deploy a lot of capital in terms of just, you know, expanding to new markets or releasing new product lines within the existing brands. Do you know how he sort of thinks through that? You know, if he can achieve a high return, just reinvesting internally, then maybe acquisitions aren't as attractive. So I would also think that the acquisitions might have more risk in embedded in that because if you're making changes to the underlying business, I'm curious to get your thoughts on that as well. I think the challenge for the big brands in terms of reinvestment is international expansion, more of that has already been done, right, for a brand like LV than

Starting point is 00:57:09 for many of the smaller to medium-sized brands in the portfolio. So I think that is one challenge, certainly the so-called space race that we used to talk about in retail. And I think even in luxury in some markets like certainly in some parts of China, you know, much of that has already been done. But I think you're right in principle. I don't think they're any different from most companies we look at in that if they can reinvest organically at reasonably high rates, then that would be their preference, because as you say, the risk profile is very different. I think the reason they, clearly there's a limit to how much they can reinvest, especially in an industry like this. And so the sort of residual they've spent on acquisitions, anything from small to quite large in the

Starting point is 00:57:51 case of Tiffany. And then thirdly, I guess, with some of the acquisitions they make, apart from the fact that they can improve the running of the business as such, there are also benefits of running those businesses within Alvium age. But I would think they're not super explicit on this, but my assumption would be that they operate similar to many other or most other businesses in that, you know, it's organic investment first and then acquisition and then thirdly returning cash to shareholders. They haven't really been buying back shares meaningfully. So you get a dividend. Well, that change at some point possibly, but I think for now, my focus is on trying to understand, when it comes to CAPEX, trying to understand store network expansion and acquisition,

Starting point is 00:58:31 they're thinking around acquisitions. The dividend piece with a lot of these European companies is always interesting. A lot of American companies have a bias towards doing share repurchases, where it seems like European companies have more of a bias of doing the dividends. I saw the same thing when I was looking at Hermes. They reinvest a decent amount of capital in their business and also pay a pretty large dividend that's been increasing each year and they do some special dividends. I'm actually going to be speaking about Hermes on a future episode with Sri Viswanathan.

Starting point is 00:59:01 It should be out in two or three months or so. And I believe you own both LVMH and Eremes in your fund. So I'd like to also just give you the opportunity to just talk about how you contrast these two companies, given you own both of them and your fund and they're both in the luxury industry. I'll do it briefly because I think Shrival, who's a good friend, I think he will do a better job with that. So what are the key differences? One is that if you're buying into LVMage, you're getting this sort of broad, diverse exposure to different categories and brands, right? Some investors, and once again, so this is from an investor's point of view, what are the differences? Some

Starting point is 00:59:36 investors prefer that, right, because you may not have strong views on one category or one brand, or, you know, in the case of our mess, you're buying one brand, they are much more dependent on one category or one or two categories of products. If you have a strong sort of use on the outlook for that category for that brand, then of course that's probably the place you want to be in that, well, assuming it's a positive outlook, then that's probably where you want to be invested. But so the sort of diversification versus concentration, I think, is key. I think the culture is another one where we've talked about the fact that LVMH is clearly, you would think of as a holding company, which acquires and owns the number of brands. And so you need to analyze the brands at

Starting point is 01:00:14 brand level, but it's a holding company. And so you're partly also buying the capital allocation and all of that, right? Whereas in the case of Almes, it's all about organic developments. So you're buying the business as is, and so you need to be very comfortable with that. And so I think from an investor's point of view, there are probably the two main differences that I see. There are similarities. They both seem very strongly focused on risk management. Clearly, Almes, more so if you look at the balance sheet, I mean, they would appear to be super conservative. and culturally perhaps more sort of European in many ways. I think both of these groups are very, very good at managing risk

Starting point is 01:00:52 and building a sort of robust structure. I think they're both very long term in that they're willing to invest up front to nurture and develop these brands. So I think there are also a number of similarities. If you look at some brands within LVMH, they are actually somewhat similar to LMS. So if you look at LOROPH to take a well-known example, I don't think the DNA and the way they operate is so different,

Starting point is 01:01:14 from Elmess. And so that's why I say that you almost need to look at this at a brand level, because when you look at group level, it becomes a whole sort of different discussion. And in a way, you're not comparing like for like. You know, I think there's a lot of investors who will be invested in one of these two because they either like the capital allocation sort of angle and all of that when it comes to all the image. And there are some people who just love the inherent qualities of the MS business. And then in some cases, like myself, there's room for both in my portfolio. Well, Christian, I really appreciate you. joining me for the second time here to talk about the luxury space and talk about LVMH.

Starting point is 01:01:50 Before we close it out, I wanted to reiterate that Christian and I recorded a discussion on the luxury strategy. That was last week's episode, episode 643. So if you enjoyed this one, you're likely going to enjoy that one as well. I thoroughly enjoyed this book from Capfer. He really dives in deep to the DNA of a lot of these luxury businesses and sort of why these businesses are able to operate so much differently than any other industry practically. So Christian, thanks again. I'd like for you to please give a handoff for the audience to get connected with you or how they can learn more about you and your work if they'd like to. Yeah, sure. So we have a website. I'd be delighted if anyone goes on there has a look at our holdings, our philosophy and

Starting point is 01:02:30 everything. And there's contact details there if anyone wants to discuss any of these, you know, anything we've talked about today, Clay, or anything else for that matter. And yeah, I really enjoyed it. Thank you for having me on again. Wonderful. Well, I'll get that linked on the show notes for anyone that's interested in Christian. I really enjoyed this and it's been a lot of fun. So thanks for the book recommendation and thanks for sharing all you did today. Likewise. Thank you. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes. before making any decision consult a professional.

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We Study Billionaires - The Investor’s Podcast Network - TIP645: The King of Luxury: Bernard Arnault & LVMH w/ Christian Billinger

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