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LVMH - cautiously confident outlook for 2021

Sophie Lund-Yates, Equity Analyst | 27 January 2021 | A A A
LVMH - cautiously confident outlook for 2021

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LVMH Moet Hennessy Vuitton SE Euro.30

Sell: 626.50 | Buy: 628.30 | Change 12.10 (1.96%)
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LVMH reported full year revenues of €44.7bn, with a 16% decline in organic revenues. However, sales shrank just 3% in the final quarter. The declines reflect restrictions on international travel and store closures, with Asia and the US seeing a stronger recovery than Europe in the second half.

Operating profit fell 29%, to €8.0bn as cost savings failed to offset lower sales.

The group said: "LVMH enters 2021 with cautious confidence", and a dividend of €4.0 per share was announced. That takes the final dividend for the year to €6.0 per share.

The shares rose 1.5% the morning after the announcement.

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Our View

CEO, Chairman and 47.5% shareholder Bernard Arnault has guided LVMH group through a lot in 30 years, but nothing has come close to coronavirus.

The group is faring better than we'd expected. LVMH's large, swanky (read: expensive) store estate means it's not a very flexible business. High fixed costs were a concern when swathes of stores were forced to close, but the operating margin dilution has been fairly mild.

That's a result of better-than-expected cost savings, and a very welcome upswing in demand in key markets like China and the US. We had been worried that the group's blockbuster brands like Louis Vuitton and Christian Dior would really continue to struggle - with the VIP experience customers demand being something online sales just can't replicate. But we've been impressed by the trading here.

We should also note the high net-worth of LVMH's customer base means it should be able to weather an economic downturn better than some. This demographic tends to be less sensitive to economic shocks or recessions, meaning in store spending should be more reliable if things take a turn for the worst.

That's not to say LVMH is home and dry. It's pretty impossible to map exactly where demand levels are going to settle. Rolling lockdowns in Europe are keeping a lid on revenue growth, and the group also relies heavily on international travel with airport and hotel spending crawling to a halt. It's unclear when this side of trading is expected to normalise, but it's likely to act as a drag for some time.

That means it's important to look at the financial strength of the company. That leads us to the deal to buy Tiffany & Co.

Having called Tiffany's prospects "dismal" in light of the effects of coronavirus, and trying to walk away from the deal, LVMH successfully negotiated a lower price tag. If Mr Arnault's earlier assessment of Tiffany is correct, this will see LVMH's balance sheet stretched to acquire a potential burden, rather than a boost. With net debt equal to 2.1 times profits, the balance sheet isn't in dire straits, but debt is higher than we'd like. For now we'll have to wait to form our final opinion of the deal until we get a clearer picture of the strategy for the newly acquired brand. This is likely to take some months.

More generally we continue to have faith in LVMH's unrivalled stable of brands and more resilient customer base. However, plenty of uncertainty remains around sales trajectories and the success (or not) of the costly Tiffany acquisition. The current share price valuation makes it sensitive to a fall if either of those key issues don't go as expected, so for now we'd suggest investors exercise caution.

LVMH key facts

  • Price/Earnings ratio: 34.2
  • 10 year average Price/Earnings ratio: 19.8
  • Prospective dividend yield (next 12 months): 1.3%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year results

The group's largest division, Fashion & Leather Goods, was the best performer over the full year, with organic revenue falling 3% to €21.2bn. There was double-digit growth in the second half, boosted by China and the US. Strong cost control meant profit from recurring operations declined at a slower rate than sales, falling 2% to €7.2bn. Louis Vuitton was able to offer an enhanced online-shopping performance, and Christian Dior gained market share in all regions.

Selective Retailing, which includes beauty business Sephora and luxury travel retailer DFS, saw organic revenue decline 30% to €10.2bn. Losses from recurring operations reached €203m. The weak performance was in spite of much-improved trends in online sales at Sephora. DFS was severely impacted by the suspension of international travel.

Perfumes & Cosmetics reported organic revenues of €5.2bn - a 22% drop year-on-year. However, profits fell at a much faster rate, down 88% to €80m. The declines were a result of reduced traveller spending and LVMH's decision not to discount heavily or allow lower-brow vendors to sell their products. This was done to protect brands.

Wines & Spirits saw a "significant" drop in volumes in the second half, although Champagne and cognac demand improved in the US. Overall organic revenues fell 14% to €4.8bn, while profit from recurring operations was down 20% at €1.4bn.

Momentum in Watches & Jewellery was similar, with organic revenue falling 23% to €3.4bn, while profit from recurring operations dropped a more severe 59% to €302m. Revenue declines tempered to 2% in the fourth quarter. Newly acquired Tiffany will sit in this division from this year.

LVMH saw operating margins fall to 18.6%, from 21.4% last year.

The group reported operating free cash flow broadly in line with last year, at €6.1bn, and net debt including lease liabilities of €17.6bn, compared to €19.6bn last year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.