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After Sparkling Half, LVMH Hopes High

PARIS — Bernard Arnault, the bullish chairman of LVMH Moët Hennessy Louis Vuitton, likes to brag that the French luxury giant can outpace the tough economy. <br><br>"It’s the company that matters," Arnault told a meeting of press and...

PARIS — Bernard Arnault, the bullish chairman of LVMH Moët Hennessy Louis Vuitton, likes to brag that the French luxury giant can outpace the tough economy.

“It’s the company that matters,” Arnault told a meeting of press and analysts here on Thursday as LVMH reported double-digit increases in first-half operating profit and net income before goodwill amortization. “It’s creative products and entrepreneurial management that makes the difference. LVMH is unlike other luxury groups.”

Arnault’s words underscored LVMH’s 19 percent gain in first-half operating income to $814.8 million, which outpaced most analysts’ expectations. Net income before goodwill amortization in the period grew 10 percent to $339.5 million. As reported, sales in the period gained 2 percent to $5.6 billion. Dollar figures are converted from the euro at current exchange rates. French firms report sales and earnings separately.

Despite an upbeat message sparkling with corporate vitality and high hopes for the rest of the year, Arnault acknowledged that second-half growth hinges on the delicate geopolitical situation. “If the United States attacks Iraq, and all of the indicators seem to point in the direction that it may do so, the economy will most certainly suffer,” he said.

“LVMH is the only luxury group, apart from Hermès, that hasn’t disappointed the market,” said Antoine Colonna, equities analyst with Merrill Lynch.

At roughly the same hour, Compagnie Financière Richemont, the Swiss luxury firm whose brands include Cartier, Dunhill and Van Cleef & Arpels, said sales dropped 5 percent in the five months through August. Excluding exchange effects, sales declined 1 percent, said chairman Johann Rupert at a shareholders’ meeting in Zoug, Switzerland. Without providing specifics, Rupert warned that first-half profits would be down from last year.

Claire Kent, luxury goods analyst at Morgan Stanley in London, called the LVMH numbers better than expected and driven by the effervescent wine and spirits division, which includes Dom Perignon champagne and Hennessy cognac.

However, Kent warned that there was no reason to be optimistic for the second half, considering the economic environment.

For his part, Arnault predicted a “significant” improvement in operating profit for the full year despite “economic uncertainty.” He said sales in July and August were on par with growth in the first half; he reiterated a pledge to double sales and profits in five years.

Arnault singled out new products, including Vuitton’s Tambour timepiece and the Vuitton Cup sportswear and leather goods line, and Dior’s Addict fragrance, as motors for second-half growth.

“The Vuitton watch is a success,” boasted Arnault. “There’s already a waiting list in many countries.”

He said 300 of the watches, which retail from about $1,165 to $6,300, were sold on the first day of business in its new Omotesando, Tokyo flagship, which opened early this month.

“There is significant growth in certain markets, for example in Japan, where Louis Vuitton’s strong,” added Arnault. “Even before the Omotesando store opened, sales were good. But the store will continue to fuel business.”

Arnault praised the new 10,000-square-foot Tokyo flagship, Vuitton’s largest store to date. He reported that clients camped on the sidewalk to visit the first day. “There was a line around the building,” he said. “By mid-afternoon we had to turn people away; we told them that there wasn’t enough room in the shop for them to come in.”

By yearend, Vuitton plans to open its first unit in Russia, in Moscow, and add stores in Chicago and Japan.

Arnault suggested LVMH’s DFS, or duty-free shoppers division, would be most severely affected by a confrontation with Iraq. “That’s the biggest problem DFS faces,” he said. “If there’s war, airports and tourism will screech to a halt.”

Arnault said the company would continue to focus on organic growth and build its “star brands,” such as Vuitton, Dior and Fendi.

LVMH controls 66.9 percent of Fendi. It is currently reorganizing the Roman fashion house, installing new management and production teams.

Arnault trumpeted the brand’s potential. “In two to three years, we believe we can replicate at Fendi the success we’ve had at Dior,” he said. “Fendi will become the leading Italian fashion brand within the next five years.” LVMH expects Fendi to turn a profit within two years.

As for Dior, Arnault said the house was on line to “imitate the success of Vuitton.” Arnault said sales were increasing in excess of 50 percent in certain Dior retail units.

LVMH’s fashion and leather goods division, its largest business group, with brands from Christian Lacroix and Donna Karan to Thomas Pink and Givenchy, saw operating income increase 3 percent to $635.4 million. Besides Vuitton and Dior, Arnault cited the success of Céline’s Boogie bag. Yves Carcelle, head of fashion and leather goods, added that Loewe, the Spanish leather brand, was selling briskly in Japan.

Arnault said LVMH has decided to grow its houses slowly. “We make sure we can turn a profit before we invest in a house,” he said. “We don’t pour money blindly into an untested brand. Only when we’re certain of success do we begin to invest.”

Operating income in the perfumes and cosmetics division decreased 38 percent to $29.1 million. Arnault said investments weighed on profitability. The firm expects the launch of Addict as well as new men’s fragrances from Givenchy and Marc Jacobs to buoy sales in the second half. Meanwhile, LVMH is gearing up for the relaunch next year of Guerlain.

The watch and jewelry division, due to production reorganization and investment, lost $6.8 million on an operating basis.

The selective distribution arm firm narrowed its losses to $37.8 million compared with losses of $101.9 million in the first half last year. Arnault said he expects Sephora, which halved losses in the U.S. after closing money-losing units, to become profitable next year.

Operating income in wine and spirits grew 26 percent to $268.7 million.

LVMH stock closed down 0.6 percent to $42.20 in trading on the Paris Bourse.