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Family Empire of Luxury

“In the luxury business, you have to build on heritage.”

– Bernard Arnault, Chairman and CEO of LVMH

arvy’s Teaser: LVMH, the epitome of luxury, has shone with its strategic acquisitions and family-led ethos. Succession planning and the heritage of the Arnault family have been masterfully interwoven. But there are some cracks in the “Good Chart”.


Luxury.

This is one of my favorite sectors to invest in.

The underlying market is growing at 4% per year, margins are high and consumers have inelastic spending patterns – meaning the sector is recession-proof and companies have pricing power. In addition, the segments of high fashion & leather goods, perfumes & cosmetics, wines & spirits as well as watches & jewelry are multifaceted.

When looking at businesses in this area, I stick to the market wisdom spread by our chairman Nic. “Always buy the companies that are located where the story makes sense”. That means you buy luxury in France or Italy, you buy renewable energy companies in Scandinavia and you buy chocolate in Switzerland.

If you combine all these factors, you find a family-owned business in France that enjoys an excellent reputation and has a top-class track record. The largest luxury company in the world (chart 1).

It is the family-run luxury empire of Bernard Arnault: Louis Vuitton Moët Hennessy.

In short: LVMH.

Chart 1: A World of Luxury Goods, 12 Largest Public Luxury Companies by Market Cap

Source: Quartr, December 2023

Serial Acquirer

Over the years, LVMH has made several ingenious strategic acquisitions.

Serial acquisitions are a difficult task and require a lot of discipline, knowledge, and well-thought-out execution. Yet, Bernard Arnault mastered the art of capital allocation through several acquisitions over the last 35 years (chart 2), most of which resulted in great success with a very high return on their invested capital. This has led to a prestigious and well diversified brand portfolio across all major segments and strong sales growth in recent years.

Are you still not on my side when it comes to recession-proof and resilient demand?

Little exercise for you on a Friday morning: Point to the global financial crisis or the dotcom recession by just looking at the bar charts showing revenues below.

Not that easy, I know.

Chart 2: Arnault’s Luxury Empire, LVMH’s most notable acquisitions

Source: Quartr

A Certain Fate

48%.

This is the percentage of LVMH owned by the Arnault family, one of the richest families in the world. A net worth of $180 billion. LVMH is the epitome of a family-run business and a prime example of why they outperform over the long term (chart 3). Ownership structures, attractive incentives and long-term thinking are a key feature of these companies. Details that we focus on when analyzing a “Good Story”.

Like every family business, this one faces a certain fate.

Succession.

But Bernard, the patriarch of the family, would not be so successful if he did not tackle this problem early on. He knows that in the luxury sector, you have to build on your heritage. This also applies to his five children. That is why he has strategically placed them all in the family empire:

  1. Delphine (1975), CEO at Dior and LVMH Board Member
  2. Antoine (1977), CEO at Christian Dior SE and LVMH Board member
  3. Alexandre (1991), Executive Vice President at Tiffany & Co.
  4. Frédéric (1995), Head of LVMH Watches
  5. Jean (1998), Watch Director at Louis Vuitton

Their collaboration, mutual respect, and shared vision for LVMH’s future point towards a dynamic continuity and evolution of the luxury giant.

C’est magnifique, n’est-ce pas?

Chart 3: Family-owned companies outperform

Source: Credit Suisse Research, Thomson Reuters Datastream

Never Trust Just the Good Story

LVMH is a textbook example for me of how easy it is to fall in love with a “Good Story”. Just think about what you just read in the last few paragraphs.

What’s not to love?

At arvy, this is why alongside the “Good Story”, which has a greater subjective component, we always look at the “Good Chart”. An objective assessment. We follow an important key rule by never trusting the story nor just the numbers unless confirmed by price action.

LVMH, with a third of its luxury sales stemming from Asia, mainly China — a region driving two-thirds of the company’s growth due to rising incomes — reaped the benefits of the pandemic’s economic tailwind. However, the West’s economic concerns and Asia’s cooling property market signal a cautious stance, some first cracks, prompting us to hold off on buying.

Our preference leans towards Hermès, whose high-selling-price items attract wealthier, more stable clients, as evident in its superior price action.

But as I wrote this week in NZZ The Market under the title “When should I sell. 12 sell rules”.

The following still applies to both: “The trend is your friend until the end, when it bends”.

Chart 4: LVMH & Hermès over 10 years

Source: TradingView

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