Recent acquisition activities in the growing cosmetics market in the Southeast encourages a review of Moët Hennessy Louis Vuitton’s business operations.
A few days ago, the Journal reported that South Korea is gaining more popularity as a trendsetter in the cosmetics business. According to the article, several big investors such as Goldman Sachs Group and Bain Capital Private Equity were reportedly acquiring majority stakew in a specialty cosmetics company to take advantage of the rapidly growing market. Moët Hennessy Louis Vuitton (MIL:LVMH, Financial) was also reportedly taking a stake in another fast-growing South Korean makeup maker, Clio Cosmetics. The latter was detailed to have a 16.5% profit margin last year.
Moët Hennessy Louis Vuitton has been fairly active in acquiring major ownership in other premier luxury brands.
In 2010, the company was thought by some of being imposing when it acquired 17% stake in Hermès, just a few months after when the Hermès family’s patriarch, Jean-Louis Dumas, passed away at the age of 72. After legal complaints filed by Hermès against Moët Hennessy Louis Vuitton, the latter finally sold its entire Hermès stake in 2014, and pledged not to buy any Hermès shares in the next five years.
A year after taking a stake in Hermès, Moët Hennessy Louis Vuitton acquired a majority stake (50.4%) in Bulgari SpA (OTCPK:BULIF, Financial) for about €3.7 billion (or $5.2 billion). According to Bloomberg, the acquisition’s primary purpose was to double the size of its watches and jewelry unit. The acquisition went through despite criticisms Moët Hennessy Louis Vuitton received for paying such a high premium (28.2 times Bulgari’s then EBITDA) while experiencing an earnings slump of 67 percent in the three years prior to the acquisition.
In 2013, the company acquired an 80% stake in the cashmere clothier Loro Piana for €2 billion (or $2.57 billion).
(A Louis Vuitton store, image source)
Meanwhile, If one would want to know how to properly pronounce these high-end fashion names appropriately, here is a YouTube video for pronouncing most of the fashion brands and names, Part 1 and Part 2.
Business overview
Moët Hennessy Louis Vuitton was founded in 1987 from the merger of Moet Hennessy and Louis Vuitton. According to its annual filing, the company currently has six business groups:
- Wines & Spirits
- Fashion & Leather Goods
- Perfumes & Cosmetics
- Watches & Jewelries
- Selective Retailing
- Other Activities
As can be expected, the Fashion & Leather Goods group contributed the most to Louis Vuitton’s total sales. On average, the group contributed roughly 35% of the company’s total sales in the past three years (2013 to 2015). Selective Retailing group contributed second most at 31% at the same time frame.
(Store count worldwide, Moët Hennessy Louis Vuitton)
Further, Moët Hennessy Louis Vuitton had more than half (53%) of its sales from both the U.S. (27%) and Asia (27%), excluding Japan.
Fashion & Leather Goods
The brands that represent this business group are: Louis Vuitton, Fendi, Donna Karan, Loewe, Marc Jacobs, Céline, Kenzo, Givenchy, Thomas Pink, Pucci, Berluti, Rossimoda, Edun and Loro Piana. According to Moët Hennessy Louis Vuitton, the group has 1,566 stores worldwide.
Selective Retailing
According to the company’s filing, this business group mainly operates in Europe, North America, Asia and the Middle East. Selective retailing has, in itself, two business segments: travel retail and retail concepts mainly represented by the Sephora and the Le Bon Marché Rive Gauche businesses.
(Trident by Feadship – Royal Van Lent, De Voogt and Donald Starkey, image source)
Other activities
Meanwhile, Moët Hennessy Louis Vuitton had been losing earnings in this business group. Other activities include the brand names Les Echos group, Royal Van Lent yachts and luxury hotel developer Cheval Blanc. This group had failed to earn any sales in the past three years and had averaged a €370 million decline in sales.
Moët Hennessy Louis Vuitton’s possible major stake acquisition of the aforementioned South Korean makeup maker may help the company improve its profitability in the Perfumes & Cosmetics business. In the past three years, the company was able to earn just 11 cents per dollar revenue in the segment, while the target company had earned 16 cents in fiscal year 2015. Nonetheless, both the Wines & Spirits and Fashion & Leather Goods produced the best operating margins among the six business segments.
Dividend
Moët Hennessy Louis Vuitton over-the-counter shares currently yield a dividend of 2.57%. According to GuruFocus data, the company has a payout ratio of 46% and a five-year growth rate of 10.9%.
Cash, debt and book value
As of the recent quarter, the company had total cash of $3.9 billion and total debt of $9 billion. Moët Hennessy Louis Vuitton had a debt-to-equity ratio of 0.34 book value of $26.5 billion. The company also carried 41% ($25.8 billion) of its total assets ($62.7 billion) as intangible assets.
An intangible asset is an asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace.
Cash flow
In fiscal 2015, Moët Hennessy Louis Vuitton had $4.03 billion in cash flow from operations. In addition to this, it had an additional $127 million brought by new share issuance. As a good steward to its shareholders, the company paid out $2.1 billion in dividends. Moët Hennessy Louis Vuitton paid $1.58 billion to lower down its debt.
Valuations
Trailing-12-month price-to-earnings ratio is at 20 times, while the price-to-book value ratio is at 2.86 times. The S&P 500, on the other hand, has a PE ratio of 25 times and PB ratio of 2.92 times. Further, the S&P 500 currently yields about 2.03% compared to the company’s 2.57%.
Conclusion
Moët Hennessy Louis Vuitton has been around for several decades and has always been able to improve its business’ top and bottom lines. The company also had been paying dividends for the past nine years. Its serious list of premium brands inevitably allows it to build a strong intangible moat around itself. Nonetheless, Moët Hennessy Louis Vuitton's current traditional valuations do not share Mr. Market’s appreciation for the company. According to Bloomberg data, the company’s shares had sagged 2.78% year to date and 14.53% for the past year.
For some borderline aggressive investors, the currently borderline-mild depreciated Moët Hennessy Louis Vuitton shares may be an opportunity to get in. But the prospecting investor must also consider the ongoing economic slowdown in two of the company’s major sales contributors, China (Asia) and Europe (Brexit) prior to initiating a long position. Overall, the company still trades higher than its five-year average (in terms of price-to-earnings multiple) and may not be as good a deal right now to most conservative investors.
Disclosure: I have no Moët Hennessy Louis Vuitton shares, nor plan to initiate a long/short position this week or the next.
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