Luxury goods, France

LVMH Moët Hennessy - Louis Vuitton S.A.

Date: 18/09/2020 Euronext Paris Stock Exchange: MC

LVMH: UNDERRATED GROWTH OPPORTUNITIES OUTSIDE OF TECHNOLOGY

We issue a buy recommendation on LVMH with a target price of 510.74€,

presenting a 23% upside potential on the closing price of 413.85€ on September 18th
2020. Our valuation is based on a Discounted Free Cash Flow to Firm Model. Our
recommendation is based on the following pillars: 1. Expanding TAM as more people
grow wealthy in Emerging Markets, 2. The strongest competitive position in the luxury
goods industry and 3. An outstanding CEO in Bernard Arnault, with skin in the game
and a near immaculate track record.

1. LVMH benefits from increasing world demand for its products.

The conglomerate derives most of its growth from Asia (excluding

Japan), which accounted for 30% of its sales in 2019. Most of the
growth within the region comes from China, although LVMH does not
disclose the exact figure. As the country quickly climbs on the GDP per
capita rankings, its youngest and more affluent consumers sport high
rates of luxury consumption. Status signaling is especially acute in
China, which paves the way for the most exclusive brands.

Outside of China, there are a host of markets for the taking in the
future. India is expected to emerge as the world’s fastest-growing
major economy and take China’s place as LVMH’s lever of growth.
Other countries, like Indonesia, Malasya or Mexico could also make a
major impact in LVMH’s bussiness. Potential markets are not solely
circumscribed to other countries: the luxury services segment can also
boost profits in the future and LVMH is making an early entry through
acquisitions.

2. LVMH is the leading company in the industry.

LVMH is the biggest company in the industry, by a wide margin. Its closest competitor, Kering,
is less than a third of its size. Size creates both operational (economies of scale, leverage over
suppliers, designers or landlords) and creative (transfer of ideas and talent across brands or
countries, cross-selling) advantages. Creating value without capturing it is worthless, but
LVMH enjoys great pricing power due to the strenght of its brands. Some of them, over 100
years old, are the byproduct of millions of dollars of investments in brilliant marketing.

Louis Vuitton and Dior are consistently classified among the top 5 luxury brands, with LV
taking the lead. There are only a handful of brands in the world able to convey such a sense of
exclusivity, high-quality and innovation. LVMH remains well positioned to take advantage of
the opportunities an economic crisis could provide, as the company gains market share in
those times and can use its financial strenght to buy competitors.

3. Bernard Arnault is a proved CEO with great feel for the bussiness.

Bernard Arnault is the CEO, Chairman and major shareholder of the company. His tenure in
the company goes all the way back to the 1980s and since then he has grown the company
through acquisitions,
 geographical and product expansion and price increases. The rest of the management team is
also very capable, and 4 of Arnault’s children have positions in the company, ensuring
succesion should Mr. Arnault retire.

BUSINESS DESCRIPTION

LVMH is the leading personal luxury goods company, operating +75 brands globally in six subsectors of the industry:
fashion and leather goods, perfumes and cosmetics, watches and jewelry, selective retailing and other activities. The
French company is primarily known for its fashion houses Louis Vuitton and Christian Dior, which earn most of the
profits of the company.

No available
data

41.2% MS
7.3% Market
Share

11.4% MS
15.7% MS

Source: LVMH 2019 annual report and Bain

LVMH follows a two-tiered business strategy: while the financial, operational and managerial capabilities are
served at the corporate level, the creative aspect remains decentralized at the brand level . The company endorses
a “product first, profitability second” mentality, which means that it focuses on seeking excellence for its products,
and profits are just a consequence of delivering value to its customers. LVMH gives full authority to its world class
designers to be as bold as necessary and to disregard trends, conventions and even market tests because, according
to its CEO, “you can’t charge a premium price for giving people what they expect”.

LVMH’s CEO is Bernard Arnault, who is also the Chariman and the major shareholder of the company . He has ran
the company for more than 30 years, adding new brands to the conglomerate when opportunities emerged. His
approach to acquisitions consists in spotting brands with deteriorated value, identifying the sources (usually
excessive distribution and poor marketing) and turning the situation around. This approach has earned Mr. Arnault
great praises, with an analyst at Jefferies saying “Bernard Arnault is possibly the world’s most succesful investment
banker”.

Graph: BCG grow matrix. Source: own.

LVMH’s growth is not solely restricted to purchases of other companies. Long-owned brands such as LV or Dior have
performed remarkably, and they remain the first and 6th world’s most valuable luxury brands. The company has
experienced high growth rates for the last decade, delivering around 10% compounded annual earnings growth in
that period. A big part of the growth has come from China, especially in the last few years as the number of wealthy
and aspirational upper-middle class citizens have shot up.

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING

SPLITTING THE WHIFF FROM THE BLING: WHAT IS FASHION?

Quoting Miuccia Prada, “fashion is how you present yourself to the world”. Since LVMH’s fashion and leather goods
account for more than 40% of LVMH’s revenues and over 60% of its profits, we will focus mainly on this area during
the report. However, jewelry, cosmetics and watches share many commonalities with the fashion category so the
reasoning and a lot of references apply.
Lumping LVMH with other fashion companies like INDITEX or Guess would be a mistake, as it would mask LVMH’s
economics and market power in a glaring way. Thus, in our view, a more accurate representation can be found in the
graph below, which can vary depending on strategic changes in brand positioning and on the economic climate as
consumers trade up or down during economic cycles.

Graph: Industry segmentation. Source: own assessment.

TRENDS ALONG THE CHAIN

Graph: Industry map. Source: own assessment.

Suppliers
Traditionally, luxury firms have recurred to third-parties to acquire the ingredients needed to manufacture their
goods, due to the cost advantage, specialization and flexibility these firms provided. However, during the last decade,
luxury firms have pursued an upstream vertical integration strategy, seizing control of dozens of these suppliers .
The goal is three-folded: to increase the quality and continuity of the products, to hamper incumbents’ access to
scarce and rare inputs and to increase their profit margins as the middlemen are removed from the equation .
Bringing suppliers in-house is therefore not only a move to manage supply risk but also a tactical change to increase
the competitive position. The breadth of these acquisitions truly reflects the commitmment of the top of the crop:
from flower, alligator and python farms to tanneries or silk providers. Securing the supply chain does not come
cheap: for instance, LVMH paid 2 billion euros in 2013 for Loro Piana, one of the world’s top cashmere makers.
There is another reason behind this move: to ensure the traceability of materials in an ever increasing
environmentally conscious society. As National Geographic reported in May, luxury fashion brands had more
than 5,600 items made from illegal wildlife products seized by the U.S. Fish and Wildlife Service at U.S. ports of entry
from 2003 through 2013. These type of news have increased scrutiny from ONGs like PETA, which has recently taken
stakes in LVMH or Kering as an attempt to confront management about these practices. Studies like that of Nielsen
have shown that 3/4 of millennials are willing to spend more on sustainable and socially conscious luxury brands
and they expect these brands to be open and vocal about it.

Manufacturers
The last couple of decades have also seen a divergence between the manufacturing models of luxury and mass-
market brands. INDITEX seized consumerism and social media to bring about the fast fashion revolution in the mass
market segment, where basic easy-to-forecast ítems are manufactured far away while trendy ítems are
manufactured closer to market. The production system was splitted into two models -slow fashion cycle vs faster
fashion cycle- as globalisation gave rise to implacable competition and the quest for efficiency as a competitive
advantage. Bringing factories closer allows companies in that segment to be more agile and react faster to changing
styles, which in turn enables higher inventory turnover and less inventory obsolescence.
This model, known as “demand pull”, has not seen its way into the luxury segment. The luxury players invert the
model into a make to stock one: top notch designers envision bold concepts and ideas which are plasmed into
designs, introduced in fashion shows a few times a year and marketed toward the public months latter . The key
here is leading rather than following, limited editions rather than availability and exploiting branding power rather
than focusing on best-in-class logistics.
Branding, however, is not the only requirement: quality needs to back up the marketing campaigns. That is why,
starting in the 1990s amid a period of stagnant growth, luxury firms were forced to regain control of production
and cut licensing royalties as an effort to ramp up the quality of the products. Furthermore, as authenticity plays a
big role in brand’s perception (“Made in France” is better perceived than “Made in China”), the most succesful luxury
brands have stayed away from offshoring.

Distribution
Third-party distribution is usually the cheaper and more flexible alternative, with no upfront investment required and
with the intermediary taking on inventory risk. However, in the luxury sphere, where goods are marketed as
exclusive, elusive and elite, companies aim to manage brand perception and the shopping experience thorugh
complete control of the points of sale. Specialty stores ensure brand’s visibility is not diluted next to others, and
during and after sales service reflects positively on the brand’s products.
The last three decades have seen the decay of on-malls department stores, as discount, off-price chains and e-
commerce have made inroads on its business. There is a self-reinforcing cycle at play: the fewer clients go to stores,
the fewer staffers are hired, which in turn compromises the customer experience by way of long lines, unfolded
piles of clothes or neglected store designs. As millenials shun this format, more accostumed older generations grow
tired of bad customer service and gear toward online and specialty stores . To make matters worse, the pandemic
has become the last nail in the coffin, as severe social distancing measures have killed foot trafic.
As the wholesale channel accounts for between 20% and 30% of sales, and given that new generations place a lot of
value on quick, trendy and highly-interactive propositions, brands are required to redirect their sales effort towards
upgrading their own stores. The Fashion Retail blog offers some ideas of how stores can cover experiential and
emotional needs, citing personal stylists or tailoring and customization services. The consumer seems to be moving
toward a more curated approach, focusing its attention on the exclusivity and prestige of the brand, which is tied
to the store’s atmosphere. Thus, brands would be best served to implement capabilities such as Artificial Intelligence
and Virtual Reality to improve the shopping experience.
E-commerce has been gaining traction in the last years, and the COVID19 pandemic has greatly sped up its adoption.
Doubts abounded and still do over its viability: will online sales deteriorate brand exclusivity? How big is the
cannibalization effect? Will going online affect profit margins? Can brands tackle the marketing and logistical
challenges of delivering high-priced goods in a low-touch channel? What is the role of e-commerce marketplaces?
As the trend remains in the early innings, the jury is still out on these issues.
However, the major firms (barring Channel) seem to be committed to investing in e-commerce channels. As for
cannibalization, e-commerce can also work as a complement to brick and mortar stores by way of showrooming (in-
store visits + online purchases) or webrooming (online reservations + in-store pick ups).
Amazon started selling high-end brands in 2012, following an entry in the private label segment. Amazon has
previously been accused of using data about its sellers to develop competing products, so some people like
Moncler’s CEO and Chairman Remo Ruffini fear Amazon could drive some brands out of the market. However, in
our view, this will not affect the strongest players, which derive their appeal through decades of identity brand
building and a reputation for quality and exclusivity, nothing of which Amazon can compete on. For this reason,
companies like Kering, Hermès or LVMH have already rejected the “everything store”, since it could undermine
brands’ cachet by its association with low-prices and basic items. The giant retailer is also notorious for allowing
fakes in its site.
Smaller niche-oriented e-commerce marketplaces have emerged, such as Farfetch, Yoox Net-a-Porter or Lord &
Taylor. Some luxury brands have decided to carry out partnerships and collaboration agreements with these players.
Should they decide to make use of their services, top dogs like LVMH or Kering have strong bargaining power over
these companies, being able to dictate the term of the deals.
Online sales are expensive: shipping and returns are costly, customer acquisition is tough and investments in IT are
continuously required. Farfetch is still losing Money after 13 years of operations, and so is YNAP. While e-commerce
is expensive, it is also imperative, as Bain expects e-commerce to make up 30 per cent of the luxury sales by 2025.
Finally, the so called circular economy is also heating up in the industry, mostly through rentals and second-hand
sales. Disruptive startups like Rent the Runway or LeTote have surged to defy the ownership model by offering more
flexibility and lower prices for aspirational consumers. Secondhand startups like thredUp or Plato’s Closet have
found their way with more environmentally conscious users, and organizations like the Worldbank have celebrated
this model as the fashion industry is responsible for 10% of annual global CO2 emissions. While we do not think of
these new platforms present a threat for now as they mostly target the middle class, we advise to stay attentive to
their evolution.

STRATEGY CANVAS

The canvas below shows LVMH’s main competitors’ performance in what we consider the most important variables
in the industry. Some firms not making the cut include Michael Kors or Richemont. Richemont only competes
tangentially with LVMH, in the jewelry and watches category, and Michael Kors’ prestige has been damaged so badly
we think it drifts between luxury and mass prestige. As the chart shows, LVMH ranks at or near the top in most of
the indicators, with Kering and Hermès following suit.

Graph: strategy canvas. Source: own assessments.

Pricing
In the luxury industry, firms seldom compete on a low-cost basis. The main battlefields are innovation and
storytelling, which encourages them to seek high quality and be bold but also to stay away from price wars.
Indeed, luxury goods are regarded as Veblen goods: as the riches pursue signaling through status symbols, higher
prices enable the signaling and, just like that, price and quality are often conflated. However, as the industry realizes
massive gross margins, there are incentives for over-production.
That was the case with the unexpected COVID19 pandemic, which has put pressure on firms to get rid of its
outmoded collections, as stores closed and shopping trips came to a hault. When this happens, luxury brands are
forced to either destroy unsold inventory or to push it through discount channels, thus risking reputational
damage. To wit, there are three types of brands: those like Michael Kors which have abused that strategy and lost
its luster, those like Prada or Burberry which banish mark-downs from their specialty stores and instead steer
unsold items to off-the-radar outlet stores and those like LV that write inventory off. Such waste, however, has
prompted criticism and governments like the French have moved to ban the destruction of unsold products by 2023,
encouraging alternatives like donnations and recycling.
Companies are also adjusting their geographical price discrimination schemes, as it facilitated arbitrage across
markets, grey markets and the chinese practice of daigou trade to avoid tariffs and consumption taxes. The
pandemic has also redirected sales from luxury hubs like Paris or Milan to China, which typically had higher prices.
When it comes to prices, LV, Dior, Gucci and Chanel stand out as the brands with the most expensive items. There
is some segmentation, however, and some goods are introduced at lower prices as as an effort to build brand
loyalty among young aspirational customers.

Graphs: Most expensive women’s products, entry price level for handbags. Sources: Vogue, Business Insider

Quality
High-quality goods are those with more refined materials, a more artisan manufacturing process, “Made in Italy” or
“Made in France” labels and ground-breaking designs. LVMH ranks again very high in this variable. Arnaul, “the
Pope of Fashion”, has been very vocal about its focus on quality, adopting advanced methods of quality control
and taking on unparalled collaborations with world-class artists of the likes of Marc Jacobs or John Galliano.
Likewise, being under the umbrella of a conglomerate enables LVMH’s different brands to use diverse manufacturing
facilities and the creation of state-of-the-art programmes and schools of artisenary and craftmanship, such as the
“Escuela de Maroquinería” opened by Loewe in 2013.
The only brand topping LV in this variable is Hermès, as its “raison d’être” lies in a deep attachment to its French
identity, with each artisan controlling every stage of fabrication from start to finish. Hermès has also been active in
acquiring suppliers as it seeks to secure the best raw materials.

Exclusivity
Luxury is the business of instilling emotions to consumers and it relies heavily on building inspiration and rapport, so
that customers fuse the brand’s unique personality with their own identity. Thus, notwithstanding what we said in
the previous section, the top quality product is not always the most succesful, because prestige and exclusivity
matter a great deal. Prestige is something delivered through history and storytelling, while exclusivity is a byproduct
of breaking the mold, a think-outside-the-box approach and a tight distribution strategy.

The general view is that there is a tradeoff between volumen-based growth and exclusivity: the farther-reaching a
brand becomes, the more betrayed its consumers feel. Mass-adoption of an hitherto scarce brand can cause its
demise. Burberry infamously became an ubiquitous brand in the 2000s, as it deviated too much from its core and
started granting more and more licenses.

Some argue LVMH’s constant pursue of expansion is hard to compatibilize with inducing a sense of exclusivity in
the consumer’s mind. Forbes contributor Pamela N. Dazinger commanded Hermès’ discrete profile as the firm
spends half the money on advertising than other brands and it does not pursue endorsements from celebrities . At
the same time, she pointed out that LV suffers from higher ubiquity and saturation. A testament of this is the
Japanese market, where it was reported that in 2012 85% of women owned a LV product.

However, LV takes a host of measures to avoid brand’s degradation. Unlike several of its peers, Louis Vuitton never
out-licenses, but manufactures through its own factories. Its products never go on sale. It does not sell to
department stores, but through its own boutiques and it always remains in control of inventory, presentation and
pricing decisions. It also takes the counterfeiting threats very seriously: in 2018, according to Entrupy, more than 50%
of all fake products identified were LV goods, which encouraged LV to launch a platform based on blockchain to
empower consumers to track the origins of the goods. Other than LV, the whole group is deeply focused on creating
exclusivity, as the art museum center built in 2006 or many of its brands’ (Thomas Pink, Fendi or Sephora)
personalization and consumer interaction services attest.

We can not forget Arnault is also very aware of the dangers of brand’s dilution. In the 1970s, he revitalized the
image of Dior, which had been compromised on account of extensive licensing and widespread distribution. Two
decades later, when LV faced the same identity issues, Arnault appointed Yves Carcelle as LV’s CEO in 1990 and she
managed to create artificial scarcity and restore the lost allure. Moreover, the conglomerate has proven for many
years its quest for growth eyes expansion to new markets, acquisitions and creation of new brands, with firms such
as beauty brand developer Kendo leading the way.

Innovation
The same way we find a tradeoff between exclusivity and growth, a similar dilemma exists with innovation and
tradition. While exclusivity finds its roots in history and legacy, disruption is the main tool to stay relevant with new
generations as they grow with different tastes and values. Here, LVMH sits heads and shoulders above the rest: its
CEO Bernard Arnault endorses its artists to be radically creative and the rest of its staff is pushed to do the same, as
the group launches a competition every year between its employees to find innovative concepts. The innovative
environment is one of the reasons why, in 2019, LVMH dethroned Google from the No. 1 position in the Universium
ranking of most attractive employers among future graduates of business schools.
In 2015, LV hosted the first software marathon in the industry to develop an app to gain better knowledge from
customers and trends. Among other notable feats we can find the swiss watchmaker Tag Heuer teaming up with
Google and Intel to develop its smartwatch, Guerlain surprising the world with Olfaplay, an audio fragance
community and the Sephora highly curated New Experience stores, which strive to offer superior customer
experience through digital apps or makeup lessons.
LVMH dedicates vast resources in this regard. Its investment arm LVMH Luxury Ventures seeks to bank on niche
brands with high potential. In 2017, it bought a 80% stake in high-tech luggage maker Rimowa and in 2019 it
invested in Madhappy (an optimistic brand promoting mental health) and Gabriela Hearst (“luxury with a
conscience” upscale bags). LVMH also jumped into the gamification experience with its partnership in 2019 with
Riot Games (creator of League of Legends game), as more teens get used to in-app virtual purchases for the avatars.
On top of this, LVMH hosts anual innovation awards for the most promising startups in the industry.
At the artistic level, LVMH is also excellent at dropping hyped collaborations: last year, the company gave Rihanna
the reins of creativity of a new fashion line called Fenty. This move comes after Rihanna Fenty launched the beauty
line with Kendo, which is said to have brought 100 million in its first 40 days.
CRS
While LVMH was the first luxury company to establish an environmental department in 1992, it is only in the last
years when it has started to ramp up its efforts on the CRS. According to the Know the Chain 2018 Apparel & Fotwear
Report, which measures areas such as supply chain standards, recruiting or forced labor policies, LVMH ranks 31st
out of 43 companies. The company has taken measures such as allocating increasing amounts to an in-house fund
for CO2 emissions and taking a more strict approach with its materials. And some of its brands (Gabriela Hearst or
Stella McCartney) have banned the use of leather and fur as they target sustainable conscious customers. Despite
the efforts, this remains LVMH’s weakest point. We believe, however, that the 2020 appointment of Helene Valade,
a former member of the board of directors of French environmental protection agency ADEME, as the new
environmental development director is a positive sign.
Kering has being named the world’s second most sustainable company across all industries and the first one in the
Luxury industry by the Corporate Knight’s 2019 Global 100 Index. Its brands capture 60% of social’s sustainable
fashion mentions and the Brand Passion Index reveals Kering earns a 96% net sentiment and a passion ratio of 72
when analyzed for sustainabiilty and ethical fashion practices, well ahead of LVMH’s 67% net sentiment. The
company is also included in the Dow Jones Sustainability World and Europe Indices, alongisde Burberry. However, as
some analysts points out, Gucci has been slow to use its environmental prowess as a branding strategy, which
could open an opportunity for LVMH.

Online

Source: https://www.gartner.com/en/marketing/research/luxury-us-europe-2019-fashion

According to Luxe Digital’s analysis, Gucci, Louis Vuitton and Chanel rank as the 3 most popular brands online in
2020. Dior sits 5th, Burberry 10th, Hermès 11th and Prada 13th. Gucci’s success among young generations place it
ahead in social media mentions, being discussed over 11 million times per month. Chanel, as popular as it may be,
has announced in several occasions its refusal to sell its clothing, watches or handbags online, not having
overcome fears of brand dilution. Hermès and Prada have also been slow or reluctant to embrace e-commerce and
social media, with Prada’s strategic marketing director saying in 2015 they would not sell online to protect its image
only to reverse course a year later.

LVMH was the first mover on the Internet in 2000, with the launch of its website “eluxury”, while other brands were
more uncertain of how it would affect their businness. The website closed in 2009 because the market was not
mature enough, and 8 years later LVMH launched a new-commerce website named after Le Bon Marché
(24sevres.com), which sells more than 150 luxury labels, including many outside of LVMH. It has the strenghts of the
more established rivals (fast delivery times, stylists-on-demand or glossy packaging) plus a more visual outlook
than its competitors.

LVMH is also learning along the way through investments in e-commerce players: in 2018, it invested in the
streetwear and sneaker e-commerce website Stadium Goods and in the fashion search platform Lyst, a digital
platform that uses Machine Learning and AI to offer personalized style recommendations of over 11,000 designers
and stores to its shoppers. Owning these sites gives LVMH a data advantage, being able to track customers
behaviour online and how brand’s perception evolve and then use it in its favor.

Remaining consistent with its approach to decentralize marketing decisions, the Apple alumni and LVMH’s Chief of
Digital Officer Ian Rogers stated that online implementation would be assessed on a case by case basis and that
online sales would count with the same high level of customer service that in-person sales. Thus, LVMH takes the
active and curated route: from videochats with parisian stylists to WeChat and Whatsapp sales and customer service
centers to process customers’ enquiries.

Kering stands at the top, adopting WeChat early on, focusing on editorial content and bearing ample merchandise
range. Unlike LVMH, Kering followed a more centralized approach and outsourced its online retail platforms for all its
brands but Gucci through the leader e-commerce platform Yoox Net-a-Porter in 2012. In 2018, the firm announced
the end of the Joint Venture to set up its own online shop by 2020. Kering, however, may struggle to compete with
multi-brand e-tailers like YNAP, Farfetch or 24sevres.

China
According to Gartner L2’s digital IQ index luxury China 2019, LV remains the strongest digital brand in the country,
owing its success to its streetwear products, WeChat success of popular sneakers and the announcement of Kris Wu
as its global ambassador. Gucci ranks at number 4, with its products having the highest visibility on Farfetch and
underlining its expertise on online marketing and the use of anti-frauding tools and customization. Kering has thrived
in showing the chinese it understands its culture and history, and the overall differences in their products. Burberry
sits at a distant 9th place.

A proprietary ranking elaborated by Bernstain that measures brands’ ability to capture spending by chinese shoppers
confirms LV’s achievements in the country, as the brand sits at the top of the list right below jewerly and watch
makers.

Source: https://www.wsj.com/articles/luxury-brands-get-hyperactive-on-chinese-social-media-11596192796

LV became a pioneer in the chinese market when it opened its first store in 1992, while the country was freeing its
economy and opening up to other countries. Arnault’s prescient outlook allowed LV to gain foothold earlier than
his competitors in a country that was developing rapidly. In 2011, it became the first comercial brand to partner
with the National Museum of China for an exhibition of its luggage and bags, which gave it even more exposure.
Likewise, LV bécame the first luxury brand to partner with the increasingly popular chinese fashion social shopping
platform Xiahongshu in 2019, which has +200 million of users and 70% of them were born after 1990. Earlier this
year, LV also became a trailblazer by livestreaming from Shanghai’s flagship store, climbing to the top of the hour
list. While the experience had drawbacks (some people felt the setting was too low-end and lacked prestige),
livestreaming with celebrities can bear fruits: Jo Sun, a chinese influencer with 700,000 followers can sell around 80
items in 3 hours, almost doubling what a top performing luxury store can achieve in a whole day. LV also secured Fan
Bingbing, the most famous actress in China, as its brand spokesperson in WeChat and Weibo.
Hermès, as usually, has pursued a lower-growth lower-risk strategy, as it opens just one flagship store per year and
has avoided partnering with celebrities or marketplaces. Burberry has introduced an interactive and futuristic
approach, with stores like that in Shenzhen where it uses challenges and to games reel customers in.

Group

The luxury goods industry has high fixed costs, since a big chunk of the outlays come from marketing, rent, logistics
and production expenses. Therefore, the economies of scale at play give the biggest players an edge over smaller
ones. A bigger size also provides higher leverage in negotiating with landlords, social media platforms, designers or
celebrities.

But cost-saving is not the only advantage of getting bigger: HBR analyzed the drivers of performance of more than
350 fashion brands from 2000 to 2010 and found that group-affiliated brands are prone to be more creative, as
workers seeking different experiences (be it abroad, in a different department or a different brand) can find these
within the group. The broad range of possibilities within a same conglomerate attract the most talented graduates
and outsiders. The groups also transfers processes, ideas and knowledge across products and markets and in doing
so a manager at a established brand (for instance, Dior) can get a job in a fast-growing brand (for instance, Kendo)
and use its expertise to consolidate it in the market. Asides from this, the group may use the power and earnings of
its biggest brands to give exposure to the up-and-coming brands.

In this aspect, LVMH stands way ahead of Kering, with more than 3.5 times its assets. The leading French
conglomerate owns a beauty retailer (Sephora), a chain of airport shops (DFS), a department store (Le Bon Marché)
and even a financial daily (Les Echos). This structure can therefore open the door for cross-selling or collaboration
opportunities among bussinesses.

Services
It is widely regarded that new generations value experiences over ownership of goods. There are a bevy of
explanations: from disillusion with status quo to the growth of the sharing economy or posturing on social media. In
this category, while other firms have an annecdotal presence (Gucci owns some restaurants and Prada has a pantry
shop), LVMH is the king.
Last year, LVMH completed the acquisition of Belmond Ltd., owner of luxury hotel, restaurant, train and river cruise
propierties all around the world. This move increases LVMH’s presence in the hospitality world, where it already had
share with the Cheval Blanc maisons and the Bvlgari hotels. This move helps to diversify its revenues base at the
same time it taps into a new growth area with opportunities of cross-selling . One can only imagine hosting in a
Belmond hotel and ordering a glass of Don Perignon while wearing a Dior dress.

CORPORATE GOVERNANCE

TRACK RECORD

The story of LVMH can not be separated from the man in charge: Bernard Arnault. In 1985, at 35 years old, he
abandonned a job in the construction industry to buy Boussac (the bankrupt parent company of Christian Dior)
from the French government. Showcasing outstanding visionary skills, managerial abilities and an unparalalled
ambition, he sold off everything but Dior and went on to build the global powerhouse known as LVMH. In 1989, he
gained control of LVMH through a hostile takeover, ousting the LV president from his family company, which
earned him the nickname “the wolf of cashmere coat”. He kept on acquiring firms such as Givenchy in 1988, Berluti
and Kenzo in 1993, Céline in 1996, Sephora in 1997 and Tag Heuer in 1999, but he failed to take control on Hermès
and Gucci.
However, the ship was not always running tight. In 1987, his attempt to develop Christian Lacroix’s brand failed as he
overfocused on short-term performance and curtailed designers’ creativity, which damaged the brand’s identity. He
also went on a buying frenzy in the second half of the 1990s which swelled sales but profits slipped as a
consequence of overpaying for brands. This undoubtdedly taught Arnault two valuable lessons for the next
decades: luxury brands need the passage of time to win customers’ hearts and LVMH should not stray too far away
from its core products, misteps competitors like Burberry or Kering experienced several years later. Realizing these
mistakes, in 2002, Arnault began to focus on growing its star brands and furthered implemented integration
strategies among the smaller brands, aiming to cut costs and to position them for future growth.
GOVERNANCE
The Executive Committee of LVMH is composed by 13 members, with Bernard Arnault at the helm as both
Chairman and CEO. Other significant members are Sidney Toledano (Chairman and CEO of LVMH Fashion group with
over 25 years at the firm and an integral part in Dior turnaround in the 1990s), Antonio Belloni (chairman of the
Executive Committee and the Group Managing Director, with almost 20 years of experience) and Chris De Lapuente
(CEO of the fast-growing Sephora retailer since 2011 and the youngest president in teh history of P&G). These are
competent people with lots of years of experience and spotless resumés.

As for the Board of Directors, there are 15 members, with 10 of them being independent. The three committees
(Performance audit, Nomination and Compensation and Ethical and Sustainable Development) are chaired and
entirely composed by independent members, which have experience in broad areas such as banking, consultancy,
teaching, philantropy, politics and bussiness. These members serve in several boards and have a high net worth so
they are not in to enrich themselves at shareholders’ expense. We must highlight the presence of Diego Della Valle,
which is also the Chairman of italian leather goods company Tod’s, as well as Arnault’s two children Delphine and
Antoine Arnault.
While several studies reveal that family-controlled firms outperform other companies in metrics such as revenue
growth or innovative output, we understand those who question the existence of nepotism. However, in LVMH’s
case, we can confidently assert Delphie and Antoine are fit to the job. Delphine Arnault, which serves both in the
Executive Committee and in the Board of Directors stands as Executive Vice President of LV and learned product
development for years as John Galliano’s right hand. Antoine Arnault is the head of communication and image of
the group, the chairman of Loro Piana and the Chief Executive of Berluti. He was behind the succesful “Core
Values” campaign which launched in 2007 and featured celebrities posing with Vuitton bags.
INCENTIVES
Not only does LVMH’s top management shows an outstanding track record, but they have skin in the game too. The
Arnault Family Group owns 47.35 % of share capital and 63.4% of voting rights of LVMH. Directors Antonio Belloni
and Nicolas Bazire hold 542,077 and 121,570 stocks, with the rest of the Directors required to hold at least 500 of
them. Morever, the company has not set up any option plans since 2009 and we view this as a positive sign of
shareholders’ wealth preservation.
LVMH’s corporate structure is complex. The Arnault Family Group owns 41.15% of share capital through Financière
Jean Goujon, which is a wholly owned subsidiary of Christian Dior whose main activity is to hold LVMH securities. The
other 6.20 % of share capital is owned directly by the Arnault Family Group. As LVMH is partly owned by Christian
Dior and Christian Dior has 2.45% of its share capital as free float, investors could feel tempted to search for
arbitrage opportunities when price divergences occur. However, french squeeze-out rules allow the Arnault Family
Group to take Christian Dior private at a price an independent expert deems as fair so we our advice is to be careful.
 Source: LVMH’s universal registration document FY 2019

CAPITAL ALLOCATION
As for its capital allocation choices, the firm prefers dividends over buybacks. During the past 5 years, LVMH has
distributed an average of 5.6% of its sales in the form of dividends, and only 0.4% directed to buy shares back. The
company has spent an average of 6.2% to capital expenses and 3.9% to acquisitions. While capex is fairly regular,
hovering around 5.5% and 7%, the acquisitions are contingent on whether or not LVMH can spot a favorable target.
For instance, in 2015, 2016 and 2018, the firm actually made divestments on a net basis. This showcases Mr.
Arnault does not seek growth for the shake of it and he has no qualms about shedding underperforming brands: in
2003, LVMH divested from Michael Kors and in 2016 Donna Karan was sold off.

LVMH announced in November last year that it would acquire Tiffany for $16.2bn, at a 16 times trailing
EV/EBITDA. The acquisition would double LVMH’s share in the hardlines segment placing it at a 18 %, higher that
Richemont. We believe Tiffany has been badly ran over the last years, having lost its prestige and sophistication by
way of forgetting its american heritage, struggling to market to new consumers and lowering its prices . Last year, it
increased its prices by 10% in America and Europe while volumen decreased at 12% and 10% respectively.
This is a sign the Veblen effect might be damaged, as the company derives a great deal of its sales through items
with a price a little over $500, a considerably higher percentage than rival brands like Cartier. Thus, while Richemont
has sported a 5.15% compounded anual sales growth rate pace for the last 5 years, Tiffany’s sales have remained
flat-ish at a 0.83% CAGR. Arnault is confident he can turn the brand around and its rationale is correct: jewelry has
strong barriers to entry, it is a high-growth sector and Tiffany’s hiccups can be surmounted with strategic shifts
that include better marketing and a push to its digital sales channel.
This would certainly not be a first for LVMH: in 2011, it acquired Bulgari at a higher 28.2 EV/EBITDA ratio. The firm
was suffering unstable sales since the mid-2000s with thin profit margins (about 10%), as it deviated from its core
business and ventured into fragances and male watches. Arnauld made some staff changes in the organization and
revamped the product assortment, branding and store layout. According to analysts, Bulgari has tripled its profits
since the acquisition due to price hikes, cost-cutting on expensive materials like gold and economies of scale effects.
On September 9th, LVMH backed out of the Tiffany deal, arguing that the French Foreign Minister had requested
the company to call the acquisition off on account on US-France trade disputes. LVMH also cited mismanagement as
a material adverse event, since the american company paid its full dividend during 2020 despite suffering losses.
According to sources from the WSJ, the letter was not binding but merely a suggestion. LVMH seems to face long
odds of walking away from the deal, as Delawere courts have only once before ruled in the acquirer’s favor. In our
view, Arnault is attempting to play hardball and get a cheaper price in a coronavirus-hit market. Be it as it may, we
think the acquisition will be brought to fruition by the beginning of 2021 at the arranged price.

VALUATION

We issue a BUY recommendation on LVMH with a target price of $510.74, representing a 23.41% upside from the
closing price of $413.85 as of September 18th 2020. Our target price calculation is based on a 3-stage Discounted
Free Cash Flow to Firm model which projects 9 years of cash flows. Given COVID’s impact, 2020 figures have been
affected by the closure of stores and subdued tourism. In 2021, 2022 and 2023 we project slower than recent growth
and from 2024 on we see the company growing at a faster clip until it reaches terminal growth in 2029. As for
LVMH’s growth in perpetuity, we have used an EV/EBIT exit multiple approach.
DCF ANALYSIS

EBIT Margin
 Source: LVMH annual reports.

LVMH’s operating margins have remained very stable during the last decade, averaging 19.82% and ranging between
a low of 17.72% in 2014 and a high of 21.8% in 2011.

For 2020, we agree with analysts’ estimates of 15.9% for the whole year, up from a 9% margin experienced in the
first half of the year but still below the 21% achieved last year. LVMH’s margins have fallen more than peers like
Kering, which outsource the production and distribution of many of its products. While this has proved benefitial in
the short-term, we believe players dependant on small cash-strapped suppliers may have to provide them financial
assistance or rearrange their supply chains.

We see a gradual recovery from the 15.9% estimated in 2020 to 21% in 2024 and that level being sustained into
the future.

As for Tiffany, we forecast a 9% margin for 2020 (slightly below expectations) and a gradual recovery from that level
up to 19% starting in 2024. A 19% margin represents 200 basis points above its 2019 margin, which is conceivable
under Arnault’s command.

Revenue growth

Source: LVMH annual reports.

*2020 (sizable decline)

LVMH experienced a 27% decline in sales in the first half of the year. HSBC has forecasted luxury goods sales to fall
17 per cent this year, while Bain has predicted a decline of between 20 to 35 per cent. As for LVMH, we are
confident the company can beat the industry projections given its strong digital presence, the strong momentum
of its brands and the resilience of the accesories category, which account for a big part of LVMH’s sales. As a result,
we forecast a 15% decline in sales.

For Tiffany, the consensus between analysts is a 20% decline in growth and we agree with this number. For the
remaining of 2020, we see the firm as an independent company, but we expect the acquisition to be completed in
the beginning of 2021.

*2021/2022/2023 (smaller growth than pre-covid)

The International Air Transport Association (IATA) expects air travel to return to previous sales by 2024 so given the
industry reliance on air travel we think it is prudent to expect a slower growth period during three years before the
situation comes back to normal and growth picks up. This also allows us to account for weaker demand that may be
caused by the economic crisis, as the aspirational upper-middle class may be affected.

During these three years, we forecast a rebound of 15% growth in 2021 and an average growth rate of 7% for 2022
and 2023, with the following factors driving our assumptions:

- Savings from tourism or dining outside may be channeled through other forms of discretionary spending,
namely shopping. According to the Institute for Fiscal Studies, the richest fifth of british households drive
1/5 of their expenses on these categories.

- LVMH usually gains market share during crisis. Aspirational buyers who are forced to budget their
purchases focus their attention on the highest-quality, most classic and exclusive brands, disregarding
lesser brands. This means more opportunities for LVMH or Hermès at the expense of Prada or Burberry.

- While the financial effects of COVID19 have not rolled out yet, during the 2008-2009 financial crisis LVMH
showed impressive resilience, in sharp contrast with the overall market. Its 2008 sales saw 4.32% growth,
while in 2009 its sales only decreased by 0.81% (versus a 1% and 8% decline respectively for the industry).
In 2010, the economic recovery contributed to a 19.16% growth.

- LVMH has a strong digital presence, which can offset in-store sales declines. The firm has also a lower
dependence on department store sales than its peers. With the coronavirus thriving in closed packed
spaces, those brands more exposed to the wholesale chanel suffer more.

A 7% rate is below analysts’ estimates, and LVMH organic sales would recover in 2022 rather than in 2021 as
projected by Bernstein. We feel it is best to be conservative in uncertain times.

Graph: EPS estimates. Source: The Economist.

As for Tiffany, high-end jewelry experienced high growth before the crisis, buyoed by sales in Japan and China. In
2018, the sector grew at a 7% clip, while Tiffany’s grew at an inferior 6.52% rate. In 2019, Tiffany’s experienced a
negative growth of -0.41% vs a 12% gain for the industry. Under more competent management, we believe Tiffany
could reach its potential through volumen-based growth, price increases and a push to its watches segment, which
is a meager fraction of that of its competitors.

However, Tiffany’s problems could take time to solve so we forecast 12% growth for 2021 and 6% growth for 2022
and 2023. Tiffany would recoup its pre-pandemic revenues in 2023, as we are accounting for the fact that Tiffany
derives a considerable portion of its sales from weddings and the following years might see more postponements.

*2024-2029 (sustained recovery)

LVMH had momentum going for her prior to the pandemic. While growth rates had slowed since 2018 for the rest of
the industry –mainly due to lower visits of chinese to Hong Kong- LVMH achieved jaw-dropping growth rates of 9.8%
in 2018 and 14.6% in 2019. We believe LVMH will be able to resume most of this growth from 2024 onwards, aided
by tailwinds from Asia and success in unlocking Tiffany’s brand value.

We foresee a 8.5% growth rate for LVMH in this period (below its last 5year CAGR of 11.9%), with China resuming its
strong growth. China emerged unscathed from the previous financial crisis and, despite pessimistic reports that a
crackdown on corruption could pose a threat to luxury goods, the country has delivered. While economic growth is
bound to slow the bigger the country gets, we still see the chinese driving a sizable portion of growth in these years
as consumers’ penchant for luxury goods started quite recently. Moreover, chinese luxury consumers are two
decades younger and less indebted than their counterparts in Europe and the US, and have entered the market
before.

As for Tiffany, we see 5% growth in the period. Its transition into being a part of LVMH would be completed and the
brand would share the same principles and strategies of the other brands in LVMH’s portfolio.

Terminal value

For the terminal value, we have used a final exit approach due to the difficulty of forecasting LVMH’s growth rates as
far in the future, especially considering a large part of the growth comes from emerging countries. The multiple we
have chosen is EV/EBIT. Using Kering, Hermès, Burberry and Prada as proxies for the industry, we have applied to
LVMH’s 2029 EBIT the industry’s weighted 2019 EV/EBIT average of 25.93. The reason we have used the 2019
EV/EBIT multiple is that lockdowns have depressed the 2020 EBIT part of the equation, while market capitalizations
have hold ground or even increased. Thus, the 2020 EV/EBIT multiple would be too high due to the aforementioned
distortion.

LVMH’s terminal value spans around 16 years, and accounts for 61.14% of the whole valuation . Converting this
number into a revenue growth rate, we see a 3.79% revenue growth rate during the next 17 years. Given LVMH’s
increasing exposure to the fastest-growing regions, its dominance in the industry and its sustained record over time,
we believe the stated growth rate is more than plausible.

LVMH has a huge run way to grow: when China’s economic growth slows down the road, other largely populated
countries like India, Indonesia, Bangladesh or Pakistan could emerge as new driving forces for LVMH . There is also
an entire continent (Africa) where the luxury goods market is non-existent, and as countries develop and citizens
grow wealthy, it is only a matter of time until LVMH grabs part of the market.
 Source: The State of Fashion 2020

Tax rate

LVMH’s effective tax rate was 27.4% in 2019. However, LVMH’s long-term tax rate should be equal to its marginal
rate as taxable and reported income converge over time. Therefore, between 2019 and LVMH’s terminal year we
have progresively adjusted the rate down until LVMH’s tax rate coincides with its marginal tax rate (25.59%).

Reinvestment needs

Reinvestment needs comprise changes in working capital, net capital spending and acquisitions.

Prada, Todd or Ferragamo are some of the brands that have struggled during the pandemic, and their problems
could be solved if LVMH was to offer financial muscle in the form of an acquisition. While predicting which
competitors could end up engulfed by LVMH is feasible, projecting those acquisitions into the analysis is almost
impossible and consequently beyond the scope of this report.

Regarding Capex, lesser brands like Gucci or Burberry have a larger store count in China than LVMH. Should
international travel bans prolong or chinese preferences change towards domestic shopping, LVMH would have to
accelerate capital spending towards building new stores as the chinese replace european for at-home purchases.
After all, more than 2/3 of chinese purchases were made outside China last year. Besides, as the shift to e-commerce
gains pace, LVMH would have to build new capabilities in the form of fulfillment centers, warehouses, etc.
 Graph: Number of stores in China. Source: Financial Times

For 2021, we included as reinvestment the cost of acquiring Tiffany and LVMH’s 5-year average of NET CAPEX and
working capital changes (2.2% of its sales). For 2022 and 2023, we think LVMH’s reinvestment needs could increase
to 8% as more money is funneled into adjusting to the new paradigm. After 2023, we estimate reinvestment needs
could remain at a 6.5% level, a bit over LVMH’s 5-year average of 6%.

WACC

We arrived at a cost of capital of 5.51% for 2021, and a terminal cost of capital of 6.11% starting in 2029. Between
these two dates, the cost of capital increases progresively as the firm reduces its debt until it reaches its D/E 10-
year average. The computation of cost of equity is based on the CAPM while the firm’s cost of debt is estimated by
using a synthetic rating approach.

SENSITIVITY ANALYSIS

Due to the large weight the Terminal Value bears in our calculation, we have calculated how LVMH’s target price
would change were the Terminal WACC and the Exit EV/EBIT Multiple to change. For LVMH’s terminal cost of capital,
we have increased and decreased the number by 0.5% and 1%, while for the exit multiple we have increased and
decreased the ratio by 2 and 4.
The first graph shows the results in terms of target price and the second graph represents the upside of the different
assumptions. In a best-case scenario, there is an upside of almost 50%, while in the worst-case scenario the upside is
practically null. In any case, there is no downside given these assumptions.

CATALYSTS AND VARIANT PERCEPTION

The probable causes of the divergence between LVMH’s value and its price may be caused by the markets’
coronavirus jitters, an excessive focus and momentum on american high-growth tech companies at the expense of
less exciting sectors and the fact that LVMH does not seem cheap by looking at traditional financial ratios. Moreover,
as political issues such as the 2020 US elections, trade wars or Brexit draw a big chunk of the markets’ attention, the
growth of emerging markets in the future is not adequatly covered or factored in.

As for catalysts, we can find:

- Higher focus away from tech and onto more traditional sectors of the economy.
- The realization that LVMH’s growth opportunities are superb both in the short and the long term.
- Success in making Tiffany a relevant brand again.
- Well-executed acquisitions or development of brands with potential.

MULTIPLE ANALYSIS

Before diving into the relative valuation, let’s look

at a few key metrics from LVMH and its main
competitors.
 Graph 1: Revenues growth since 2010. Graph 2: Earnings growth since
2010. Source: Annual reports.

As depicted in the graphs from above, Hermès was the highest

growth company in the industry in the past decade, with
LVMH following suit. Both firms have seen strong and stable
growth, while Kering has been more unstable and Burberry
and Prada have stagnated or shrinked. The stated growth is
not organic, but total, so it does not account for the
acquisitions and divestments made by these firms. Most
notably, LVMH acquired firms such as Rimowa or Loro Piana,
while Kering divested from Puma in 2018 as management
shifted its focus onto luxury goods. Calculating total growth is
useful, since it allows us to take into account size advantages.
Besides, unlike in the 1990s, LVMH’s revenue growth and
earnings growth have not decoupled so the acquisitions undertaken have been value accretive.

In any case, we must point out that given how diversified LVMH is in terms of product assortment, slower growing
categories such as watches have weighted down its top and bottom line. However, having a presence in all the
luxury goods subsectors allows LVMH to take advantage of potential future growth should these categories
experience a boom in the future.

Graph 1: Gross margins. Graph 2: Operating margins. Source: annual reports.

As for margins, it is Hermès again who shows the best margins in the group. After focusing on luxury goods, Kering
has shown growth in its operating margins, as expected. Again, while LVMH’s margins are lower than Kering and
Hermès, we must note those firms are more focused on higher-margin bussinesses such as leather goods, while
LVMH has operations on beauty retail (e.g. Sephora) and other segments where a high asset turnover instead of
high margins can be key for achieving excellent returns on capital.

We use the multiples analysis as an indicator to assess how fairly valued the company is based compared to its
peers. Using commonly accepted ratios of P/E, PEG and EV/EBIT, we arrive at the conclusion that LVMH trades at a
discount to the market. For the composition of the peer group, we chose LVMH’s main competitors minus Chanel as
the firm is privately owned. In terms of EPS, the group has an average trailing P/E of 31.4 (vs LVMH’s 29.1), but a
forward P/E ratio of 46.41 (vs LVMH’s 51.3). LVMH also looks cheap on a forward EV/EBITDA basis (23.2 ratio for the
group vs 21.4 for LVMH) and on a PEG level (3.8 for the group vs 2.3 for LVMH). As a consequence, we confirm that
LVMH remains notably undervalued.
 Source: Bloomberg. Graph: Multiples valuation ratios.

In fact, taking a look at the graph we can state only Kering and Burberry are cheaper from a quantitative
standpoint.

Tethering the qualitative analysis performed throughout the report with the ratios from above, we contend that:

- Kering appears to be the cheapest stock given the company’s recent performance. The company has shown
tremendous growth rates in the last years ever since Alessandro Michele was appointed Gucci’s new
creative director in 2015. However, some risks weight the firm down: Kering is too dependent on Gucci
and it is less diversified in terms of brands and categories than LVMH. Furthermore, Gucci started showing
slowing momentum last year, and the trend has continued during the 2020 pandemic where it has lost
market share to Louis Vuitton and Dior. Gucci’s eclectic and hip style has enamored millennials, but the
brand has yet to proof it can sustain its success in the long-term.

- Hermès’ stock has outperformed the luxury pack in the recent past, and it sports the highest margins and
quality in the industry, which at first could explain the higher multiples. However, the company is a digital
laggard, with small presence on Instagram and fewer online sales. While Hermès has succeed with its
discrete and timeless approach, the company is not as well-positioned as LVMH to disruptions in the
industry. Moreover, the company is not exactly well aligned with young consumers, as according to Citibank
only a quarter of its sales are directed to this segment.

- Burberry has entered the pandemic right in the middle of a its turnaround plans. The brand has struggled
in repeated occasions during the last decades so a cheaper valuation is granted. It is also less diversified in
terms of products and brands.

- Prada is in a similar situation to Burberry, with stagnant sales, poor online capabilities and slow
penetration in China.

RISKS

International travel bans

New outbreaks spiralling out of control in some regions could force governments again to take strict measures as
travel bans or lockdowns, and the industry relies heavily on tourism. This would force the entire industry to revamp
not only its distribution chain, but the manner in which new collections and styles are marketed to consumers.
Supply chain disruptions

The supply chain risks another bout of tariffs hikes if Donald Trump is reelected and the trade war between the US
and China escalates. Desperation arising from crisis may entice other governments to implement protectionist
beggar-thy-neighbour measures as an attempt to drive down unemployment rates.
Economic crisis

The economic effects of COVID19 might linger for years. While LVMH participates in a recession-resilient industry due
to the vast wealth of most of its customers, we can not discard sweeping reforms in the fiscal system of advanced
nations. The political landscape across western countries has become increasingly polarized, while inequality has
reached high water marks. As calls for a more progressive system mushroom, rises in the capital gains tax or
corporate income tax could affect LVMH clientele.
As far as developing nations are concerned, economic woes could harm luxury consumption rates by the aspirational
upper-middle classes. In China, for instance, the number of High Net Worth Individuals has growth at 12% annually
from 2016 to 2018, according to a report by Bain. A crisis could put a damper on LVMH overseas expansion, which is
currently a very important growth lever for LVMH.
Cultural developments

Just as the 1960s saw the expansion of the hippie culture celebrating experimentation and alternative lifestyles, the
luxury industry could be threatened as cultural paradigms evolve over time. We currently live in a self-obsessed
and superficial status-driven society, a situation that is amplified by the use of social media. The luxury industry has
thrived on this, but a reversal of these patterns could be overdue. Furthermore, Millennials and the Z generation
seem to pay more heed to sustainability, services over goods and the so called Circular Economy . Other cultural
shifts include a work-from-home scenario and the ever-increasing penetration of e-commerce channels or the
circular economy, which could lead to overabundance of LVMH merchandise.

APPENDIX: VALUATION

TERMINAL VALUE
TAX RATE

REINVESTMENT NEEDS

WACC

Cost of Equity

*Risk free rate

For the “Others” region, we used the average risk free rate of Latin America since the rest of the continents are already
represented and we do not think Africa is a big part of LVMH’s bussiness as of now.

*ERP

*Beta

We have used the average of LVMH’s peers and unlevered the number to lever it up again and get LVMH levered B.

Cost of debt

*Target debt