LVMH: behemoth bets on beauty boss

Two years ago, LVMH toppled Nestlé to become Europe’s biggest company. Since then its shares have surged by a half, fuelled most recently by China’s reopening. The scale of the French group is a source of strength, powering a formidable marketing machine. But it also raises questions about how it can maintain an aura of exclusivity, crucial to selling luxury goods.

An obsession with control characteristic of chair and chief executive Bernard Arnault is one answer. Witness LVMH’s beauty division, which this week acquired a new boss in Stephane Rinderknech. Most luxury brands license the cosmetics and fragrance side of their businesses to specialists such as Coty. But LVMH has insisted on managing the business in-house.

LVMH also maintains strict controls over distribution, relying heavily on its own retail network. Unlike some of its peers, the group did not permit the sale of unsold stock at a discount in the pandemic. That hit profitability last year. The perfume and cosmetics division, which accounts for about a tenth of sales, had an operating profit margin of 9 per cent, a third of LVMH’s average.

Rinderknech, a former L’Oréal executive, takes charge of the division at a time of growing competition. Luxury brands are increasingly extending into beauty. That takes them into closer rivalry with pure-play companies such as L’Oréal, Estée Lauder and Coty. They are attracted by strong demand trends and the role of beauty in recruiting customers.

LVMH’s share price performance over the past decade has been exceptional. Over the past ten years, investors have received total returns, with dividends invested, of 700 per cent. Now the shares trade on a forward price/earnings ratio of 26. That is about 15 per cent higher than the ten-year average and implies a forward PEG ratio (price/earnings divided by earnings growth) of more than two times, which investors tend to consider expensive.

There are indeed risks. LVMH would suffer if Chinese consumers turned against foreign brands. It would be hard hit if Louis Vuitton, its key profit driver, fell out of vogue.

However, the luxury market is a secular growth story. Wealthy consumers appear to have shrugged off inflationary pressures. LVMH stands out among its peers. Its pricing power, marketing prowess and distribution model merit a premium valuation.

The Lex team is interested in hearing more from readers. Please tell us what you think of LVMH as an investment in the comments section below.