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As readers may remember, Christian Dior (‘CDI’) is the mono-holding company through which Bernard Arnaut controls LVMH, the luxury goods conglomerate.

We last wrote up CDI in the January newsletter. Although we sold a small portion of our holding just north of €800 in February 2024, the going subsequently has been tougher, with the shares currently trading at €568.

During the month LVMH (100% of CDI NAV) provided a Q3 sales update with group revenues declining -3% vs. consensus expectations of +1% growth.

Most pertinently and worryingly, the all-important Fashion and Leather Goods division saw sales decline -5%, having grown +1% in Q2 and +3% in Q1, with management citing the deterioration of China as the proximate cause. This was materially worse than expected, with megabrands Louis Vuitton and Christian Dior having hitherto shown themselves to be immune to the luxury slowdown than smaller peers. In turn the disappointing results have led to increased investor concern around the depth and duration of the current slowdown in luxury goods spending.

Visibility on these issues abating remains limited – we are yet to see evidence that this is the bottom and there are risks of consensus earnings estimates falling further. However, it remains our view that mega-brands such as LVMH are best positioned to weather this storm given its 1) margin structure and absolute opex $m advantage; 2) ever-green product offering; 3) direct control of retail; 4) balance sheet strength.

Since taking control of LVMH in 1987 Mr Arnault has traversed through all conditions – both rain and shine – showing himself to be a masterful owner of brands and an astute operator who uses times of market weakness to his advantage. We expect this to be the case going forward – something which does not appear excessively reflected in LVMH’s valuation, having de-rated to 15x NTM EV/EBIT (from a peak of c.28x) and a free cash flow yield of 5%. Mr Arnault seems to agree and has been buying in the market post results.

In turn, CDI trades at 20% discount to NAV. This is much wider than average and we believe the fair discount to be ~0%. It remains our contention that the family will likely look to collapse the mono-holding company structure at some point in the future, providing an additional fillip to returns.

Godrej Industries (+57bps) was the standout contributor, with the shares up +21% over the month as the discount continues to narrow. Apollo (+38bps), Schibsted (+33bps) and FEMSA (+24bps) were also strong performers. Oakley Capital Investments detracted -54bps as the shares declined -7%, and Aker shaved off -47bps with the shares -6%. Shares in Christian Dior, the mono-holding company through which Bernard Arnault controls LVMH, rose +4% during a month in which LVMH reported full year results.

When we last wrote about Christian Dior in January 2023 there was near universal excitement about the prospects for the luxury goods sector, and the impact of the “re-opening” of China’s economy on growth. In the spring of 2023 LVMH rose to become the first $500bn market cap company in Europe. Shortly after this we sold ~1/3rd of our position (in Christian Dior) at a price of €809. As 2023 progressed, growth in China underwhelmed and concerns mounted over a slowdown in luxury spending following the elevated global demand observed during COVID. This allowed us to modestly add back to the position at an average price of €678 during the latter half of 2023. The shares currently trade at €737. The consensus view toward luxury goods today is much more sceptical than it was a year ago. However, we believe LVMH is well positioned both in the nearer term and longer term. We wrote last year that Louis Vuitton was underearning, with high levels of “investment” in operating expenses depressing earnings in the near-term but building brand desirability and entrenching dominance. The benefits of this were evident in the 2023 full year results, with sales growing +13% organically and operating profit increasing by +8%.

Importantly, the scaled cost structure offers considerable flexibility, with sales and marketing expenditure flat year on year in the second half of the year, having grown +26% in the first half. Smaller mono-brands that have underinvested and have less flexible cost structures will likely find the path to a post COVID normalised world more challenging, with LVMH growing at roughly twice the rate of the overall industry in Q4. It is our contention that such outperformance will likely endure, given the considerable scale advantages in an industry with relatively high fixed costs. In previous cycles LVMH has emerged stronger – the bigger get bigger – and we expect this to be the same once again, with optionality around countercyclical M&A given LVMH’s pristine balance sheet.

Looking further ahead we believe LVMH offers exposure to an irreplicable collection of competitively advantaged brands operating in a sector with attractive long-term growth prospects and strong underlying economics, returns on capital and cash generation. These advantages and attractions do not seem to excessively reflect in LVMH’s valuation. The shares trade at a 17x 2024 EV/EBIT and a 2024 FCF yield of ~4.5%. In the context of other luxury goods companies, this is a middle-of-the-pack valuation for a company that has consistently performed ahead of the pack and reflects a considerable conglomerate discount (34% on our numbers).

Returning to Christian Dior, the shares currently trade at an 18% discount to NAV. At some point of the family’s choosing the mono-hold co-structure will likely be collapsed, providing an additional kicker to returns, which have and will be principally a function of NAV growth. To date, the investment in Christian Dior has generated an ROI and IRR of +110% and +27%, respectively.

Christian Dior (“CDI”) was one of the strongest performers over the month, contributing +85bps to returns. The shares rose +16% – slightly behind the NAV (which rose +18%) – and as such the discount widened modestly from 13% to 15%.

The proximate cause for CDI’s outperformance was China, with luxury goods companies key beneficiaries of the rapid re-opening of the economy and abandonment of zero-COVID policies. Industry analysts at Bain estimate that China’s re-opening will see the global luxury industry grow at +6-8% in 2023, versus prior estimates of +3-5%. On a recent earnings call alongside LVMH’s full year results – published at the end of January – Mr. Arnault struck a similarly optimistic tone, declaring “we have every reason to be confident, indeed optimistic on China”, with “quite spectacular” signs of things to come from Macau, where Chinese tourists can now travel.

In terms of LVMH’s Q4/FY results, the business remains in rude health with Q4 sales organic growth of +9% well ahead of consensus. On the other hand, operating profit and margins were weaker than expected with much higher than anticipated marketing expenditure. Whilst interpreted as a negative by some, we believe this speaks to both LVMH’s strength and the why mega-brands are likely to continue outperforming, with significant scale advantages in an industry with high fixed costs.

In the short-term mega-brands go through periods where they underearn as spending runs far above “inflation opex”, but in the long run the brand equity is increased and growth extended. Smaller mono-brands simply cannot compete with this, with our estimates indicating that Louis Vuitton’s incremental opex in 2022 is of a similar magnitude to a smaller mono-brand’s entire budget. If it is artistic creativity and a certain je ne sais quoi that creates brand strength, it is investment in the brand that maintains it.

As such we see LVMH as well placed to keep compounding earnings and driving NAV growth. On top of this there is further upside if and when the family decide to simplify the group structure.

Christian Dior (“CDI”) was a meaningful contributor to returns during a period in which LVMH (100% of CDI NAV) reported a strong set of results for the first half of 2022. The shares and NAV returned +17% and +16% over the month, with a slight narrowing of the discount to 15%.

Even with a headwind of continued restrictions in China, the business is performing at a very high level. Sales were up +21% organically and operating profits increased by more than one third to €10.2bn – some +6% better than consensus analyst expectations. The all-important Fashion & Leather division – home to Louis Vuitton and Christian Dior – achieved a 41% operating margin, with profits well more than double their 2019 level. Management believe that a >40% margin is the “new normal” – with Christian Dior an increasingly integral part of this.

We have noted in the past that we expect “mega-brands” to outperform given the considerable scale advantages in luxury. Recent results seem to re-affirm this.  We also note the recent proposal for Tods, the Italian-listed luxury shoemaker, to be taken private by the founder. Tods has more than tripled sales over the last twenty plus years as a public company, but profits have barely budged – highlighting how hard it is for small luxury goods companies to compete. Our expectation is that winners will continue to win, and that LVMH will continue to drive attractive returns.

Shares in LVMH are down -6% year to date, yet operational performance and the reporting of three sets of strong results have forced consensus expectations higher, with EBIT estimates for this year and the next two years increasing +16% / +14% / +18% year to date. The multiple has thereby compressed, with LVMH trading at an EV/EBIT multiple of 17.1x, back below its long-term average.

At 15% CDI’s discount is slightly wider than where it started the year. Our expectation is that over time the Arnault family will collapse the structure, having taken numerous steps to simplify their group holding companies in recent years. As such we view the fair discount as zero. In the meantime, time is our friend as we expect the NAV to keep compounding at an attractive rate.

Christian Dior was the largest single detractor from returns in August, with the share price falling -7%. The proximate cause of the share price weakness was the regulatory environment in China. Investors have been skittish following comments regarding the need to promote “Common Prosperity” by President Xi Jinping at the 10th Meeting of the Central Committee for Financial and Economic Affairs on August 17th. China, as a key growth region for the luxury goods sector, is closely watched for any signs of change in the regulatory environment.

The ideal of common prosperity has appeared frequently in events and speeches in recent years. However, in the context of 2021 and a seemingly more invasive approach to regulation and the promotion of social goals, investors are pondering whether the ideals of the CCP might dampen growth for the luxury goods sector.

As several luxury goods CEOs have pointed out, the ambition to grow the middle class, and reform taxes, is prima facie beneficial for the luxury industry over the long term. What is less clear, however, particularly in the shorter term, is whether displays of wealth and conspicuous consumption become less socially acceptable. This remains largely unknowable in the short term.

We would however reject comparisons between today’s situation and historic anti-grafting initiatives, where the luxury goods sector was specifically targeted. More than that, we would note that regulatory actions over the last 18 months have been distinctly pro-luxury, most notably with regard the development of Hainan as a duty-free luxury hotspot, and last year’s tripling of the tax-free shopping quota to ¥100k. Certainly the promotion of the luxury goods industry and the repatriation of spend would fit with goals to boost domestic consumption.

Christian Dior (CDI) is a holding company whose sole asset (100% of NAV) is a 41% stake in LVMH, the European luxury goods conglomerate. CDI is 98% owned by Bernard Arnault, CEO of LVMH and Europe’s richest man. As a single-asset holding company, CDI typically traded at a tight discount to NAV; however, the market volatility in March last year saw the discount widen. We took advantage of this to initiate a position in CDI at discounts of 20-25%.

LVMH is the owner of a collection of luxury houses, across such diverse areas as Fashion & Leather, Wine & Spirits, hard luxury, specialty retail and beauty. Its brands – to name but a few: Louis Vuitton, Moët & Chandon, Dom Pérignon, Christian Dior, Bulgari, and, more recently, Tiffany – have long heritages spanning hundreds of years, and as such cannot be replicated. This translates into high demand for its products, pricing power, attractive margins, and superior returns on capital.

The pandemic has had a harsh impact on the luxury industry. However, our thesis was that high-quality brands would emerge stronger, having entered the crisis with strong balance sheets, more flexible cost structures, and a greater capacity to invest in digital. This appears to be playing out. During the month LVMH reported first quarter sales well ahead of consensus expectations, with sales growing +30% year on year (+8% versus 2019). Pent-up consumer demand appears very strong, and we expect healthy growth to continue through the year as physical economies continue to re-open and travel restarts.

CDI was, and remains, a classic AVI investment. LVMH is a high-quality asset with great growth potential, and we also expect to benefit from discount tightening, either through a continued normalisation of the CDI discount to the pre-COVID range or a collapse of the holding structure completely. We remain enthusiastic shareholders.

Christian Dior (CDI, 2% of NAV) is the French-listed mono-holding company whose sole asset is a 41% stake in
LVMH, the luxury goods conglomerate. CDI is 98% owned by Bernard Arnault, CEO of LVMH and Europe’s richest
man. Since the creation of the current group structure in 2017, CDI has typically traded at a very small discount to
NAV, but the recent market volatility saw the discount widen out to greater than 25%, and we were able to
accumulate a position at wide discount levels. We also bought a direct stake in LVMH, accounting for another
1% of NAV, as it sold off strongly in February/March. We view LVMH as a highly attractive asset, with diverse
category exposure across Fashion & Leather and Wine & Spirits, as well as hard luxury, speciality retail and beauty.
LVMH owns a collection of unique brands with intangible qualities that cannot be replicated.

This brand equity translates into high demand for their products, pricing power, and attractive margins. In
particular Louis Vuitton is a global mega-brand, operating in an industry in which such status and scale is a huge
advantage, driving top-line growth, supporting superior margins, and creating a virtuous cycle in which dominant
scale reinforces their incumbent positions. The Christian Dior/LVMH position is a “classic AVI” investment, with the
potential to benefit from NAV growth as LVMH recovers and continues to grow its presence in emerging markets,
as well the upside from discount contracting, either through normalisation to a 0-1% discount, or the collapse of
the CDI holding structure.