LVMH

LVMH owns about seventy-five luxury houses — Louis Vuitton, Dior, Tiffany, Bulgari, Fendi, Celine, Loewe, Loro Piana, Moët & Chandon, Hennessy, Sephora, TAG Heuer. It is the largest luxury company in the world by a wide margin, and it was assembled almost entirely by one man over forty years.

But the first thing to understand is that the group is far more concentrated than the brand list suggests. One division — Fashion & Leather Goods, which is essentially Louis Vuitton and Dior — produced 47% of the revenue and 71.3% of the profit in the first half of this year. Everything else, all seventy-odd other houses combined, generates under three-tenths of the earnings.

That division shrank for seven consecutive quarters. The shares fell from €904.60 in April 2023 to €464.95 today — a fall of nearly half — because Chinese luxury demand collapsed and the aspirational middle-class customer who drove the 2021–22 boom simply stopped buying.

And then, this summer, something changed.

A wonderful business is rarely cheap. It gets cheap when something frightens people — and the test is always whether the thing that frightened them was temporary. Part V is about nothing else.

We should say plainly where this sits relative to our recent work. The last four companies we examined — Thermo Fisher, Diageo, Paychex and Innovative Industrial Properties — all came back "not cheap" or "be careful". This one does not, and we want to be explicit that the difference is in the evidence rather than in the mood.

Forty-seven percent of the revenue produces seventy-one percent of the profit. When people say "LVMH is diversified across seventy-five houses", they are describing the revenue. The earnings are Louis Vuitton and Dior.

This concentration is the single most important structural fact about the company, and it cuts both ways. It means LVMH is not really a portfolio at all — it is two extraordinary brands with a large and useful collection of other assets attached. That makes the earnings more fragile than the brand count implies. But it also means the quality is higher than the group margin suggests, because a 22% blended margin contains one business earning far more and a retailing arm earning far less.

Nine days ago we published our analysis of Diageo, and there is a direct link between the two companies that is worth making explicit.

Moët Hennessy — the champagne and cognac business inside LVMH — is 66% owned by LVMH and 34% owned by Diageo. It is the same asset appearing on both boards. At Diageo's capital markets day this month, after press reports that it was reviewing the holding, Diageo ruled out selling its 34%.

Read the two sets of results together and something useful emerges. Diageo's spirits business is struggling with falling volumes and a halved dividend. Yet Moët Hennessy inside LVMH grew organic revenue 5% in the first half and lifted profit 11% to €582 million. Champagne and cognac had a bad two years; they appear to be recovering. ⚠️ The comparison is not perfectly clean — different products, different geographies — but it is a genuine data point suggesting that premium drinks demand is cyclical rather than terminal, which was precisely the question we could not resolve at Diageo.

Return on invested capital is 9.5%. For a business of this quality that looks wrong, and the explanation matters.

LVMH's operating brands earn enormous returns — Louis Vuitton is one of the most profitable consumer businesses on earth. But the group's invested capital includes roughly €41 billion of goodwill and brand value created by acquisitions, and above all the $15.8 billion paid for Tiffany. Once the purchase prices are in the denominator, the consolidated return falls to single digits.

This is the same pattern we found at Thermo Fisher, and the lesson generalises: a company can own wonderful businesses and still earn an ordinary return on the money it spent buying them. The difference here is that LVMH's crown jewels were not bought — Louis Vuitton and Dior came in at the beginning, at prices that are now a rounding error. The excellence is real; the acquisitions have diluted the measured return on it.

Everything turns on this. Between 2023 and 2025 LVMH's revenue fell 10% from its peak and its operating profit fell 25%. The cause is not disputed: Chinese demand for luxury collapsed. Property wealth evaporated, youth unemployment rose, an official mood of anti-ostentation took hold, and the currency moved enough to shift a lot of Chinese buying to Japan and back home rather than to Paris.

The question is what kind of decline this is, and it is exactly the question we were unable to settle at Diageo. Here we have a better instrument for answering it.

The most persuasive explanation of what happened is not that luxury demand fell. It is that one specific customer left.

During the 2021–22 boom, with travel restricted and savings accumulated, a large cohort of aspirational buyers — middle-class customers stretching for their first Louis Vuitton bag — entered the market at the same time. LVMH then raised prices hard, repeatedly, through 2021 to 2023. That combination pulled forward years of demand from precisely the customer least able to absorb a 30% price increase. When conditions normalised, that customer withdrew, and the very wealthy — who never left — were not numerous enough to fill the gap.

If that is the correct diagnosis, this is a cyclical problem with a self-inflicted component, not a structural one. The rich did not stop buying. The nearly-rich did, and they will come back — more slowly, and at prices that may have to stop rising for a while.

This is the most useful comparison available, and it is why we can say more here than we could at Diageo. Hermès sells into the same category, the same countries and the same wealth pool as LVMH. But it sells almost exclusively at the very top, it has never chased the aspirational customer, and it deliberately restricts supply — you cannot simply walk in and buy a Birkin.

Through the entire downturn, Hermès has continued to grow while LVMH shrank. That single fact does an enormous amount of analytical work:

It rules out "luxury is finished". If the category itself were in structural decline, the purest luxury company in the world would be the first casualty, not the last. It is not: it is the one still growing.

And it points the finger at the customer segment rather than the product. The part of the market that collapsed is the part Hermès never served. That is consistent with the bifurcation thesis and inconsistent with a generalised retreat from luxury goods.

⚠️ The uncomfortable corollary, and we will not skip it: if Hermès is growing because it stayed exclusive, then part of LVMH's problem is that it let too many people in. Louis Vuitton is a vastly larger business than Hermès and cannot be run on Birkin scarcity. Some of what LVMH lost may be the price of having been available.

We applied the same evidentiary standard we used on weight-loss drugs at PepsiCo. Here is the scorecard.

Our conclusion: this is a cyclical downturn with a self-inflicted pricing component, and it has begun to turn. We hold that with appropriate humility — a single quarter is not a trend, and we said the same thing about the need for evidence when we declined to call the AI threat at Paychex. But the combination of a return to growth, margins that never cracked, and a competitor who never stopped growing is a materially stronger evidence base than "the shares fell a lot and the brands are good".

★ And here is the fact that made us look harder at this company. While the shares fell through 2025 and into 2026, the Arnault family was buying — including a single purchase of around €270 million of stock — and in the process took its holding past 50% of the company, to just over half the equity and roughly two-thirds of the votes.

A controlling family does not need to buy more to keep control. Buying past fifty percent, with their own money, while the price is halving, is the most expensive way there is to express an opinion.

Be clear about what this does and does not tell you. It is not proof of anything — insiders can be wrong about their own companies, and a family buying its own stock also increases its grip. But it is a real economic commitment made at real prices, and it stands in useful contrast to Paychex, where the only insider buying in two years was two directors spending about $99,000 each.

The trade-off you accept as an outside shareholder is straightforward. You will never outvote them and you will never receive a takeover premium, because no one can buy this company without Arnault's consent. In exchange you get an owner-operator with almost everything he has in the stock, who has demonstrated over four decades that he will spend a decade building a brand rather than a quarter defending an earnings number. For a long-term holder that is close to the ideal governance structure, and it is exactly the arrangement Buffett has spent his career looking for.

Our house rule is that any dividend-paying company gets its payout examined properly — coverage on free cash flow rather than earnings, the trend, and what would have to happen for a cut. After the last few reports, this one is a relief to write.

The balance sheet matches. Net debt of €27.9 billion is just 1.25 times EBITDA, and the Altman-Z score of 3.99 sits comfortably in the safe zone. There is no financial risk in this company worth discussing. The dividend yield is 2.84%, which is not why you would own it — the case is capital growth from a business earning below its normal margin.

The arithmetic of the case is simple enough to state in one paragraph. LVMH earned a 26.2% operating margin in 2023 and earns about 22% now. On roughly current revenue, restoring the old margin would add some €3 billion to operating profit and take earnings per share back towards €28–30. At today's price that would be about 15 times earnings for the best collection of luxury brands in the world. That, and nothing more sophisticated, is what the analysts' €569 target represents.

★ And here is the discipline this report has to keep. That case rests entirely on margin recovery, and margin recovery is an assumption, not a fact. If 22% is the new normal — because the aspirational customer is permanently poorer, or because LVMH must stop raising prices to win them back — then the shares are worth roughly what they cost today. Our own cash flow model, which extrapolates from current margins rather than assuming a return to the old ones, says exactly that: $91.83 against a price of $106.03.

We are reporting both because both are honest. The bull case and the bear case here are not different views of the facts. They are the same facts with a different assumption about one number.