July 19, 2024 • 1hr 6min

TIP645: The King of Luxury: Bernard Arnault & LVMH w/ Christian Billinger

We Study Billionaires - The Investor’s Podcast Network

In this episode, host Clay Finck interviews Christian Billinger about Bernard Arnault and the luxury conglomerate LVMH. They discuss Arnault's business acumen, LVMH's strategy and performance, the luxury industry landscape, and investment considerations for the company. Christian Billinger is the chairman of Billinger Förvaltnings AB, which invests in publicly listed equities. He has been invested in LVMH for 6-7 years and provides insights as both an investor and industry observer.

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Key Takeaways

Bernard Arnault has built LVMH into a luxury conglomerate worth over €350 billion, making it one of the largest companies in Europe
Arnault combines traits of an engineer and artist, with short-term risk management and long-term optimism
LVMH owns 75 luxury brands across categories like fashion, leather goods, wines & spirits, watches & jewelry
The company has averaged 10% organic growth over the past decade, outperforming the broader luxury market
Brand equity and desirability are crucial factors for LVMH's continued success
China accounts for about 1/3 of luxury spending globally and has driven 2/3 of industry growth over the past two decades
LVMH trades at around 20x earnings, which seems reasonable given its quality and growth prospects
Key risks include succession planning as Arnault is 75 years old, and maintaining brand equity

Introduction

In this episode, host Clay Finck interviews Christian Billinger about Bernard Arnault and the luxury conglomerate LVMH. They discuss Arnault's business acumen, LVMH's strategy and performance, the luxury industry landscape, and investment considerations for the company.

Christian Billinger is the chairman of Billinger Förvaltnings AB, which invests in publicly listed equities. He has been invested in LVMH for 6-7 years and provides insights as both an investor and industry observer.

Topics Discussed

Bernard Arnault's Unique Traits as a Business Leader (2:08)

Unusual combination of engineer and artist - brings precision to business-building but also involved in creative side
Short-term paranoia, long-term optimism - manages risks carefully but exposed to long-term growth trends
Combines obsessive attention to detail with granting autonomy to brand managers
Has been in the right place at right time for deals, especially early in career

Christian notes that Arnault is more private than Warren Buffett, making it harder to analyze his traits. But his track record in building LVMH over 40 years demonstrates his capabilities.

Comparing Arnault/LVMH to Buffett/Berkshire (6:29)

Both are conglomerates redeploying cash into new opportunities
LVMH more focused on luxury vertical vs Berkshire's diversification
Arnault has dynastic ambitions vs Buffett's philanthropic plans
LVMH "almost never sells" businesses vs Berkshire's occasional sales
Arnault more private, less accessible than Buffett's public persona

"In many ways, they're strikingly similar. In some ways, they are strikingly different," says Christian about Arnault and Buffett.

LVMH Business Overview (12:21)

Holding company owning ~75 luxury brands across categories:
Fashion & leather goods (largest segment)
Wines & spirits
Watches & jewelry
Perfumes & cosmetics
Retail
Louis Vuitton and Dior account for ~2/3 of earnings

Christian explains: "You should think of LVMH at the group level, and that's what you're buying. If you invest in LVMH, the listed company you are buying into, the holding company, where capital allocation takes place and where Arnault exercises influence through very direct engagement with the people who run these businesses."

Arnault's Acquisition Strategy (23:49)

Early on, bought distressed assets at bargain prices
Now focuses more on quality brands that are undermanaged
Provides financial resources and expertise to accelerate growth
Example: Grew Bulgari's EBIT from €60M to €500M in 10 years post-acquisition

Christian notes Arnault has evolved his approach over time, similar to Buffett: "As the whole business has grown and as the stakes have become higher, I think he's becoming increasingly focused on quality and robustness and building something durable, building something multi-generational."

The Role of China in LVMH's Business (26:25)

Chinese consumers account for ~1/3 of global luxury spending
China has driven ~2/3 of industry growth over past two decades
Growth has slowed recently but remains an important market
LVMH still growing strongly overall despite China slowdown

Christian sees this as a sign of strength: "You could argue, on the one hand, it's a real issue that China is not growing at the rate it once was. But you could argue, on the other hand, that it's a real sign of strength, that at the group level they can carry on growing at a very healthy rate, despite the fact that China isn't growing at the rate it once was."

LVMH's Adherence to the Luxury Strategy (30:48)

Varies by brand within LVMH's portfolio
Some brands like Loro Piana follow luxury playbook closely
Flagship Louis Vuitton brand may be breaking some "rules":
Easier accessibility of products
Use of celebrities in advertising
Olympic sponsorship raising questions about ubiquity

Christian notes it's too early to say if this matters: "Does it matter? I don't know, and it's too early to say. I think for some of the brands it's easier...If you look at Chanel or Hermès, I find it more difficult to assess the future of a brand like LV especially."

Stock Performance of Luxury Companies (35:33)

Hermès: 21% CAGR over past 20 years
LVMH: 16% CAGR over past 20 years
Kering and Burberry have underperformed
Divergence reflects quality of businesses and brands
Family ownership enables long-term focus on brand desirability

Christian explains the outperformance: "I think ultimately that's what it comes down to. Obviously, a lot of things go into that, but I think in some ways, it's a very fair reflection of the divergence in performance, and the fact that clearly LV, Dior and Hermès have been much more true to this luxury business model we discussed last week."

Key Metrics for Assessing LVMH (38:02)

Organic growth rate
Margins and underlying EPS growth
Culture and willingness to invest for long-term
Brand desirability
Adherence to luxury business model principles

Christian emphasizes the importance of qualitative factors: "Some of that is difficult to put numbers on, but ultimately that should be reflected in the higher organic growth rates and the margins and the returns and all of those metrics."

Succession Planning (39:43)

Arnault is 75 years old
Expectation that one or more of his children will take over
Possibility of an outsider (likely from within LVMH) as CEO
May see changes in capital allocation and cash returns post-succession

Christian notes the uncertainty: "I don't think anyone knows. I don't even know if he knows at this point...I think he's very pragmatic. Right. And ultimately he cares about preserving the business the empire has built."

Capital Allocation (41:55)

High reinvestment rate historically
Deployed €20B incremental capital at 20% returns between financial crisis and pandemic
Mix of organic capex (especially real estate/retail) and acquisitions
Pays dividend but share repurchases insignificant

Christian sees this as impressive: "I think the 20% number is very impressive when you look at the overall amount of capex being redeployed."

Valuation and Risks (46:56)

Trading at ~20x earnings, 5% free cash flow yield
Valuation seems reasonable given quality and growth prospects
Key risks:
Maintaining brand equity, especially for Louis Vuitton
Succession planning and potential changes to business profile
Cyclicality and operating leverage in luxury industry

On valuation, Christian states: "To me that seems like a perfectly reasonable or even somewhat attractive valuation for a business of this quality."

Conclusion

LVMH stands out as a high-quality luxury conglomerate with an impressive track record of growth and returns. Under Bernard Arnault's leadership, it has built a portfolio of strong brands and demonstrated an ability to improve acquired businesses. While risks exist around succession and maintaining brand equity, the company's diversification and financial strength provide some cushion.

For investors, LVMH offers broad exposure to the luxury goods industry at a reasonable valuation. Its mix of established brands and growth potential in emerging markets could drive continued strong performance. However, the cyclical nature of luxury and potential changes post-Arnault warrant monitoring.

Overall, LVMH exemplifies many of the attractive qualities of luxury businesses - pricing power, brand strength, and exposure to growing global wealth. Its ability to continue executing on these advantages will be key to future success.