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A few days ago, Bernard Arnault passed Elon Musk as the world’s richest person.

His estimated fortune is $171 billion. 👀

He became the fifth person ever to rank No. 1 on Bloomberg's wealth index since it debuted in 2012. The others? Carlos Slim, Bill Gates, Jeff Bezos, and Elon Musk.

Arnault is chairman and CEO of Louis Vuitton SE or LVMH (LVMUY), a French conglomerate with a roster of more than 70 luxury brands.

He has earned the nickname “the wolf in cashmere” for his business acumen in the luxury industry.

So you might be wondering

Today, we’ll cover the following:

1. Who is Bernard Arnault?

2. How does LVMH make money?

3. A closer look at the financials.

1. Who is Bernard Arnault?

After graduating from Ecole Polytechnique (France's leading engineering school), he took over the family business, encouraging his dad to focus on real estate.

His mother had a fascination for Dior. So in 1984, when he heard that the French government was looking for a buyer of the Boussac Saint-Frères (a conglomerate that owned Chistian Dior), he jumped on the opportunity. He was able to acquire the struggling business, restructured and turned it around in under three years.

Arnault had the idea was to create a conglomerate of luxury brand. LVMH was founded in 1987, and the rest is history.

Let me summarize almost 40 years of expansion in 40 seconds:

• 1987: Creation of LVMH. Moët et Chandon and Hennessy (champagne and cognac) merged with Louis Vuitton (luxury goods).

• 1988: Givenchy (couture and ready-to-wear brand).

• 1993: Berluti (men’s shoes, leather goods).

• 1993: Kenzo (womenswear and menswear brand) $80 million.

• 1994: Guerlain (perfume, cosmetics, and skincare).

• 1996: Céline (ready-to-wear, leather goods, shoes and accessories) $540 million.

• 1996: Loewe (leather goods and ready-to-wear).

• 1997: Marc Jacobs (fashion and leather goods).

• 1997: Sephora (cosmetics chain).

• 1999: Tag Heuer (Swiss watch) $739 million for 50.1% ownership.

• 1999: Gucci Group LVMH took a 34.4% ownership, ultimately sold.

• 2000: Emilio Pucci (fashion and leather goods).

• 2000: Rossimoda (fashion).

• 2001: La Samaritaine (department store) 55% stake for €256 million (later 100%).

• 2001: Fendi (high-end luxury goods) 51% stake (later 84%).

• 2001: Hermès 5% stake (23% later), utlimately divested after regulator scrutiny.

• 2010: Moynat (trunkmaker).

• 2011: Bulgari (jewelry) 50.4% stake for $6.0 billion.

• 2013: Loro Piana (luxury textile) 80% stake for €2 billion.

• 2015: Repossi (jewelry) 41.7% stake (later 69%).

• 2016: Rimowa (luggage) 80% stake for €640 million.

• 2017: Christian Dior (luxury goods) $13.1 billion deal. Previously Groupe Arnault.

• 2018: Jean Patou (couture label).

• 2019: Fenty (joint venture with Rihanna, who holds a 49.99% stake).

• 2019: Stella McCartney (joint venture).

• 2020: Tiffany & Co. (jewelry) $15.8 billion.

All these transaction have turned LVMH in a giant conglomerate

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2. How does LVMH make money?

Revenue by business groups:

• 🍷 Wines & Spirits (~9% of overall revenue).

• 👜 Fashion & Leather goods (~48% of overall revenue).

• 💅 Perfumes & Cosmetics (~10% of overall revenue).

• 💍 Watches & Jewelry (~14% of overall revenue).

• 🛍️ Selective retailers & other (~19% of overall revenue).

LVMH only reports its financial performance twice a year, so the most recent period available is the first half of 2022.

At the end of June 2022, the company had 5,582 worldwide (+3% Y/Y).

Looking at the revenue mix by continent:

• Asia 39% (7% for Japan alone).

• Unites States 27%.

• Europe 22% (7% for France alone).

• Other markets 12%.

Revenue growth has been strong in Europe, the US and Japan. Asia (excluding Japan) has been adversely impacted by health restrictions in China.

3. A closer look at the financials

Here is a bird’s-eye view of the income statement for the first half of FY22.

Main highlights:

• Revenue grew +28% Y/Y to $36.7 billion.

  • 🍷 Wines & Spirits grew 23% to €3.3 billion.

  • 👜 Fashion & Leather goods grew 31% to €18.1 billion.

  • 💅 Perfumes & Cosmetics grew 20% to €3.6 billion.

  • 💍 Watches & Jewelry grew 22% to €4.9 billion.

  • 🛍️ Selective retailers & other grew 30% to €6.6 billion.

On a constant consolidation scope and currency basis, revenue grew only +21% Y/Y, which is a better representation of the growth profile of the company.

• Gross margin was 69% (+1pp Y/Y).

• Operating margin was 28% (+1pp Y/Y).

  • 🍷 Wines & Spirits 35% (+1pp Y/Y).

  • 👜 Fashion & Leather goods 41% (flat Y/Y).

  • 💅 Perfumes & Cosmetics 11% (-2pp Y/Y).

  • 💍 Watches & Jewelry 20% (+1pp Y/Y).

  • 🛍️ Selective retailers 6% (+4pp Y/Y).

Fashion and Leather goods is the highest-margin segment. As a result, it’s even more critical to the overall business than you might think (48% of the overall revenue, but 73% of the overall operating profit).

Cash flow:

• Operating cash flow was €7.3 billion (20% margin, -7pp Y/Y).

Balance sheet:

• Cash and cash equivalent: €10.4 billion.

• Gross borrowings (short and long-term): €21.5 billion.

The company’s net debt was €11.1 billion at the end of June.

Given the cash flow generated by the business on an annual basis, it’s not really concerning. The sustainability of the business is not at risk. The company’s debt-to-equity ratio is reasonable below 25% in the past year.

I hope this article gives you a better sense of the story behind this giant French conglomerate, how it makes money, and what drives its financial performance.

It took a massive drawdown in the tech sector in the past 18 months, but as of this writing, LVMH is behind the largest fortune on earth in the form of its CEO Bernard Arnault. Maybe a sign of the uncertain times we are going through.

While you are here, I take the opportunity to wish you a wonderful Holiday season, from my family to yours. 🎉

That’s it for today!

Stay healthy and invest on!

Disclosure: LVMH is not part of the App Economy Portfolio. I share my ratings (BUY, SELL or HOLD) with App Economy Portfolio members here.