$400B LVMH Dreams

TLDR:

Why I left Gorgias

Learning from LVMH’s Lux-conomy

LBAB Community - Why I left Gorgias

Last Monday, I finally made the jump to go full time on LBAB! In classic side hustle fashion, the late nights and early mornings have grown it to a full-time gig. 

So, why would someone working at a category-leading Shopify app leave a high-paying salary with all that equity?

2 reasons:

1. You create significantly more wealth owning your own biz than working for someone else.

2. This is so much more than a hobby to me.

Story time.

Back in May of 2020, I started looking at Buying a Biz for passive income. Something that would require 15-20 hours a week while I ran BD at Daasity. I made all the classic mistakes:

• Wasted time on small deals/Overvalued bizs

• Chased owners who weren’t really interested in selling

• Hoped to get into deals that were already baked

• Got distracted by interesting bizs that I wouldn’t want to run for 10 yrs

• Didn’t send LOIs soon enough

It’s been weird calling this a hobby. I deeply enjoy the work and did it in my free time. But this has always been about building a real biz: 

1. Hunting for bizs

2. Building relationships with owners 

3. Diving into P&Ls & Balance Sheets 

4. Building Game plans to expand EBITDA

5. Sending Term Sheets 

I've looked at 250+ deals in the past 3 years. Passed on more than I can count. Failed to acquire a couple. Advised PE firms on what to do with the eCom assets. Passed a couple along for PE partners to acquire. 

But I haven’t been able to catch my white whale: finding the right one to buy and operate myself.

Late last year, there were a couple of deals I poured hours into that ended up falling through. It reminded me of how much I love operating bizs. While I've been investing, advising, and consulting eCom Bizs for 4-5 years + supporting tens of thousands between Daasity and Gorgias… 

It isn’t the same. It’s time for me to get back in the game and operate 1 myself.

This is going to be my 8th biz I started/operated. I'm so pumped to get back into the arena.

I also feel like this is the perfect time for eCom.

How we survived the past couple of years: from the insanity of the COVID-boom to the always-looming consumer credit crisis. The past 4 years have been a white-knuckled roller coaster.

And there are a lot of great bizs out there that need a lot of love + attention. 

So, I’m giving myself 1 year to find, acquire, and run a brand or SaaS.

Here’s what I’m looking for:  

If your biz fits that criteria or you know someone who does, send them my way. I’d love to take a look.

Now, for the most aspirational brand we’ve looked at. Let’s take in the incredible lessons LVMH has to offer.

Let’s Examine This Biz

If it were a country, LVMH would be the #73 largest economy in the world: behind Venezuela and ahead of Uzbekistan. This Portco Powerhouse (with 75 luxury “houses”) is flourishing in the Lux-conomy.

Trading at $176.09/share with a $439.8B market cap, +1,135% since Oct ‘08, this Brand House is truly the shining example of success.

Their 75 Houses span all the major luxury categories:

• Fashion (Louis Vuitton)

• Spirits (Moët & Hennessey

• Accessories (Fendi)

• Jewelry (Tiffany)

• Beauty (Sephora, Fenty), and many more.

• They’re even designing the Paris 2024 Olympic Medals.

This biz is completely out of reach at a $439.8B cap, but Let’s Buy A Bit of the ultimate luxury biz and get a taste of how the richest man in the world lives.

Today, we’re going to dive into the 3 reasons why this is the biz to learn from.

For the <$10m Rev/yr, take aspiration, but not inspiration. The strategies and tactics will be irrelevant for a while. It’s important to analyze the best to see what the end of the map looks like, but don’t try to recreate LVMH next year.

Financial Summary

TLDR Analysis: Playing a different ballgame

• LVMH’s ‘23 Rev >>> 31 brands we analyzed so far COMBINED. 🤯

• GM% @ 69% AND NI% @ 18%. 🤤

• They Spend $30B/yr on Sales & Marketing. $30B!!!

• 29x P/E ratio & 5x Rev multiple is ok considering it’s scale

• $496k Rev/employee is solid considering they have 173k Employees.

LVMH is basically its own economy. And the Lux-Conomy is GREAT right now. This biz is the gold standard for luxury bizs and for good reason. Strong margin profile across the board. Disciplined operations with precise cost controls. 

They’re not lost in the sauce of the luxury lifestyle. They’re monetizing every ounce of it and building the future collection of Luxury Houses.

The Arnault family owns 48% of the biz with 64% of the voting rights. This family is worth $210.9B!!!! It feels insane to say, but then you look at how well this biz is operating.

Let’s Learn This Biz!

I can’t afford to buy this biz, but here are the 3 aspirational insights I’m taking away. 

1) A+ Marketing & Sales Wins over Product Quality

If you can convince a person to change their life, you’re sitting on a pot of gold.

I know this sounds obvious, but how much of your marketing is truly creating that demand to build new consumer habits?

How much of your product offering and branding is dedicated to changing the way people live?

It’s expensive and sounds ludicrous, but it works. LVMH spent $30B last year convincing customers that they needed to drop serious $$$ on clothes, bags, perfumes, drinks, and jewelry because it will make them “better people.”

None of those products have an exponentially better quality than anything else on the market. Moët doesn’t get you drunker than a $10 bottle of prosecco. Louis Vuitton bags don’t hold 10x more than a purse from Walmart.

None of that matters. LVMH’s brands have convinced customers to see themselves differently. And they spent tons of money to do that.

Luxury isn’t the right playbook for everyone. Changing the way people see themselves might not be right for your brand.

But here’s the key insight:

Wedge yourselves into changing a core part of the consumer’s life.

That is our equivalent of hitting a gold vein or an oil gush.

Actually creating that change is hard and expensive to accomplish, but once you do, the flywheel is virtually unstoppable. But as we can see with LVMH, your product doesn’t actually have to be better than the competition.

It just has to be positioned better.

Takeaway: Invest in changing Consumers' lives. That flywheel is unstoppable.

2) Just Stay the Course.

I know you come here for the out-of-the-box growth ideas, but sometimes it feels like we wildly forget the fundamentals. The blessing of LVMH is that they have to protect a legacy (these are centuries-old brands). 

I know that sounds crazy coming from the guy who talks about disruption and shaking things up every week.

But even for the disruptors, it’s too easy to stray from the original mission and get lost on side quests. It’s easy to lose sight of the “mission to the moon” when you’re experimenting and chasing the “new-new thing”.

In reality, Patience + Compounding interest is what matters. Everyone is so wrapped up in hitting that next number that they forget that momentum will carry their growth regardless of how hard they hustle. The point of hustling is to build more momentum.

Your take away today. Spend 1 weekend every year backcasting 30 years from now. 

What is the legacy of what you’re working on that you have to protect?

Takeaway: Compounding growth is the greatest value creator. Full Stop.

3) In Good Times, Invest for Better times.

The difference between Great Sellers vs. Great Biz Builders is knowing where to invest. From all my experience, I’ve learned it’s easier to cut expenses in the hard times than to know where to invest budget in the good. If you can master that, you’ll build an enduring asset.

LVMH made 1 of those hard moves this year, and my bet is it will pay off in spades over the next decade. Here’s how they did it.

The chart we’re going to review is more technical than we usually see, but makes my heart sing. So we’re going to break it down + how you can adapt it to think about for your biz.

The Left chart is looking at Net Cash from Operations (Calculation: Sales - COGS - OPEX).

Basically, how much cash is left over after running the biz without investments or financial considerations. AKA the cash flow equivalent for EBITDA. 

We can see that LVMH had a monster year, creating $18.4B in Operating Cash.

The second chart is Operating Investments: how much they’re investing back into the biz. What’s crucial here is the sustained continued investment. 

This biz is an absolute cash machine, but the owners aren’t sucking it dry. They’re reinvesting back into the biz every year. Their Operating Investment growth is far exceeding the rate their Operating Cash is.

Then the 3rd chart is the Operating Free Cash Flow (FCF), which is a result of the first 2 charts. This is THE GOAL for every biz. I don’t care if you raised or not. This is THE END GAME. More on this is a sec.

Their Operating Cash is fairly consistent over the past 3 Years, and they’re investing more of their Operating cash, so there’s less FCF.

So what does all this mean? LVMH is:

1. Creating an incredible amount of cash. 

2. Reinvesting ~40% of it back into the biz.

3. Building one of the most valuable bizs on the planet.

Yes, $3B, or even $7B, could go into investors pockets this year. But again. They’re building + preserving a legacy. 

The key to having an incredibly successful ATM is to ensure there’s always cash in it. May we all be blessed enough one day to make these kinds of decisions.

Takeaway: Build an engine + Invest in the future engine = True Wealth Creation

Final Thought

Most of the brands we analyze don’t have an FCF analysis because they aren’t cash flow profitable. But this is their biggest miss, which hurts all of us.

FCF is THE most important metric if you own the biz.

It’s literally the amount of dollars in your pocket at the end of every year.

When you add on that FCF literally determines whether your biz lives or dies, you realize how truly great idols LVMH are.

Valuations and Revenue #s are all just noise. Live every day on the FCF maximization train. That doesn’t mean you don’t invest in Marketing or your team or growing the biz.

But it does mean making every decision in your biz around increasing FCF. 

The last reason I’m going full soapbox here is because this metric determines your Ent value. The other metrics are just proxies for investors to figure out how much cash the biz will kick off. 

👆What investors actually care about.

When we look at a biz, all the metrics are inputs to figure out how much cash the biz will throw off (cough cough FCF).

As you’re looking at your 2024 goals this year, stop obsessing about how much topline you’re adding. Instead obsess over how much FCF you’re generating. It’ll radically change the way you think about every decision. 

For those that do… Send me a shot of your boat, insane vacation, new home, etc. 

🧠 The Takeaways

LVMH is too expensive to acquire, so we’re buying a stake in this historic house of brands to learn invaluable lessons for our own biz.

1. Product Positioning is creating insane margins (Gross, Net Income, and FCF).

2. Patience is paid in Compounding Interest. Stay the course.

3. In Good times, take some chips off the table, but always invest for better times.