LVMH
will
release
its
full-year
earnings
on
January
25
after
market
close.

As
the
largest
luxury
group
in
the
world,
its
comments
on
the
state
of
luxury
market,
in
particular
in
Europe,
the
US
and
China,
will
be
watched
closely.
As
usual,
the
company
will
say
little
about
its
own
outlook.

When
it
released third
quarter
sales
figures
 last
year,
LVMH
characterised
its
outlook
in
the
following
terms:

“In
an
uncertain
economic
and
geopolitical
environment,
the
Group
is
confident
in
the
continuation
of
its
growth
and
will
maintain
a
strategy
focused
on
continuously
enhancing
the
desirability
of
its
brands,
drawing
on
the
authenticity
and
quality
of
its
products,
excellence
in
distribution
and
agile
organization.”

Expect
more
of
the
same
for
2024.

What
to
Watch
For

After
a
solid
first
half
in
2023,
when
sales
grew
17%
on
a
like-for-like
basis,
revenue
growth
sharply
decelerated
in
the
third
quarter
at
+9%.
In
Q4,
consensus
expects
total
revenue
of
€23.62
billion
(£20.2
billion),
growing
at
8.6%
organically.

Fashion
&
Leather,
which
houses
Louis
Vuitton
and
Christion
Dior
and
has
been
the
main
driver
in
growth
and
earnings
for
many
years,
has
also
seen
its
growth
decelerating.

In
the
final
quarter
of
2023,
analysts
expect
the
division
to
grow
9%
on
a
like-for-like
basis.
Some
analysts
are
more
bullish
than
others,
seeing
growth
rebounding,
in
part
thanks
to
easier
basis
of
comparison
in
China.

For
the
full
year,
LVMH
is
expected
to
report
total
sales
of
€85.74
billion,
an
operating
profit
of
€22.49
billion
and
net
income
of
€15.70
billion
(compared
with
€79.18
billion,
€21.06
billion
and
€14.08
billion
in
2022
respectively).

Fair
Value
Estimate
for
LVMH

Morningstar
analyst
Jelena
Sokolova
recently
upgraded
her
Fair
Value
Estimate
(FVE)
for
LVMH
to
€670
from
€640
per
share,
to
incorporate
the
time
value
of
money
“offset
by
slightly
more
pessimistic
expectations
for
2023
sales
and
profits.”

“We
expect
Louis
Vuitton
brand
to
grow
3%
faster
than
the
luxury
leather
goods
supported
by
an
outsize
marketing
budget,
brand
recognition,
and
pricing
power”,
she
wrote
in
a
report
dated
January
8.
In
2023,
the
fashion
and
leather
good
division
should
grow
7%
and
report
an
operating
margin
of
40%,
compared
with
20%
and
40.6%
respectively
in
2022.

Key
Morningstar
Metrics
for
LVMH

• Fair
Value
Estimate:
€670;

• Current
Price:
€661;


Morningstar
Rating:
★★★;

• Morningstar
Economic
Moat
Rating:
Wide;

• Morningstar
Uncertainty
Rating:
Medium.

Key
Question:
Where
is
The
New
Normal?

After
years
of
double-digit
growth,
the
slowdown
in
luxury
market
and
more
cautious
consumers
in
the
US
and
Europe
have
weighed
on
the
momentum
for
many
luxury
companies,
with
few
exceptions
like
Hermes.

One
important
question
for
LVMH
is
what
is
the
“new
normal”
in
terms
of
organic
growth
and
profit
margins
going
forward?

Pricing
should
help
fuel
some
growth
and
protect
margins,
and
the
company
should
be
able
to
continue
enjoying
its
favourable
business
mix
towards
Fashion
&
Leather,
thanks
to
its
continuous
investments
in
marketing
and
in
retail
channels.

Yet
despite
somewhat
easier
basis
for
comparison
in
Q4
of
2022
(mostly
due
to
China’s
lockdowns),
analysts
don’t
expect
growth
to
reaccelerate.

This
has
translated
in
a
compression
in
valuation
multiples,
from
a
peak
of
27.6
times
expected
earnings
in
April
2023,
when
it
reached
an
all-time
high
of
€901
a
share
to
21.3
times
currently.

LVMH

Wide
Moat
Rating

We
believe
LVMH’s
portfolio
of
leading
brands
spanning
multiple
industries
will
allow
it
to
generate
economic
profits
for
years
to
come.
It
scores
highly
on
most
of
our
brand
intangible
asset
supporting
criteria.
Most
brands
in
LVMH’s
portfolio
are
at
least
100
years
old.

The
flagship
Louis
Vuitton
brand
is
among
the
best
known
and
recognised
luxury
brands
with
strong
market
share
(double
the
next
biggest
peer
in
leather
goods
according
to
Euromonitor)
and
a
strong
track
record
of
pricing
power.
The
brand
generates
around
three
fourths
of
its
revenue
from
iconic
bags
and
low-double-digit
percentages
in
accessories,
where
product
cycles
are
long
(reducing
product
and
fashion
risks
and
encouraging
people
to
spend
more
for
a
product
they
will
use
longer),
and
scale
allows
to
generate
very
attractive
margins
(usually
in
excess
of
40%).
Recurring
buyers
represent
around
a
half
of
Louis
Vuitton’s
revenue,
somewhat
reducing
revenue
cyclicality.

LVMH’s
portfolio
of
watch
brands
is
made
up
of
midrange
and
high-end
brands,
with
average
prices
of
€2,000
and
up.
LVMH
also
has
a
strong
position
in
branded
jewelry
with
the
Bulgari
and
Tiffany
brands,
which
is
among
the
leading
players
in
the
industry,
where
we
consider
entry
barriers
to
be
higher
than
other
luxury
goods,
thanks
to
the
high
value
attached
to
raw
materials,
low
availability
to
communicate
the
brand,
stickier
gifting
demand,
and
need
for
quality
assurance
on
the
top
end.

In
perfumes
and
cosmetics,
LVMH
has
around
10%
global
market
share,
with
a
strong
heritage
in
fragrances
(notably
Christian
Dior
and
Guerlain).
In
wines
and
spirits,
it
commands
leading
market
share
in
attractive
conspicuous
niches.
It
has
over
20%
global
and
30%
export
market
share
in
Champagnes
with
such
brands
as
Moët
&
Chandon,
Dom
Perignon,
and
Ruinart,
and
it
has
undisputed
global
leadership
(half
of
the
market)
in
cognacs
with
flagship
Hennessy.

Risks
and
Uncertainty

We
assign
LVMH
a
Morningstar
Uncertainty
Rating
of
Medium.
Luxury
goods
growth
over
the
past
15
years
has
been
fueled
by
emerging
markets
demand
linked
to
China’s
economic
development.
This
makes
industry
growth
vulnerable
to
future
structural
and
cyclical
growth
in
this
region.

Recent
growth
for
Louis
Vuitton
has
been
spectacular
(doubling
in
revenue
from
2018
to
2022
from
around
€10
billion
to
around
€20
billion)
and
faster
than
its
historical
pace,
thanks
to
favorable
cyclical
demand
environment,
brand
investments,
pricing,
and
strong
brand
momentum.
Slower
demand
for
luxury
goods
overall
and
an
adverse
fashion
cycle
could
further
limit
the
brand’s
growth
on
an
increasingly
challenging
comparison
base.

Deceleration
of
demand
from
European
and
American
customers,
who
spent
record
amounts
on
luxury
in
the
years
since
Covid-19,
was
helped
by
savings
from
foregone
experience
spending,
solid
asset
markets,
and
payment
checks
in
the
US
Chinese
demand,
dampened
by
weak
real
estate
prices
and
slower
GDP
growth,
may
not
compensate
for
this
slowdown.

While
the
firm’s
overall
record
of
mergers
and
acquisitions
is
quite
successful,
in
our
view,
there
remains
a
risk
of
overpaying
or
choosing
a
target
poorly.
Acquisitions
can
also
drift
the
group
into
less
moaty
and
more
competitive
areas.

A
large
portion
of
production
and
administrative
costs
is
incurred
in
euros,
while
almost
80%
of
revenue
is
invoiced
in
other
currencies.
In
addition,
given
the
global
pricing
transparency
that
the
internet
has
made
possible,
adjusting
pricing
for
currency
movements
has
become
more
challenging.
While
LVMH
has
historically
been
able
to
pass
through
currency-related
cost
increases
to
consumers,
this
may
prove
more
difficult
in
a
weaker
demand
situation.

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