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LVMH - another good quarter

George Salmon | 25 July 2019 | A A A
LVMH - another good quarter

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

LVMH Moet Hennessy Vuitton SE Euro.30

Sell: 689.50 | Buy: 689.70 | Change -4.60 (-0.66%)
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LVMH has delivered revenue of EUR25.1bn euros in the first half of 2019, up 12% on an underlying basis. With Q1 revenue rising 11%, this represents a strong end to the half.

Operating profit increased 14% to EUR5.3bn, with the interim dividend up 10% to EUR2.20.

The shares rose 2.3% on the news.

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Our View

Bernard Arnault took over as Chairman and Chief Executive of LVMH in 1989. Since then, through home grown success stories and a sprinkling of acquisitions, LVMH has grown into the world's largest luxury goods group. Products range from wines to watches, with the unifying factor a focus on the very wealthiest customers.

Luxury is already a multi-billion dollar industry, and is expected to grow by around 4.3% a year to 2025. Wealthy customers are prepared to pay handsomely for the latest must-haves, keeping LVMH's margins over 20%.

Cash generation is strong as a result - which in turn helps support the dividend. LVMH has grown or held the payout for over 20 years and we're hopeful this good track record can continue, although there are no guarantees. The prospective yield is 2%.

Given LVMH's French roots you'd be forgiven for thinking the focus is more St Tropez than Shanghai, but Asia is the group's most important geography. Not only is it the biggest, thanks to rapid wealth creation in the East, it's the fastest growing.

However, ongoing trade wars and a possible crackdown on the shady world of the daigou bring a few question marks. Daigous fit somewhere between a personal shopper and luxury trader. They buy products in the west, taking advantage of lower costs or favourable exchange rates, before transporting them back to their own customers in China. LVMH doesn't say how much business goes through this channel, but a tougher stance from the authorities would be enough to impact sales.

As things stand, the market is holding up well, helping the Fashion & Leather goods division continue to grow at an impressive rate.

That helps explain why the shares trade at a premium rating of 24.8 times expected earnings. We think this shows that just like the products themselves, quality comes at a price.

The fact this rating is significantly fuller than it has been in the past poses a risk to investors. If the group can't satisfy the market's thirst for earnings growth, the rating could come down a notch or two - bad news for the price.

Still, the group seems nicely placed for the long-term. It's well-established in its core geographies, has oodles of pricing power and is taking its aspirational brands into exciting growth markets.

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Half year results

Growth was broad based, with Asia, the United States and Europe, particularly France, which saw a rebound in the second quarter, all delivered strong performances.

Each of LVMH's 5 houses generating underlying growth, with the group's largest division, Fashion & Leather Goods leading the way. A 'remarkable' performance from both Louis Vuitton and Christian Dior helped underlying sales rise 18% to EUR10.4bn, with profits up 17% to EUR3.2bn.

Selective Retailing, which includes beauty business Sephora and luxury travel retailer DFS, saw sales rise 8% to EUR7.1bn, with online sales particularly strong. DFS sales were strong, but demand in Hong Kong and Macao did wane towards the end of the period. Half year profits rose 17% to EUR714m.

Underlying Perfumes & Cosmetics revenue rose 9%, reaching EUR2.9bn, with flagship names like Dior, Givenchy and Guerlain again standing out. Profits increased 6% to EUR387m.

Good growth in the US and China helped revenue in Wines & Spirits rise 6%, with performance skewed to the first quarter. Half year profits rose 6% to EUR772m.

Momentum in Watches & Jewellery wasn't as strong, with sales rising just 4% to EUR2.1bn and profits increasing 4% to EUR357m. However, the group said recent launches had been well received.

Free cash flow dipped from EUR2bn to EUR1.7bn as the repayment of leases more than offset the improved profitability. The group said net debt rose to EUR8.7bn, principally due to the acquisition of Belmond.

Looking ahead the group plans to increase its footprint in growth markets, while managing costs.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.