The Business Of
LVMH | What Do They Do With Their Profits?
Morning All!
We covered a fair bit on Tuesday and Wednesday looking at the revenue and costs for LVMH. On Tuesday we saw that quality, exclusivity and price are 3 factors that allow LVMH brands to maintain their luxury status. And then yesterday we saw the costs involved with this business model… including the ridiculous sums LVMH dishes out on store rents!
Today’s email is much shorter, you’ll be glad to know!
And we’ll be diving into what the company does with all the profits it makes. Because remember, €79bn revenues. 27% EBIT margin. Means €21bn profits (before interest and tax). Where does all that €21bn go! Let’s find out now…
Who Needs More Than €5bn In Cash?
Okay, so remember back a few weeks, we said that there are 3 ways a company can use their yearly profits/cash flow. (i) Add cash to the balance sheet. (ii) Reinvest cash back into the business. (iii) Return cash to shareholders.
Well, looking at the chart below, we can see that LVMH’s cash balance stayed fairly flat pre-pandemic. But what does this mean?
Well it means that when LVMH make a profit, they don’t just add that cash to their balance sheet. They like spending that cash! I mean, who needs more than €5bn on the balance sheet anyway!
And as we mentioned earlier, they’ll either spend it by reinvesting back into the business. Or by returning it to shareholders. Let’s have a look at the reinvestment part first!
Goodness Me, It’s Those Stores Again!
Right, so let’s have a think. How does a company like LVMH reinvest back into their business in order to grow future profits? Well, in terms of growing revenues, LVMH has been very active in purchasing buildings and constructing new stores. In 2022, the company spent a sizeable €2.8bn in purchasing buildings and constructing stores. How does this relate to growing revenues? Well, these buildings will be used by their brands as store fronts. The new stores will act as new distribution points for LVMH and will drive future revenues. In 2022, we saw Berluti, the French brand, open a new store in Kobe, Japan and Sephora enter the UK market with their first store in London.
Whilst they’re in two incredibly different industries, it’s interesting that we saw a similar strategy at Tesco. In order to reduce their rental payments, Tesco have been buying more of their properties (instead of renting) over the last decade. Given the kind of rental figures we saw in yesterday’s newsletter, we won’t be surprised if LVMH continue this strategy!
In addition to purchasing buildings, LVMH also spent their profits purchasing vineyards (for their wines and spirits division). Upgrading machinery and equipment. And a host of other capital expenditures (Capex). The table below shows us that, operating investments - which is what LVMH calls Capex - totalled €5bn last year.
So as we can see, ~30% of LVMH’s cash flow every year is consistently spent on capital expenditures to improve their business.
Made by Acquisition, Grown by Acquisition
The second type of reinvesting that LVMH do is also to do with purchasing. However, it’s not purchasing buildings. But purchasing entire companies. Whilst purchasing buildings and constructing stores is done with the aim of growing profits organically, LVMH also enjoys acquiring profits. Given the number of acquisitions that Bernard Arnault’s done, you’d be forgiven for thinking the man had been listening to too much DJ Khaled…
The table below reminds us of the main acquisitions that have taken place to make LVMH the force it is today…
As the table shows, unlike LVMH’s regular investments in Capex, M&A is a lot more unpredictable. Given that they’ve already got so many of the world’s largest luxury brands, there are years where LVMH don’t spend very much at all on acquisitions. But then there are years like 2021. In 2021, LVMH broke the record for the largest deal made in the luxury space by shelling out a whopping €13.3bn to acquire Tiffany, the iconic US brand. (The table says 2019 because the deal took a couple of years to complete!)
The Not So Formal Dividend
Okay, last but not least, let’s talk about the dividend. The way LVMH returns cash to shareholders. In previous weeks we saw Tesco and Ninety One both have formal dividend policies. Both companies have committed to paying out at least 50% of profits as dividends. However, with LVMH, we see no such thing. There is no formal dividend policy.
That doesn’t mean LVMH doesn’t pay a dividend. They do. It just means that the dividend they pay out isn’t quiteeeee as certain. If we look at the chart below, we can see LVMH’s dividend payout (dividend per share / earnings per share) over the last decade. In 2014, we saw the company only pay out 28% of their profits as dividends. But then in 2020, we saw the company pay out 64% of their profits in dividends. There’s a lot more variability in the dividend payout then at a Tesco or Ninety One where the dividend policy is more formal.
However, if we look at the last decade, we can see that on average, LVMH pay out 45% of their profits as dividends. Why they don’t just commit to a formal dividend payout of 45% of 50%, I have no idea! You’d have to ask Bernard!
23rd Mar 2023
Alrighty, that is well and truly a wrap for today. To sum up, LVMH spends ~45% of their profits on dividends (cash return). ~30% on Capex (cash reinvest) and the other ~25% is used for acquisitions, and other bits and bobs (e.g. paying down debt).
In tomorrow’s newsletter, we’ll take a brief look at how the outlook for LVMH and the luxury industry is changing. And we’ll also be having our next Career Talk!
Have a cracking day!
The Business Of Team