Putting on the Ritz: Luxury Consumer fund core holding LVMH reminds investors that Luxury is a secular growth story and not a cyclical one
Yesterday LVMH, a core holding in Luxury Consumer and the “traditional” luxury benchmark stock, reported Q4 and 2018 results. In 2018 revenues rose +10% (+11% organic) and cash from operations +15% and net profits +21%, a very good result. Q4 organic growth was +9% better than expected. In Q4 the group’s core Leather and Accessories business (59% of EBIT) reported a very strong acceleration in sales in China (+17% organic growth vs +9% expected) and rising margins, putting paid to scare stories about a slump in Chinese luxury demand. LVMH management also reported a good start to 2019 and were optimistic about the outlook, notwithstanding macro uncertainties.
LVMH’s detailed results confirm other data points seen from the likes of Brunello Cucinelli, Burberry and Remy, all of which showed no sign of a deceleration in China sales in Q4. These previous data points were ignored as investors were distracted by heavy discounting on developed country high streets over Xmas and a raft of NON-LUXURY US companies ranging from Apple, Caterpillar and Nvidia blaming slumping Chinese demand for their poor performance, much of which was self or trade war inflicted. Fortunately, LVMH is too big for investors to ignore and its shares are up +6% today, dragging up the rest of our traditional Luxury holdings between +2% and +5%.
LVMH’s share price jumped by 6% on the back of the results
Source: Yahoo Finance
When asked why Chinese demand was so strong in Q4, LVMH boss Bernard Arnault reminded analysts of the company’s luxury ethos which was to sell the goods and services that the wealthy, whose numbers continue to grow inexorably, aspire to own in order to stand out from the crowd, whether or not that crowd is richer or poorer due to the economic cycle. He also reminded investors that Louis Vuitton, which turned in a stellar Q4 performance, never discounts products nor sells them through outlets. Increasingly sophisticated affluent consumers globally know this and believe that this sets them apart from the herd whether in good or bad times.
We believe that LVMH’s results are a clear affirmation of our Luxury Consumer fund’s investment proposition which is to focus on luxury consumer companies that benefit from secular growth, have strong brands, are capable of setting their own prices and are not subject to the whims of the economic cycle. For 2019 we expect these companies to deliver +9% revenue growth, +11% EBITDA growth and to throw out +20% more cash, which could either be returned to investors or used to accelerate growth. If our portfolio gets back to valuation levels prior to scares regarding Chinese demand, we see an average of +12% fund performance and +13% for LVMH specifically.
LVMH is a core holding in Dominion’s Global Trends Luxury Fund.
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