LVMH: Leveraging Luxury Heritage for Market Leadership.

LVMH is the world’s largest luxury goods company, with a diverse portfolio of prestigious brands across fashion, jewelry, cosmetics, and wines and spirits. With centuries-old Maisons such as Louis Vuitton, Dior, and Moët & Chandon, LVMH has built a strong competitive moat through brand heritage, exclusivity, and craftsmanship. The company has consistently expanded through strategic acquisitions, while its omnichannel approach ensures it adapts to evolving consumer trends. As the luxury market navigates macroeconomic uncertainty and shifting consumer preferences, the question remains: Should LVMH have a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do own shares in LVMH. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to accomplish this can be found here. LVMH currently represents 1,34% of my portfolio, making it a relatively small position. If you want to purchase shares (or fractional shares) of LVMH, you can do so through eToro. eToro is a highly user-friendly platform that enables you to start investing with as little as $50.

The Business

LVMH is the world’s largest luxury goods company, with a portfolio of 75 prestigious brands, or “Maisons.” While many of these brands have existed for centuries, the current structure of LVMH was formed in 1987 following the merger of Louis Vuitton and Moët Hennessy. The company is headquartered in Paris, France, and operates a highly decentralized business model, where each Maison has its own CEO, allowing for independent brand management while benefiting from LVMH’s financial strength and expertise. LVMH’s business is divided into five segments. Fashion and Leather Goods is the most profitable division, accounting for 48% of revenue, and includes iconic brands such as Louis Vuitton, Christian Dior, and Kenzo. Selective Retailing and Other Activities contribute 23% of revenue, featuring Sephora, luxury hotels Cheval Blanc and Belmond, and high-end yacht maker Royal Van Lent. Watches and Jewelry generate 12% of revenue and include brands like Tiffany & Co., Bulgari, and TAG Heuer. Perfumes and Cosmetics make up 10% of revenue, with Givenchy, Guerlain, and Acqua di Parma among its leading brands. Wines and Spirits account for 7% of revenue and include Moët & Chandon, Dom Pérignon, and Hennessy. LVMH has a strong competitive moat built on brand strength, exclusivity, and controlled expansion. Many of its brands have centuries of history, creating lasting recognition and trust among consumers, which allows the company to command premium pricing. The desirability of its products is a key driver of success, as luxury purchases are based on status and aspiration rather than necessity. LVMH carefully manages distribution, maintaining exclusivity by limiting wholesale availability. Louis Vuitton, for example, does not sell through third-party retailers, ensuring full control over pricing and customer experience. The company benefits from a well-balanced global presence, with revenue split between Asia at 37 percent, the United States at 25 percent, Europe at 25 percent, and other markets at 13 percent. This diversification provides stability when certain regions experience economic downturns. However, LVMH aims to ensure that all of its brands, not just its flagship names like Louis Vuitton and Dior, achieve balanced geographical exposure.

Management

Bernard Arnault serves as the Chairman and CEO of LVMH Moët Hennessy Louis Vuitton, a position he has held since 1989. He first joined the luxury industry in 1984 when he took control of Financière Agache, a holding company that owned Christian Dior. Recognizing the potential of high-end brands, he quickly implemented a strategy to transform the business into the world’s leading luxury group. In doing so, he revitalized Christian Dior, establishing it as the foundation for what would later become LVMH. In 1987, he played a key role in the merger of Louis Vuitton and Moët Hennessy, creating the company in its current form. Shortly after, in 1989, he became the majority shareholder and has since led LVMH’s expansion into a global luxury empire. Bernard Arnault began his professional career in 1971 as an engineer at Ferret-Savinel, his family's construction business. Over the years, he rose through the ranks and was appointed Chairman in 1978. His experience in business restructuring and strategic acquisitions helped shape his leadership approach at LVMH. One of his defining strategies is a decentralized management structure, where each of LVMH’s "Maisons" operates independently under its own CEO. This allows individual brands to retain their identity and entrepreneurial spirit while benefiting from LVMH’s financial strength. The approach is similar to Warren Buffett’s management style at Berkshire Hathaway, as both leaders focus on empowering their subsidiaries while maintaining overall strategic direction. As CEO, Chairman, and majority shareholder, Bernard Arnault is uniquely positioned to focus on the long-term vision of the company. Unlike many CEOs who prioritize rapid growth to meet short-term investor expectations, he has emphasized sustainable expansion. In an earnings call, he explained that achieving 8 to 10 percent annual growth is sufficient, as his primary objective is to enhance the desirability of LVMH’s brands rather than aggressively chasing market share. His philosophy aligns with the principles outlined in The Outsiders by William Thorndike Jr., a book that examines CEOs who excel at long-term value creation. His personal life is closely tied to LVMH, with several of his children holding leadership positions within the company, suggesting a long-term succession plan that ensures stability for the group. Bernard Arnault’s disciplined approach to luxury brand management, focus on long-term desirability, and ability to execute strategic acquisitions have cemented LVMH’s position as the world’s premier luxury company. His track record and leadership philosophy give me strong confidence in his ability to guide LVMH through future challenges and maintain its dominance in the luxury industry.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. LVMH has historically maintained a strong ROIC, exceeding 10% in nine of the past ten years, with the only exception being 2020 due to the pandemic. Encouragingly, the company achieved its highest ROIC in 2022 and 2023. However, in 2024, ROIC declined to its second-lowest level in the past decade as macroeconomic conditions weighed on profitability. The decline was largely driven by a 36% drop in profits from the wines and spirits division. Management has acknowledged these challenges and has implemented organizational changes to support a recovery, while also seeing early signs of improvement in the segment. Additionally, both the perfumes and cosmetics segment and the fashion and leather goods segment - the company’s largest - experienced a drop in profits in 2024, further contributing to the lower ROIC. Despite this short-term decline, LVMH has a long track record of generating strong returns on capital. Given the company's brand strength and strategic management, I am confident that ROIC will improve as macroeconomic conditions stabilize.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. LVMH has consistently increased its equity every year over the past decade, which is a remarkable achievement. Even during the pandemic, the company managed to achieve modest equity growth, demonstrating its resilience. More impressively, LVMH has grown its equity by more than 10% annually in six of the past ten years, with the only exception being the pandemic year. Very few companies manage to increase their equity every single year, and even fewer achieve double-digit growth rates consistently. This further highlights the strength and quality of LVMH as a business.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. LVMH has grown its free cash flow from 3,66 billion in 2015 to 14,21 billion in 2024, representing a compound annual growth rate (CAGR) of more than 14%, an impressive achievement. While free cash flow declined in both 2022 and 2023, it is encouraging that LVMH delivered its second-highest free cash flow ever in 2024, only surpassed by 2021, when post-pandemic stimulus boosted demand for luxury products. The levered free cash flow margin increased in 2024 compared to 2023, but it remains below the levels seen in other post-pandemic years. This is largely due to macroeconomic factors that have impacted multiple LVMH segments. However, the free cash flow yield is higher than the ten-year average and at its highest level since 2021, suggesting that shares are trading at an attractive valuation. We will revisit valuation later in the analysis.

Debt

Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of three years by dividing total long-term debt by earnings. After analyzing LVMH’s financial statements, I have concluded that the company is effectively debt-free. I prefer companies with no debt, and this is another positive sign for LVMH. In fact, LVMH has not had any noteworthy debt over the past decade, making it unlikely that debt will become a concern in the future.

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Risks

Macroeconomics presents a significant risk for LVMH due to the inherent sensitivity of the luxury sector to economic cycles. During economic downturns or periods of financial uncertainty, discretionary spending on high-end goods tends to decline as consumers prioritize essential purchases over luxury items. This makes LVMH particularly exposed to fluctuations in global economic conditions. One of the key macroeconomic risks comes from geopolitical tensions and currency fluctuations, which can impact LVMH’s international revenues. The company generates a significant portion of its sales from outside its home market, making it vulnerable to foreign exchange movements. For instance, a weaker yen contributed to strong growth in Japan, while currency headwinds in other regions may have weighed on performance. Additionally, geopolitical instability, trade restrictions, or new tariffs can disrupt supply chains and affect consumer sentiment in key luxury markets. Management has acknowledged that 2023 and 2024 were marked by an uncertain economic and geopolitical environment, with various conflicts worldwide, inflationary pressures, and rising interest rates creating headwinds. Regional differences in economic performance further underscore the risk. Weaknesses in Asia, excluding Japan, weighed on LVMH’s results, while the U.S. faced uncertainty due to its election year, which historically leads to volatility in consumer confidence and spending patterns. Given these factors, macroeconomic risks remain a key consideration for LVMH. While the company benefits from strong brand equity and pricing power, prolonged economic uncertainty could pressure consumer spending, particularly in discretionary luxury segments.

Competition poses a significant risk to LVMH, as the luxury goods market is highly competitive, with constant pressure from both established brands and new entrants seeking to capture market share. LVMH faces strong competition from other major luxury conglomerates such as Kering and Richemont, both of which have substantial resources, extensive brand portfolios, and significant market influence. Richemont’s jewelry and watch segments continue to expand, reinforcing its dominance in the hard luxury segment. Kering, with brands like Gucci, remains a formidable competitor, consistently challenging LVMH’s market position and brand prestige. LVMH also competes with independent luxury brands such as Hermès and Chanel, both of which have maintained strong positions in the luxury market. Hermès has outperformed LVMH in 2024, demonstrating its resilience and ability to sustain high demand despite macroeconomic challenges. Chanel, known for its iconic products and strong brand identity, remains one of the most desirable luxury brands globally, continuing to challenge LVMH in high fashion and accessories. Beyond these established competitors, the luxury market continues to see new entrants bringing fresh designs, innovative marketing strategies, and a strong digital presence. While the industry has traditionally had high barriers to entry due to brand recognition, reputation, and capital requirements, the rise of direct-to-consumer models and digital platforms has lowered some of these obstacles, enabling smaller luxury brands to enter the market more efficiently.

Counterfeiting poses a significant risk to LVMH, affecting its revenue, brand reputation, and customer trust. Despite the company's zero-tolerance policy, the rise of counterfeit luxury goods remains an ongoing challenge. The global counterfeit market is estimated to be worth over $500 billion annually, with brands like Louis Vuitton and Dior being prime targets. Each counterfeit sale represents a lost opportunity for LVMH to sell an authentic product, directly impacting its revenue. Additionally, counterfeit goods saturate the market, which can reduce the exclusivity and desirability of LVMH’s luxury items. The widespread availability of counterfeit products can also damage LVMH’s brand reputation. The presence of fakes in the market may cause consumers to question the authenticity of products, even when purchased through legitimate channels. This can create skepticism, weaken brand trust, and deter potential customers from making luxury purchases. Maintaining brand prestige is crucial for LVMH, as its success depends on consumers valuing the authenticity and craftsmanship of its products. The influence of social media platforms like TikTok has intensified the issue, particularly among younger consumers. Many influencers promote counterfeit goods as affordable alternatives to luxury products, making fake items more socially acceptable. Platforms like TikTok are filled with videos showcasing counterfeit purchases from Chinese e-commerce websites, which has contributed to the growing demand for replica luxury goods. This trend poses a long-term threat to LVMH, as it risks shifting consumer behavior away from prioritizing authenticity.

Reasons to invest

Emerging markets present a significant growth opportunity for LVMH, particularly in Asia, where luxury consumption is deeply embedded in cultural and social identity. China remains a crucial market, and while economic challenges such as the real estate crisis have slowed growth, the Chinese government has recognized the need to stimulate the economy. Several measures have been announced to support economic recovery, which should gradually lead to improved consumer confidence and spending. LVMH management has emphasized that while recovery in China will take time, demand for high-quality luxury products remains strong, and Chinese consumers continue to see luxury goods as highly desirable. Cultural factors further support the long-term demand for luxury goods in Asia. In many Asian societies, luxury consumption is closely tied to social status, making high-end fashion, accessories, and other luxury products an important part of self-expression. Chinese and Japanese consumers, in particular, are eager to discover and showcase luxury brands, viewing these purchases as a way to differentiate themselves in a competitive environment. Unlike Western consumers, who often prioritize experiences over material goods, many consumers in Asia see luxury purchases as a reflection of success and social standing. Historical luxury traditions in China and Japan reinforce this trend. China has a long history of producing high-value luxury items, such as fine porcelain and silk, dating back centuries. Japan’s deep-rooted appreciation for craftsmanship and quality makes luxury consumption an integral part of its culture. These historical preferences continue to shape modern luxury consumption patterns, ensuring that demand for high-end goods remains strong. Beyond Asia, the global expansion of the middle class is another major tailwind for LVMH. By 2030, an estimated 700 million people are expected to join the middle class, which will account for more than half of the world's population. The middle class is already the largest consumer spending group, and as more people accumulate wealth, the demand for luxury goods is likely to grow.

LVMH’s ability to drive growth through acquisitions is a key reason to invest in the company. While acquisitions are inherently risky - studies show that 70 to 90 percent of them fail - LVMH has consistently demonstrated its ability to integrate new brands, optimize their operations, and enhance their desirability. The company’s success in reinvesting capital into high-potential brands and unlocking their value has been a major contributor to its long-term growth. One of LVMH’s most notable acquisitions is Tiffany & Co., which it acquired in 2021. For a decade before the acquisition, Tiffany had been underperforming despite a strong luxury market, making it an attractive target for LVMH. Since then, LVMH has significantly transformed Tiffany, tripling its operating income and doubling its overall profits. Jewelry sales have quadrupled, and the company’s flagship store, The Landmark, has become LVMH’s top-performing luxury retail location. Management attributes this turnaround to its strategy of developing iconic products, selective store openings, and brand repositioning. Every renovated or newly opened store has led to a 25 percent increase in revenue, further demonstrating LVMH’s ability to extract value from its acquisitions. The transformation of RIMOWA is another example of LVMH’s ability to successfully reposition a brand. Before the acquisition, RIMOWA was well recognized for its high-quality luggage but lacked global awareness and was not considered a luxury brand. LVMH implemented a strategy similar to the one used for Louis Vuitton by leveraging selective expansion and high-profile collaborations. Instead of aggressively expanding store locations, LVMH focused on elevating RIMOWA’s brand equity through exclusivity and carefully curated partnerships. LVMH’s approach to acquisitions is centered on long-term brand building rather than short-term financial engineering. The company is highly selective in its purchases, targeting brands with strong heritage and untapped potential. Once acquired, LVMH applies its expertise in marketing, distribution, and brand positioning to enhance the desirability and profitability of its businesses. Its ability to replicate this success with future acquisitions could provide a continued source of growth.

LVMH’s omnichannel approach is a key reason to invest in the company, as it enhances customer engagement, strengthens brand control, and aligns with evolving consumer expectations. The company has successfully integrated digital and physical retail, ensuring that the luxury experience remains exclusive and personalized while adapting to the growing importance of e-commerce. LVMH has historically been selective about digital expansion, carefully preserving the exclusivity and prestige of its brands. However, recognizing the accelerating shift toward e-commerce, it has invested heavily in digital innovation to complement its in-store experience. While initially hesitant to embrace online retail fully, LVMH has now positioned itself as a leader in luxury e-commerce without compromising brand identity. One of LVMH’s key digital initiatives was the launch of 24 Sèvres, a multi-brand luxury e-commerce platform inspired by Le Bon Marché. This platform allows LVMH to offer a seamless online shopping experience while maintaining brand exclusivity. Features such as live video consultations with Parisian stylists and AI-driven personalization enhance the luxury experience in a digital format. LVMH has also extended its omnichannel strategy by integrating digital tools into physical retail, enabling customers to check item availability, schedule in-store appointments, and use click-and-collect services. These efforts ensure that the brand experience remains high-touch and immersive, regardless of whether customers shop online or in-store. The importance of omnichannel retail is particularly evident in Asia, where online luxury sales are growing rapidly. Digital adoption in China and Japan has outpaced Western markets, making a strong omnichannel strategy essential for capturing demand. LVMH’s ability to seamlessly blend online and offline experiences positions it well to capitalize on this shift. Luxury brands rely on exclusivity, and maintaining that aura in a digital world is challenging. LVMH’s controlled expansion into e-commerce, paired with its seamless integration of online and offline experiences, makes it a leader in omnichannel luxury retail. This strategy not only future-proofs the company against changes in consumer behavior but also reinforces its ability to engage customers across multiple touchpoints.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 25,12, which is from 2024. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 12,8% in the next five years, but management anticipates growth between 8% and 10%. Additionally, I have selected a projected future P/E ratio of 26, which is twice the growth rate. This decision is based on LVMH's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be €548,02. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy LVMH at a price of €274,01 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 18.924, and capital expenditures were 4.715. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 3.301 in our calculations. The tax provision was 5.157. We have 499,7 outstanding shares. Hence, the calculation will be as follows: (18.924 – 3.301 + 5.157) / 499,7 x 10 = €415,85 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With LVMH's Free Cash Flow Per Share at €28,43 and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is €409,84.

Conclusion

I find LVMH to be an intriguing company with exceptional management. The company has a strong moat, as many of its brands have been around for centuries, earning consumer trust across generations. While LVMH recorded its second-lowest ROIC in a decade in 2024, it has historically delivered strong returns on invested capital, making the recent decline likely an outlier. Additionally, LVMH generated its second-highest free cash flow ever in 2024, and although the levered free cash flow margin decreased, this remains an encouraging sign of resilience. Macroeconomic risks pose a challenge for LVMH, as the luxury sector is highly sensitive to economic cycles, with consumer spending on high-end goods declining during periods of financial uncertainty. Inflation, rising interest rates, geopolitical tensions, and currency fluctuations can impact LVMH’s international revenues. Competition remains a risk, with major luxury conglomerates such as Kering and Richemont, as well as independent brands like Hermès and Chanel, continually challenging LVMH’s market position. Counterfeiting also presents a significant threat, leading to lost sales, brand dilution, and weaker consumer trust. The rise of social media platforms like TikTok has further normalized counterfeit purchases, particularly among younger consumers. Despite these risks, emerging markets, particularly in Asia, present a strong growth opportunity for LVMH due to the cultural significance of luxury goods and the increasing wealth of consumers in the region. The expanding global middle class is also expected to drive long-term demand for high-end products. LVMH’s proven ability to acquire and transform underperforming brands, as seen with Tiffany & Co. and RIMOWA, reinforces its long-term growth potential. Additionally, its omnichannel strategy enhances customer engagement by seamlessly integrating digital and physical retail, ensuring a personalized luxury experience while adapting to the rise of e-commerce. I believe LVMH is a high-quality company, and buying shares below €634, which represents a 20% discount to intrinsic value on two out of three calculations, offers a compelling long-term investment opportunity.

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