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LVMH - robust recovery despite travel headwinds

Nicholas Hyett, Equity Analyst | 14 April 2021 | A A A
LVMH - robust recovery despite travel headwinds

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LVMH Moet Hennessy Vuitton SE Euro.30

Sell: 705.00 | Buy: 707.80 | Change 6.50 (0.93%)
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LVMH reported revenue of €14.0bn in the first quarter of 2021. That represents organic growth of 30% year-on-year and an 8% uplift on the first quarter of 2019 (the year before the pandemic struck).

Year-on-year sales improved across all divisions other than Selective Retailing, which continues to struggle with restrictions on international travel. Geographically the US and Asia recovered well, although Europe continues to be affected by store closures and the suspension of tourism.

LVMH shares rose 3.1% in early trading.

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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.

Lockdowns should, intuitively, be bad news for luxury goods. High end cosmetics, perfumes, jewellery and bags are all made to be seen - and it's difficult to flash your luxury goodies when you're confined to your home and perhaps a socially distanced restaurant. To make matters worse shops remain shut in many markets, particularly Europe, and tourist numbers are low - disrupting LVMH's traditional sales to well-heeled tourists.

However, despite those headwinds LVMH has started 2021 with a bang. Better-than-expected cost savings, and a very welcome upswing in demand in key markets like China and the US have kept sales and margins healthy. The thrill that goes with buying a Dior bag or TAG Heuer watch has kept wealthy customers splashing the cash even in hard hit markets.

We should also note that LVMH's mega-wealthy customer base means it's able to weather an economic downturn better than some. This demographic tends to be less sensitive to economic shocks or recessions, meaning 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. The group also relies heavily on international travel, both in airports and among tourists splashing the cash while abroad. 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 puts the company's financial strength of the company. Cue a discussion of the Tiffany & Co. deal.

Having called Tiffany's prospects "dismal" in light of the effects of coronavirus, and tried 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 valuation makes it sensitive, especially 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: 36.8
  • 10 year average Price/Earnings ratio: 20.2
  • Prospective dividend yield (next 12 months): 1.2%

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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First Quarter Trading Update

Fashion & Leather Goods saw organic revenue rise 52% year-on-year and 37% on 2019, reaching €6.7bn. That result was led by "remarkable" and "excellent" results from Louis Vuitton and Christian Dior respectively.

LVMH's Selective Retailing businesses reported revenues of €2.3bn, an organic decline of 5% year-on-year and 30% on 2019. While online sales "progressed well" the duty free specialist DFS saw a significant sales decline.

The Watches & Jewellery business reported revenue of €1.9bn, an organic increase of 35% year-on-year and 1% on 2019. The division now includes Tiffany & Co, with reported sales up 138% as a result.

Perfumes & Cosmetics reported sales of €1.6bn, with organic growth of 18% year-on-year and a 4% decline compared to 2019. The division saw continued growth in online sales, which offset the impact of point of sale closures.

Wines & Spirits reported organic growth of 36% year-on-year and 17% on 2019 to €1.5bn. That reflects a 22% increase in Champagne volumes compared to the same period in 2020 and a 28% in Hennessy cognac volumes.

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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.