LVMH-Hermès Timelinearijanhorvat.com/wp-content/uploads/2018/07/... · Focuses on strengthening and the expansion of its business operations through the addition of new store E-Retailing

1

2002 Jan. 2011

Dec. 2011

Sep. 2012

Dec. 2010Nov. 2011 Jul. 2012

LVMH acquired 4.9% through subsidiaries

LVMH continue buying equity

derivatives

2007

Oct. 2010 Hermès creates private

holding company

LVMH acquired a cumulative 14.2 %

stake

LVMH not allowed to buy out minority Hermès

shareholders

AMF announces investigation of LVMH

LVMH raises stake to 22.6%

Hermès filed a criminal complaint

against LVMH in Paris court

LVMH announces complaint against

Hermès

Oct. 2012 Jul. 2013

Jul. 2013 Sep. 2013

AMF found evidence of “wrongdoing” by

LVMH

AMF said LVMH secretly bought shares

to build a stake

May 2013

Jun. 2013 AMF ruled to penalize

LVMH with a $10.4 million fine

Hermès files lawsuit, seeking cancellation of

equity

LVMH increased its stake in Hermès to

23.1 %

LVMH announced that it would not appeal

the AMF ruling

Overview Our Recommendation Financial Breakdown Synergy Analysis Key Takeaways

LVMH-Hermès Timeline 2

Our Recommendation

33

Retain Stake in Hermès, Venture in eCommerce


Hold 23.1% stake in Hermès for high

price or until lawsuit requires

LVMH to relinquish shares

Expand operations in increasingly opportunistic eCommerce

markets

Our Recommendation

31.21% Increase in equity stake from

2010-2013

Chinese eCommerce market

expanded 66.5% from 2011 to 2012

1 - Gain Asian eCommerce market share, development of mobile App

2 - Ease tensions, earn investment income on 23.1% stake

3 - Leverage market share in eCommerce & increased income, outperform luxury brands in near future

4

Financial Breakdown

5

Key Financial Information

The following information assesses the viability of acquiring Hermès:● By our valuation, Hermès is worth €27,856 million.● Key figures:

○ EV/EBITDA = 39.20○ EV/Sales = 6.61○ P/E Ratio (Sep 2013) = 38.31

● Hermès is expensive compared to its competitors○ Therefore it may be expensive for LVMH to acquire


6

Valuation of Hermès Acquisition

● The main method used was Discounted Cash Flow valuation

NPV = €5,865.27IRR = 2.74%

MIRR = 2.60%Simple Payback = 16.295 years

● The WACC used was very low: 1.178%● On paper, the acquisition is profitable.● However, financial and qualitative synergies are unrepresented in the

above figures.


Selected Data

7

Expansion into Asian eCommerce Market


Chinese eCommerce

Market expanded

66.5% in 2012

Expanding Mobile Apps

accounted for 53.6% of total

sales

Average money spent by consumer

increased 25% in 2012

Chinese eCommerce market will

overtake American

market

Few main competitors

have Chinese

eCommerce campaigns

High promise of sales and profitability

Expansion into increasingly popular purchasing medium of eCommerce through website

Utilize Mobile App to market to increasingly mobile market

8

Synergy Analysis

9

“The Selective Retailing Houses in the LVMH group all share a single objective: transform shopping into a unique experience. With specialist product selection, upgrading of stores and services,

constant innovation, digitalization and personalization of relationships, customers are the key drivers for their daily activities.”


Selective Retailing LVMH 10

11

● Same product collections are sold worldwide

• Vertical Integration-Control quality & cost of RM

Sourcing

Production

● No Marketing Department● No Brand Ambassadors (as

opposed to LVMH)

Zero Marketing

● Limited online presence with directly operated stores-Control level of client care

● Increased stores while decreasing distribution through 3rd party

Distribution• Controls 80% of sold products, only

selecting subcontractors in segments they lack expertise

• On avg. 15 hours for a single Kelly/Birkin handbag

Hermès Operating Model

Consistency


“The quality is in the eye and the hand of the artisan.”

- Axel Dumas, chief operating officer

Hermès Philosophy

12

● Labeled as one of the world’s most innovative companies ○ Innovation maintains the interest of their customer base and protects

their intellectual property○ Recruits craftsmen through partnerships with schools and puts

emphasis on cultural training

● Focuses on family ties ○ Hermès family shareholders hold about 73.4 percent of the company○ Created a family holding company, H51, to secure 50.2% of shares for

the next 20 years (2011)


Hermès Culture 13

● This social commentary gives insight as to how the Hermès views their company

culture in comparison to that of LVMH

● How accurate is this analysis?

"There is a part of our world that is playing on abundance, on glitz and glamour. And there is

another part that is concentrated on refinement, basically making beautiful objects. It's not

a financial fight, because we would lose that. It's a cultural fight.”

- Patrick Thomas, executive chairman


Hermès Culture 14

“The mission of the LVMH group is to represent the most refined qualities of

Western "Art de Vivre" around the world. LVMH must continue to be synonymous

with both elegance and creativity. Our products, and the cultural values they

embody, blend tradition and innovation, and kindle dream and fantasy.”

LVMH Mission

15

LVMH Culture

● 1987 merger between Moët Hennessy and Louis Vuitton began the LVMH empire of luxury goods

○ “Inherited a long history, deeply rooted traditions, and a unique combination of internationally

renowned brands.”

● Culture revolves around the ideas of CEO, Bernard Arnault○ Gained over 60 brands for LVMH through his emphasis on dozens of strategic acquisitions○ Visionary, bold, and innovative

● Hermès dismisses Arnault, and LVMH, of being brash and uncultured

○ American-style entrepreneurship, creating a sprawling luxury empire

○ Does this align with how LVMH views its own culture?


16

01

02

04

03

Be creative and innovative

Aim for product excellence

Bolster the image of our brands with passionate determination

Act as entrepreneurs

05 Strive to be the best in all we do

LVMH Values


17

18

Geographic Diversity

Multiple Brands with strong potential


LVMH Strengths

Diversified Retail Channels 3,384 store operations

Diversified luxury portfolio

19

● Accounts receivables increased by 9.5% indicating higher credit sales

● Increasing accounts receivable reflects inefficient credit management

● Ineffective in converting short term assets into sales

● Consistent decline in current asset turnover for FY 2013 from 1.2 to 1.1 --> cannot generate high sales through conversion of assets

LVMH

Increasing

Trade

Receivables

Decline in

Current

Asset

Turnover


LVMH Weaknesses

Her

mès

Directly Operated Stores Franchise Stores Duty Free Third Party

Designs 100% Products Manufactures 80% of

ProductsMarkets 57% of Products

Industrial Subsidiaries

Leather/SkinOther Suppliers

SilkVarious Suppliers

Watch MovementsVarious Suppliers

Hermès Sellier John Lobb Shoes

JewelryVarious Subcontractors

Perrin Ateliers Sports Soie

La Montre Hermes

Comptoir Nouveau De La Perfumerie

Cristalleries De Saint-Louis Puiforcat Orfevre Porcelaine Perigod

Perfume, RawVarious Suppliers

Porcelain, RawVarious Suppliers

Ready to Wear French & Italian Subcontractors

Hermès Customers


20

1 Growth Prospects: E-RetailAs a new form of retail emerges, Hermès has great opportunity to expand digitally and reach a wider customer base

2 Changing Dynamics of Global Fashion Market

3 Strategic Acquisition

The global apparel and accessories markets in the recent past have witnessed a paradigm shift, inclining more towards increased product differentiation and catering to a diverse, more aware and a demanding customer base.

2014 Feb: New Partnership with Marco De Vincenzo through a Joint enter2013 Nov: Established Helios (cosmetics and research center)

Focus on development of new processes and to secure new patents

4 Strategic InitiativesAimed at enhancing its business operations and existing product line

LVMH Opportunities


21

Counterfeit Goods

Governmental Regulations

LVMH Threats

Intense Competition

Constant need to maintain quality and customer loyalty

Profusion of imitative products

Extensive gov. regulations at national & state level


22

Hermès Strengths

Robust FacilitiesDiversified Product Portfolio

Operational Facility


● Network of -> 323 exclusive stores + 205 directly operated stores.

● 45 production units – 34 in France and 39 elsewhere (UK, Switzerland, Italy and one in the USa)

● From 2011 – 2012 increase of 22.6% in revenue (2.8M Euros)

● Increased operating Margin 2011 – 2012 (32.10% to 31.15%)

● Tanning, dyeing, exotic skins, leather good, equestrian items, ready to wear, accessories, jewelry, tableware, perfumes, watches, silk, textiles, luggage, diaries

23

Liquidity

Hermès Weaknesses

Declining Liquidity Position

Facing difficulty in:1. Fulfilling its

operational 2. Working capital

needs


24

Total Liquidity

Increment in current liabilities is relatively

higher than increment in current assets

Liabilities Assets

Net

Hermès Opportunities

New Business InitiativesNew product launches : Bleus d’Ailleurs porcelain, Tie 7 tie, Roulis bag, Berline bag, Toolbox 33 bag, iPad station, Un Jardin sur le Toit fragrance, Jewellery: exceptional creations, and Arceau Le temps suspendu watch.

Store ExpansionFocuses on strengthening and the expansion of its business operations through the addition of new store

E-RetailingAs a new form of retail emerges, Hermès has great opportunity to expand digitally and reach a wider customer base


25

Hermès Threats

Highly Competitive Environment

Counterfeit Goods

With global annual sales of around $500 billion, the sales of counterfeit goods are expected to cross $2 trillion in sales by 2026

Changing Consumer Demands

With its core business being beauty and beauty related products, the changing customer spending patterns will pose a major challenge to the company


Key competitors include Chanel S.A, LVMH Moet Hennessy Louis Vuitton SA, Gucci Group NV

26

Family-owned

Hands-on production

Elite customer base

Authentic

Love of craftsmanship

Corporate

Upper-class customer base

Diverse portfolio of luxury goods

Cultural Comparison

Hermes LVMH

High-end luxury

European culture


27


Breakdown of Revenue by Product Line: Hermès 28

Key Takeaways

29

The acquisition has a positive return, but it is very expensive.

The financial pros are potentially outweighed by the qualitative

cons.

Due to the culture

difference, corporate

structure and lack of synergy

we do not recommend the

acquisition of Hermès.

Key Takeaways

Wait until stock price is at its highest.

Sell stock

Invest that money into E-Commerce

30


InsightsAction Plan

Appendix

Austin Consulting Group

31

Return to Valuation

32

Return to Valuation

33

Return to Valuation

34

Return to Valuation

35

Return to Valuation

36

LVMH 2014 Total: 22.1%Hermes 2014 Total: 2.2%

Global Company Shares 37

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Austin Consulting Group

40

Merci

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LVMH-Hermès Timelinearijanhorvat.com/wp-content/uploads/2018/07/... · Focuses on strengthening and the expansion of its business operations through the addition of new store E-Retailing