I have just confirmed with LP that they use weighted average cost to calculate COGS. So we should not have a large inflation mismatch. If someone has an idea to why the cost per bottle decreased in 2023 vs. an increase in general inflation, would be highly appreciated.
Apologies for the late response. After double-checking, this is true. But even with the AVCO method, there should still be a significant inflation impact because of the 18 to >36-month aging requirement. Their disclosure is quite bad and they should have made a better attempt to help us understand the past few years of results better. Have you tried a call with management or an IR member?
I messaged with the IR, but besides confirming the weighted average cost method they didnt want to give further insights as to why the cost per bottle increased only little vs. the strong increase in general consumer prices. They said they cannot share non-public information.
Thanks for this. So they don’t even throw us a bone… honestly this type of stuff makes me even more indifferent to the stock. Why own a company that is so ignorant of non-family shareholders? They do not articulate drivers in any detail at all.
Dont they use weighted average cost to calculate COGS (instead of FIFO)? Meaning that the COGS of FY23/24 should already incorporate 3 years of inflation and 1 year of pre inflation. (I dont have gross margins 23/24 yet, but EBIT margins are higher again). I am still puzzled by the decline in unit costs in FY22/23 though.
RoE is quite low indeed. However, incremental RoE might be higher. My reasoning is that their investment in inventories is mainly driven by their premiumization strategy. Premium champagne stays longer in the inventory and hence the need for inventory investment. On the other hand, premium champagne has also higher profit margins, and hence leads to higher return on incremental capital.
I like your analysis.. I think you should also apply a NPV discount for inventory, not only for vintage issues but it is also almost 4 years of sales, so, at the very least, applying a 10% pa discount would dramatically lower the NPV of it.. However, I think not all investments need to be super charged, and given the defensiveness of this business and steady state nature of margins, visibility and all, it is not a bad one, quite defensive, good inventory support and well protected, high barriers to entry.. I caneasily see a 10%+ IRR, many years out..
Salon is way more ultra-premium than Armand de Brignac (LVMH). Salon can easily cost >1000€, sometimes several thousand € per bottle. They are extremely picky on quality, produced only 44 vintages in 120 years.
I have just confirmed with LP that they use weighted average cost to calculate COGS. So we should not have a large inflation mismatch. If someone has an idea to why the cost per bottle decreased in 2023 vs. an increase in general inflation, would be highly appreciated.
Apologies for the late response. After double-checking, this is true. But even with the AVCO method, there should still be a significant inflation impact because of the 18 to >36-month aging requirement. Their disclosure is quite bad and they should have made a better attempt to help us understand the past few years of results better. Have you tried a call with management or an IR member?
I messaged with the IR, but besides confirming the weighted average cost method they didnt want to give further insights as to why the cost per bottle increased only little vs. the strong increase in general consumer prices. They said they cannot share non-public information.
Thanks for this. So they don’t even throw us a bone… honestly this type of stuff makes me even more indifferent to the stock. Why own a company that is so ignorant of non-family shareholders? They do not articulate drivers in any detail at all.
Insightful, thank you.
Dont they use weighted average cost to calculate COGS (instead of FIFO)? Meaning that the COGS of FY23/24 should already incorporate 3 years of inflation and 1 year of pre inflation. (I dont have gross margins 23/24 yet, but EBIT margins are higher again). I am still puzzled by the decline in unit costs in FY22/23 though.
RoE is quite low indeed. However, incremental RoE might be higher. My reasoning is that their investment in inventories is mainly driven by their premiumization strategy. Premium champagne stays longer in the inventory and hence the need for inventory investment. On the other hand, premium champagne has also higher profit margins, and hence leads to higher return on incremental capital.
Great article on Laurent-Perrier.
Looked at Laurent-Perrier myself and passed.
Returns on capital are just terrible and they don't even own a lot of land (10% if I remember correctly).
Agricultural land in the Champagne region is also very expensive. This makes it difficult to generate good returns on capital.
There is a limit on how much more people pay for just a name. You can buy great sparkling wines from other regions in France as well.
Add the risks of over earning in the last couple of years (well explained in this article).
Just look at how other spirit stocks are performing.
Not sure if there is ever a time to buy a Champagne brand, but this is not the time in my opinion.
Definitely agree, Wubbe.
I like your analysis.. I think you should also apply a NPV discount for inventory, not only for vintage issues but it is also almost 4 years of sales, so, at the very least, applying a 10% pa discount would dramatically lower the NPV of it.. However, I think not all investments need to be super charged, and given the defensiveness of this business and steady state nature of margins, visibility and all, it is not a bad one, quite defensive, good inventory support and well protected, high barriers to entry.. I caneasily see a 10%+ IRR, many years out..
Salon is way more ultra-premium than Armand de Brignac (LVMH). Salon can easily cost >1000€, sometimes several thousand € per bottle. They are extremely picky on quality, produced only 44 vintages in 120 years.
Good comment, thank you. Those are insane prices.