2023-04-12 15:12:12 ET
Summary
- LVMH just published its Q1-23 revenue numbers, demonstrating the never-ending demand for the luxury conglomerate's products, and beating even my above-consensus expectations.
- Wines & Spirits grew by 3%, Fashion & Leather grew by 18%, Perfumes & Cosmetics grew by 11%, Selective Retailing grew by 28%, and Watches & Jewelry grew by 11%.
- Overall, revenues grew 17% YoY. Growth was broad-based across all geographies, with China, Japan, and Europe leading the way.
- As I expected, LVMH is on pace for another double-digit growth year, crushing the unexplainably low analyst estimates.
- I upgrade my Buy rating to a Strong Buy and update my price target to €1078.9 per share or $1186.5 per LVMHF ADR, reflecting a 29.0% upside.
Louis Vuitton, Société Européenne (LVMHF) (LVMUY) just announced its Q1-23 revenue numbers, reporting 17.0% growth from the prior year period. The luxury powerhouse shows no sign of slowing down, demonstrating the resiliency of the luxury consumer. I upgrade my Buy rating to a Strong Buy, with a price target of €1078.9 per share, which equals $1186.5 per share of the company's ADR.
Introduction
A month ago, I published an article about LVMH and rated the stock a Buy despite the 48.3% surge from its June 2022 lows. I urge you to read that article, in which I described my investment thesis in detail, as well as the group's amazing operating model as a holding company, its unique leadership strategy, its operating segments, risks, and the major growth prospects I project for 2023 and beyond.
In short, my investment thesis in LVMH is based upon the immense pricing power it possesses with its portfolio of timeless prestige brands, as the never-ending demand for the group's products is resilient and isn't sensitive to the economic environment. In addition, I view the holding structure of LVMH as extremely beneficial for shareholders, with its management's unparalleled capabilities to acquire and significantly improve already-huge brands like Tiffany.
Regarding valuation, I showed that LVMH trades at the median multiple among its peers, despite the better growth prospects and its industry-leading margins. Additionally, I explained why my model assumes higher growth than the consensus, as I thought that due to the fact that LVMH is a European company, analysts' consensus isn't as reliable (spoiler: this turned out to be true). To conclude, I previously estimated LVMH's fair value at €924 per share or $971 per ADR.
In addition to my article, I wholeheartedly suggest listening to the Acquired podcast about LVMH, as it covers aspects that aren't suitable to include in this analysis.
Now, let's focus on the company's results, see how my projections fared compared to the consensus, and provide an updated model. Spoiler alert: I upgrade my rating to a Strong Buy as LVMH was able to beat even my own projections, which were already much higher than the consensus.
Q1-23 Highlights
LVMH reported consolidated revenues of €21.0B, a 16.8% increase from the prior year. Based on its historical seasonality, the French conglomerate is on pace to deliver above 16.0% growth for the entire year. I'm very glad to see the company is on pace to beat my €89.3B sales (12.8% growth) expectation, which means it's on pace to essentially destroy the consensus expectations of €85.8B for the year.
As we can see, growth was broad-based across all segments. The worst-performing segment in the quarter was Wines & Spirits, despite champagne and wines growing by 14.0%. The segment was weighed down by a 5% decline in sales of cognac and spirits, as inventory levels of LVMH's distributors are still high, which is a phenomenon all alcoholic beverage companies are currently dealing with.
Geographically, Japan grew by 34%, Asia excluding Japan grew by 14%, Europe grew by 24%, and the U.S. was the only sub-double-digit cohort with 8% growth for the quarter. However, the geographic sales breakdown remained similar to prior years.
Overall, LVMH's results speak for themselves. To my best knowledge, LVMH outgrew any other company of a similar size in the quarter, reflecting the resiliency of luxury in tough economic environments.
Important Notes From The Call
After such impressive results, I have to say the Q&A session didn't include too many surprises. However, there were a few important notes to discuss.
First, regarding what we can expect for the remainder of the year. According to the management, the growth in Q1 is a good place to start for our annual assumptions. As projected, the growth is a result of the successful Yayoi Kasuma collection, travel recovery, successful campaigns like Rihanna's SuperBowl show, and China reopening, as well as the company's ability to take market share and expand its selective retailing businesses, specifically with Sephora. Besides these trends continuing, LVMH has other growth accelerators with its 5th Avenue store reopening, and expected depletions in inventories of its Wines & Spirits distributors.
Second, shifting to some pessimistic notes, demand in the U.S. is slowing down, as we can infer from the lower growth numbers. According to management, this is partially a result of off-shore purchases made by Americans. However, there is a slowdown, due to what the management referred to as a return to the trendline, as the U.S. grew above 20% for two consecutive years.
Lastly, let's talk about store density. Between 2019-2022, LVMH's sales increased by 47.5%, whereas its number of stores grew by a much lower 15.2%, and its total square meter presence didn't grow more significantly. While this trend is extremely beneficial to profit margins, it does result in higher store density, which could potentially hurt the overall customer experience. According to the management, store density is being closely monitored and they are not seeing a need for a material expansion in the short term. The opposite is true, with many of the group's stores in China and in travel locations not fully recovered, there's still significant room for growth without an expansion.
Updated Financial Model
In the March article, I provided my near-term projections for LVMH:
For the first half of 2023, I forecast LVMH will report €40.4B in sales, €12.9B in EBITDA, and €7.4B in net income. For the full year, I expect €89.3B in sales which is above the consensus of €85.2B, and €32.5 EPS, which is above the consensus of €31.9.
Based on the Q1 results, I need to slightly adjust my assumptions upwards. For H1-2023 I now expect €42.4B in sales, €13.4B in EBITDA, and €7.7B in net income. For the full year, I now expect €92.4B in sales and €33.6 EPS. Thanks to it being a European company, consensus estimates are still much lower, with expectations of €85.8B in sales and €31.9 for EPS.
As a consequence of the quarterly adjustment, I need to update my long-term model as well. I now forecast LVMH will grow revenues at an 8.7% CAGR between 2023-2030, which is higher than the consensus of approximately 7.0% growth, but below the company's past 7-year CAGR of 13.2%. I estimate revenues will grow at this pace due to constant price increases, continued store openings, new acquisitions, recovery in the lagging businesses, and steady organic growth.
I project EBITDA margins will increase incrementally up to 31.3% in 2030. In my view, this is a conservative projection as the company already surpassed this threshold in 2021 and it's still in the ramp-up stage of some of its businesses. Plus, LVMH provided a 30.7% EBITDA margin in 2022 despite some headwinds. Its travel retail business in DFS has yet to recover, and China was in lockdown for the majority of the year. In addition, there was significant cost inflation in 2022 and some of the company's businesses with lower pricing power, like Sephora, will see margins increase as inflation eases.
This is the same EBITDA margin I forecasted in my previous article, and I am even more certain now, as the company's management spoke about its higher sales per square meter on the call. In essence, despite the immense growth during the last three years, LVMH barely increased its real estate presence (with some exceptions, like Sephora). Partially due to this trend, we saw the company's operating margin soar from 21.4% in 2019 to 26.6% in 2022. Still, as aforementioned, this trend is yet to be exhausted, as many of the company's stores were shut throughout 2022.
The bottom line, I strongly believe LVMH has a lot of room to beat my own projections, specifically on the margin side, as the group is constantly investing for growth. So, either the company will continue to surprise investors with high-teens revenue growth, or it will surprise investors with a significant margin expansion. However, I prefer to take what I view as conservative assumptions and get a positive surprise rather than the opposite.
Created and calculated by the author based on data from LVMH's financial reports and the author's projections
Taking a WACC of 7.6%, I estimate LVMH's fair value at €1078.9 per share, which equals $1186.5 per share of the company's ADR based on the current USD/EUR ratio. This represents a 29.0% upside compared to the market price at the time of writing, and a 32.0 forward P/E ratio. As I explained in my previous article, I project the company is due for a significant multiple expansion, a trend that is already happening, but in my view, not close to being over.
Conclusion
I believe many investors would find LVMH extremely attractive based on its objective numbers and extraordinary quality. Yet, investors are known for their bias. After what is now a 56.0% surge from its June 2022 lows, investors seem to automatically presume LVMH is overvalued. Although it's hard, I urge investors to ignore their bias and focus on the objective results of the luxury powerhouse. This is a group that more than doubled its revenues in 6 years while improving its operating margins by almost 10 points and it's still growing at a high-teens pace. Based on these results, paying a 26.2 P/E for such a high-quality company seems very low to me. Thus, I upgrade my Buy rating to a Strong Buy and update my price target to €1078.9 per share, which equals $1186.5 per share for the company's ADR.
For further details see:
LVMH: Q1 Numbers Show No Sign Of Slowing Down