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September 2012 CONFERENCE Autumn Conference
LUXURY GOODS Rating 2/Outperform
Target price (6 months) +6.9% EUR142
Price (07/09/2012) EUR132.85
LVMH Reuters: LVMH.PA Bloomberg: MC FP
King of the luxury jungle Stock data
Market capitalisation EUR67444m
Free float EUR33674m
Recent developments – Mixed H1-12 results Enterprise value EUR73205m
H1-12 sales rose 26% to EUR12,966m (12% organic). Strong growth in No. of shares, adjusted 496.5m
Q1 (14%) slowed slightly in Q2 (10%). The slowdown was visible for the Daily volume EUR 88.19m
fashion and leather division (up 8.0% in Q2 vs. 12.0% in Q1), watches
and jewellery (up 9.5% vs. 17.0%) and selective retail to a lesser extent
(up 13.0% in Q2 vs. 18%). The performance remained very good Performances
nonetheless in wines and spirits (up 15.0% in H1) and perfumes and 1 month 3 months 12 months
cosmetics (up 9.0% in H1). By region, the US (up 14% and Europe (up Absolute perf. 0.5% 9.8% 16.0%
8%) continued to experience strong growth, while business in Japan Relative perf. -1.4% -4.2% 1.3%
(up 10%) benefited from a favourable comparison base. The Asia-
Pacific region (up 15%) showed some signs of a slowdown towards the
end of the first six months.
226.0 226.0
H1 profit from recurring operations grew 20% to EUR2,659m. This
yielded a margin of 20.5% (down 110bp), which was slightly
176.0 176.0
disappointing and below expectations notably for the fashion and
leather goods business, which generated a margin of 32.6% (down 126.0 126.0
220bp). The margin contraction at this division was half attributable to
an average performance by Louis Vuitton and half due to other less 76.0 76.0
problematic issues (substantial outlays for Berlut, recovering the Donna
Karen jeans licence and cleaning up the wholesale network at Fendi. 26.0 26.0
01/01 06/02 12/03 05/05 11/06 04/08 10/09 03/11 08/12
Net profit increased 28% to EUR1,681m. Net debt totalled EUR5.5bn at Price/CAC40 Price
30 June, i.e. slightly above our estimate.
Outlook – Confidence despite the uncertain environment
As usual, the group gave no specific guidance for the full year, but Sector focus
management appeared fairly confident despite some uncertainty Sector Top Picks L'Oréal, Richemont
regarding the environment in China, notably pending the elections in
September. We expect tourist flows to continue to buoy business in
Europe, while business in the US, which is more dependent on local
demand, business could slow slightly (elections also pending in Shareholders
Free Float 49.9%, Financiere Goujon 42.4%, Arnault
November).
Group Companies 5.3%, Treasury Stock 2.4%
LVMH is a robust leader in a promising industry despite the short-term
geopolitical, economic and monetary uncertainties. A portfolio of strong
brands guarantees pricing power and constitutes a barrier to entry.
Lastly, the group is particularly well placed to capture the soaring 2011 2012E 2013E 2014E
number of emerging market consumers. The main risk that could come P/E (x) 17.6 18.0 16.1 NS
into play is a pronounced and lasting slowdown at Louis Vuitton notably EV/EBITDA (x) 9.7 10.2 8.8 NS
with its Chinese client base. Attrib. FCF yield (%) 3.4 3.9 5.3 NS
Net debt/EBITDA (x) 0.8 0.6 0.3 0.0
In the short term, and in the event of a marked economic downturn,
Yield (%) 2.4 2.3 2.6 0.0
history has shown that the sector multiple is more at risk than earnings.
ROCE after tax (%) 15.4 17.1 18.3 NS
This also applies to LVMH.
EV/Capital empl. (x) 2.5 2.9 2.7 NS
Thomas MESMIN
Research Analyst Disclosures available on www.cheuvreux.com
tmesmin@cheuvreux.com
(33) 1 41 89 75 98
124 www.cheuvreux.com
September 2012 CONFERENCE Autumn Conference
Company group Valuation
World leader in the luxury goods industry Our target price works out at EUR142 (7% upside
With 2011 sales of EUR23.6bn, LVMH is the world leader in the luxury potential at the current share price).
goods sector ahead of Richemont and PPR. The group is diversified and
At the current share price of EUR130, LVMH is
holds a portfolio of powerful brands, including Louis Vuitton, Moët &
trading at a 2012E P/E of 17.6x and a 2013E P/E of
Chandon, Hennessy, Parfums Dior, Bulgari and Tag Heuer.
15.8x, i.e. a discount to its historical average since
Well diversified, by business and by region 2001 (20x). In EV/EBIT terms, it is trading at
In wines and spirits (15% of sales and 20% of profits), LVMH is the No. 1 respective multiples of 11.8x and 10.2x. It is also
in Champagne and Cognac. Louis Vuitton is the main brand in the fashion trading overall in line with its peers (excluding
and leather goods division (36% of overall group sales and 58% of EBIT),
Hermès).
along with Fendi, DKNY, Marc Jacobs, Céline, etc. LVMH has strong
positions in perfumes and cosmetics (13% of sales) through Parfums Dior. Our DCF model points to a valuation of
In the 1990s, the group diversified into watches and jewellery (8% of sales EUR155 per share, based on the following
with Tag Heuer, Hublot, etc.) and selective retail (27% of sales) with DFS assumptions: medium-term growth in sales of
and Séphora. More recently, the group acquired Bulgari (sales totalling 6% p.a., an operating margin of 23.0%, CF growth
EUR1.3bn) with a view to strengthening its legitimacy in watches and of 3% to infinity and a discount rate of 8.7%.
jewellery. By region, Asia constitutes its main end market (37% of sales of
Our sum-of-the-parts approach, which values
which 8% in Japan), ahead of Europe (30%), the US (23%) and the rest of
each business line based on peers' market multiples
Europe (10%). LVMH operates 3,095 stores worldwide and has a
works out around EUR160 per share (before the
headcount of ca. 100,000 employees. In late 2010, it acquired an
conglomerate discount).
unsolicited 20% stake in Hermès, that it has since raised to 22.6%.
High margins and a very healthy balance sheet At our target price, LVMH would trade at a
LVMH has posted an operating margin of 19% to 22% since 2004, driven 2012E P/E of 19.3x (17.3x for 2013E), i.e. below its
by its star brands (Louis Vuitton, with a margin of 40% to 45% and historical average, but still at a significant premium
Hennessy above 30%). The margin potential is significant for its other to the broader market (applicable to the sector as a
brands. Despite sustained capital expenditure, notably in stores, LVMH whole). History has shown that in the case of a
generates more than EUR2bn in FCF p.a., enabling it to pay out a marked slowdown, the valuation multiple is
dividend, carry out acquisitions and pay down debt, which stood at more at risk than earnings.
EUR5.5bn at 30 June 2012.
Investment case
A company very much controlled by its core shareholder
With a market cap. of EUR65bn, LVMH is the biggest listed luxury goods In the medium term, LVMH could post EPS growth
group. It is tightly controlled by the Arnault family, which held 46.42% of of 15% p.a. with 7-8% growth in sales and around
the share capital directly or indirectly and 62.29% of the voting rights at 12% growth in operating profit (margin growth of
30 June 2012. 80-100bp p.a.), excluding currencies.
SWOT analysis Louis Vuitton (more than half of the group's
operating profit) has always succeeded in capturing
Strengths Weaknesses market momentum (high net worth populations on
World leader in luxury goods with Wines and spirits, notably the increase, emerging markets, innovative
a diversified portfolio of strong Champagne, are fairly cyclical products) while offering a safety buffer in the event
brands Lack of exposure in watches of a crisis, due to its retail integration, the diversity of
Pricing power. and jewellery its product/price offer and its well-balanced geomix.
High entry barriers in W&S Fixed costs are high due to Lacklustre H1 results for the brand are not alarming,
Able to attract top talent: integrated production and the but no doubt the new CEO Jordi Constans will be
management or designers store network closely monitored.
On a different scale, Séphora and DFS offer
Opportunities Threats
appealing growth potential.
Growth in emerging market The acquisitions track record is
clients, notably Chinese uneven In our view, the margin potential lies elsewhere: in
Good exposure to travel flows High currency exposure other fashion brands, watches and jewellery, and
(DFS, Louis Vuitton). Internet and counterfeiting Champagne. We also see margin potential with the
Steady growth in high-net worth Long term, new entrants from integration of Bulgari in LVMH.
individuals (HNWI) the "new world"?
The "king of the luxury jungle" harbours long-term
Strong balance sheet to boost 'First mover potential
growth (capex/ acquisitions) upside potential, which could also be played via its
disadvantage for LV in China
Dvpt. of the Sephora parent company, holding company Christian Dior.
concept
125 www.cheuvreux.com
