The French multinational holding and conglomerate LVMH Moët Hennessy Louis Vuitton or LVMH emerged in 1987 following the merger between the fashion house Louis Vuitton and champagne producer Moët & Chandon. LVMH shares are listed on the Euronext Paris Eurolist and it is also a component of the CAC 40 benchmark French market stock index.
Investing in Retail Luxury: Advantages and Disadvantages of LVMH Stock
Pros: LVMH Stock Advantages
Luxury is at the heart of the value proposition of LVMH. It has since established and acquired other subsidiaries and brands. These include other luxury fashion houses like Bulgari, Celine, Christian Dior, Fendi, Givenchy, Kenzo, Loewe, and Marc Jacobs, watchmakers Daniel Roth, Gerald Genta, Hublot, and TAG Huer, and Zenith, wine and spirits producers Colgin Cellars, Dom Pérignon, Mercier, and Hennessy, and jewelers Tiffany & Co. and Repossi.
The conglomerate also controls other companies operating in other markets. These include the personal care market through Sephora, Make Up For Ever, and Benefit Cosmetics, the shipyard market through Princess Yacht and Royal Van Lent, and the hospitality market through Belmond and Bulgari Hotel and Resorts. Investing in the company means believing in the growth of the luxury market. The following are the advantages of investing in LVMH stock:
• Impressive Historical Growth in Stock Price: The value of LVMH stock has increased by more than 190 percent since 1990. Even its historical price since 2020 has undergone more than 80 percent increase. This impressive historical growth comes from its strategic acquisitions over the years which has allowed the conglomerate to have a stronger portfolio and a domineering presence in the luxury market.
• Diverse Portfolio of Subsidiaries and Brands: One of the advantages of LVMH stock is that purchasing its shares means investing in its expansive subsidiaries and brands. Most of the components of its portfolio are known companies with strong brand equities and global presence. A single investment in LVMH stock translates to investment in various subsidiaries and brands that have dominated the luxury market.
• Strong and Consistent Revenue and Profits: The conglomerate has a strong history of consistent revenue and profit growth. It specifically boasts a strong return on equity and return on invested capital. This financial performance comes from its diversified portfolio, the growth of the luxury market over the years, and the fact that it is involved in businesses that support both repeat sales and new sales acquisitions.
• Lage-Cap With Growth and Value Qualities: LVMH is a large-cap stock. Take note that it is the first European company to surpass $500 billion in market capitalization. This same stock also has the characteristics of a growth stock and a value stock. This can be regarded as an advantage of LMVH stock. Purchasing its shares provides a rare opportunity for adhering to the principles of growth investing and value investing.
• Positive Outlook in Luxury Market Growth: Another advantage of investing in LVMH stock centers on the positive outlook in the growth of the luxury market. There are still less tapped geographic markets around the world. China remains the dominant market. The growing economies of countries in Southeast Asia and South Africa provide future opportunities for untapped market potentials and sales.
Cons: LVMH Stock Disadvantages
Tapping and dominating the overall luxury market can bring in substantial returns due to the fact that companies or brands can charge a premium but the consumption pattern is still dependent on the purchasing capabilities of the target market. This is the reason why luxury goods and services have a limited geographic market presence. It is also worth noting that the appeal of luxury products has pivoted toward emerging geographic markets in recent years.
The luxury market is also affected by the boom-and-bust cycles in the economy. The demand for luxury products is affected by economic downturns because most of their consumers tend to be sensitive to a change in the level of their purchasing power. It is also influenced by seasonal trends. Sales are not consistent. There are times in a given year when products experience either low or high demand. Below are the disadvantages of investing in LVMH stock:
• Large-Cap Stock With Cyclical Characteristics: It is also worth noting that LVMH stock can also be considered a large-cap stock with some of the qualities of a cyclical stock. This comes from the fact that its sales and revenues are dependent on the boom-and-bust cycles in the economy and seasonal trends. Traders can find opportunities from this but some investors might not be at ease with its stock price movements.
• Dependent on Limited Geographic Markets: The conglomerate derives about 30 percent of its sales from Asia and about 25 percent from North America. China and the United States remain its biggest geographic markets. These markets are large and have robust economies. However, because sales are dependent on them, economic downturns in either one of these regions can affect its revenues and profits.
• Exposure to Significant Global Trading Risks: Another disadvantage of LVMH stock is that it is exposed to other more specific risks on top of the general risks in investing in stocks. This comes from its global presence. It is exposed to currency fluctuations because it operates in multiple countries and currencies. The earning potential of the conglomerate is also exposed to supply chain disruptions and geopolitical tensions.
• Intense Competition and Industry Rivalry: The subsidiaries and brands under LVMH have alternatives and substitutes. The rise of fast-fashion retailers like Shein, H&M, and Zara provides alternatives to fashion houses. The same is true for its wine and spirits market. It also has to deal with counterfeit goods from China. It also competes against other luxury brands like Hermès and substitutes like sustainable companies.
• Reliance on Shifting Preferences and Trends: LVMH is also dependent on changing consumer preferences and market trends. The sift in consumer tastes, fashion trends, and lifestyle choices could affect the demand for its luxury products. Both alternatives and substitutes like fast fashion companies and sustainable brands have tapped into these shifts to draw the target market away from luxury companies.
