Daily Brief: LVMH Has Its Conglomerate Strategy Down To A Fine Art

Daily Brief: LVMH Has Its Conglomerate Strategy Down To A Fine Art

almost 3 years ago3 mins

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No more Mr. Nice Luxury Conglomerate: LVMH announced on Friday that it’d agreed to up its stake in Italian luxury shoemaker Tod’s.

What does this mean?

It’s par for the course for the world’s biggest luxury companies to buy stakes in smaller rivals, if not acquire them outright. And LVMH is no exception: in recent years it’s partnered with Stella McCartney and Rihanna, as well as buying out fashion brand Christian Dior and – after some second thoughts – American jeweler Tiffany’s.

And now for the low, low price of $90 million, LVMH will increase its ownership of Tod’s from 3% to 10%. That won’t just allow it to benefit when the Italian company does well: it’ll put it in prime position to buy the whole company down the line. See, unlike old-school industrial conglomerates whose various businesses didn’t cross over much, LVMH specifically wants that overlap. That way, it’ll drive “synergies” – i.e. remove duplicate costs across marketing and distribution – and boost its profit.

More deals to come

Why should I care?

For markets: LVMH could be tempted to spend more.

Investors took it as a good sign when luxury brands Hermès and Pernod Ricard announced stronger-than-expected sales early last week, and they rushed to buy up shares of the industry’s other companies. But they might’ve been too hasty: Moncler’s results on Friday were “only” in line with expectations, and the skiwear brand’s stock fell 4% – a drop some analysts think might be enough to tempt LVMH to dig deep again…

Zooming out: Luxury conglomerates are the new private equity firms.

One way to look at LVMH is as a sector-focused private equity firm, taking over companies and setting them up for success. If it’s looking to make US school buses look chic, though, it’s been beaten to the punch by a generalist private equity firm: Sweden’s EQT – having just closed a near-$20 billion fund – agreed to buy FirstGroup’s US school bus business for almost $5 billion on Friday.

Keep reading for our next story...

Snap Inc. Reported Stronger-Than-Expected Results

Snap image

Snapchat parent Snap Inc. reported stronger-than-expected first-quarter results late last week, and the company’s stock price initially crackled and popped 6% on Friday.

What does this mean?

280 million users were Snapchatting on an average day last quarter, slightly more than investors had expected and schoolteachers had hoped. It’s this attention, or distraction, that Snap sells to advertisers (at ever-higher prices), meaning the company’s revenue exceeded forecasts too. Combined with keen cost-control, Snap’s profit per share broke even last quarter, while analysts had anticipated a narrow loss.

Snap stock
Source: Google Finance

And the good news just kept coming. The firm’s “free cash flow” – what’s left over after necessary reinvestments – was positive last quarter for the first time in its four-year history as a public company. Snap’s also forecasting that this quarter’s revenue will be 80-85% higher than the same time last year, more than investors had thought.

Snap’s quarterly revenue
Source: The Wall Street Journal

Why should I care?

For markets: What’s good for Snap is probably good for Twitter.

As Snap’s stock rose on Friday, so too did social media rival Twitter’s. No surprise there: the two companies’ share prices have moved in lockstep for much of the year so far. But while a strong performance for Snap should bode well for Twitter’s own forthcoming results, the read-across is less clear for advertising behemoths Facebook and Alphabet: with new costs afoot, there are more curveballs in the mix ahead of this week’s earnings updates.

Digital Ad Duopoly
Source: Bloomberg

The bigger picture: Apple’s days may be numbered.

Snapchat also revealed last week that a recent app rebuild has helped its Android user base overtake the iPhone-wielding demographic. The implications of that inversion could be bigger than investors realize: with Apple’s new privacy changes set to make advertising less effective on its platforms, publishers and developers may start focusing more heavily on the Android ecosystem.

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