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LVMH v. Morgan Stanley: Luxe Group Out to Show Major Damages in Case

LVMH’s war with investment bank Morgan Stanley could reach a new level this fall, according to the firm’s 2003 annual report.

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PARIS — LVMH Moët Hennessy Louis Vuitton’s war with investment bank Morgan Stanley could reach a high point this fall.

The French luxury goods giant vows to soon bring forth supporting evidence of “extremely substantial” damages caused by the investment firm, already ordered by a Paris court last January to pay 30 million euros, or $36.5 million, for “gross misconduct” related to its investment research.

That’s just one of the juicier nuggets that can be gleaned from LVMH’s recently released 2003 annual report and its accompanying legal and financial information. Other revelations include the fact that chairman Bernard Arnault was not the most compensated executive at the 11.96 billion euro, or $14.56 billion, firm and that LVMH lost a tidy sum — 139 million euros, or $169.2 million — to rid itself of underperforming and nonstrategic brands last year.

The Morgan Stanley case is discussed in the “litigation and exceptional events” section. As reported, the Paris commercial court appointed an expert, Didier Kling, to quantify material damages for what LVMH described as a premeditated and systematic effort to denigrate LVMH while favoring rival Gucci, which receives financial advice from Morgan Stanley.

Kling is expected to submit his findings this fall. The nature and content of LVMH’s supporting evidence could not immediately be learned.

Morgan Stanley is appealing the decision, denying any wrongdoing and standing by its equity research by luxury analyst Claire Kent. The appeal, set in motion last June, is now in a period of submissions and rebuttals that is sure to take the case into 2005.

Meanwhile, the report outlines details of the group’s executive compensation. Just over 1.2 million stock options were granted last year, more than half of them to Arnault at an exercise price of 37 euros, or $45. Group managing director Antonio Belloni, Arnault adviser Pierre Gode and vice president and special adviser Nicolas Bazire each were granted 200,000 options. Gilles Hennessy, a member of the board of directors, was granted 20,000 options.

Only two company officers exercised options last year, with Gode pocketing 1.22 million euros, or $1.49 million, and Hennessy gaining 140,000 euros, or $170,380.

Last year, Belloni and Gode were the most compensated executives at LVMH, with fixed and variable compensation and director’s fees totaling 2.2 million euros, or $2.68 million, for Belloni and 2.4 million euros, or $2.9 million, for Gode.

Arnault took home a total of 1.9 million euros, or $2.3 million; however, his family company, Groupe Arnault, and the Arnault family hold 47.6 percent of share capital and 63.2 percent of voting rights.

The financial statements also enumerate [[detail?]] a substantial amount of wheeling and dealing last year on the part of the luxury goods group — often highlighting the fact that LVMH paid top dollar for past acquisitions and had to cut its losses to shed them at a bottom-basement prices. In most cases, the reported gain for disposals was far less than market sources had estimated.

For example, LVMH last year netted:

  • 15.5 million euros, or $18.9 million at current exchange, from the sale of beauty firm BlissWorld;

  • 59 million euros, or $71.8 million, from the sale of fragrance licenses for Michael Kors, Marc Jacobs and Kenneth Cole;
  • 40 million euros, or $48.7 million, for the Ebel brand and related manufacturing and operating assets;
  • 15 million euros, or $18.2 million, from the sale of Hine cognac, and 40 million euros, or $48.7 million, for Canard-Duchene champagne;
  • A symbolic sum, possibly one euro, or $1.22, for the sale of the Tajan auction house.

The report discloses details about one high-profile disposal from 2002 as well. It says the Hard Candy and Urban Decay brands were sold in December of that year for a total of $1 million.

Continuing to focus on organic growth, LVMH made no acquisitions last year; however, it did tighten its grip on brands already in its stable. It spent:

  • 191 million euros, or $232.4 million, to up its stake in Fendi to 84 percent from 67 percent;

  • 56 million euros, or $68.2 million, to increase its ownership of Italian shoemaker Rossimoda to 97 percent from 45 percent;
  • 42 million euros, or $51.1 million, to reach a 99 percent stake in Laflachère Group (which makes everything from hairbrushes to toothbrushes and toiletry cases) from 57 percent;
  • 9 million euros, or $10.9 million, to buy the 50 percent of Italian perfumer Acqua di Parma it didn’t already own.

LVMH never gives breakdowns by brand for its giant fashion and leather goods division, which generated sales of 4.16 billion euros, or $5.05 billion, last year, about 35 percent of the company’s total. However, the report sheds some light on individual performances.

Louis Vuitton is described as the “star” of the business group. The report boasts that Vuitton ranks number one in leather goods in Japan, ahead of Hermès and Gucci, and second in the United States behind Coach, a firm Arnault is said to greatly admire — and closely monitor.

Some of the smaller brands also logged good performances, led by a 60 percent increase in constant currency terms at Marc Jacobs, a 25 percent rise at high-end footwear firm Berluti and a 24 percent increase at eluxury.com.

Net sales at Spanish leather goods and fashion firm Loewe rose 7 percent at constant currency, buoyed by strength in Japan, while Celine posted a 13 percent increase, driven by leather goods and a store network that grew by nine locations for a total of 100 at yearend, the report says.

Givenchy, whose couture and ready-to-wear collections by recently departed designer Julien Macdonald generated tepid reviews, saw sales increase “slightly” at constant currency. Still, the report stresses that the focus of that business has been on its men’s wear, “which now accounts for the major portion of its sales revenues.” Ozwald Boateng, who joined Givenchy as its first men’s artistic director, showed his initial collection for the brand in Paris last July. A successor to Macdonald has yet to be named. Givenchy counts 72 boutiques worldwide, 45 of them in China.

Donna Karan and Fendi are characterized as works in progress — the former reducing its retail network and embarking on “the long-term job of developing its accessories lines,” and the latter repositioning and renovating its retail network and concentrating on leather goods and shoes.

However, the report notes, “Fendi turned in its best performance in Japan, in the other Asian countries and in Great Britain.”

Meanwhile, Christian Lacroix, who has yet to announce the renewal of his employment contract with LVMH, gets some kind remarks for his extracurricular work at another of the group’s divisions. “The success of the collections created by Christian Lacroix accounted in large part for the increase in Pucci’s sales,” the report says, pegging the rise at 50 percent in 2003.

The report also shows licensing is hardly out of vogue at LVMH — despite the trend in the Nineties to bring such licenses in-house whenever possible, and the furor that comments by Serge Weinberg, chief executive of rival Pinault-Printemps-Redoute, set off this spring when he said licensing in some cases makes sense for luxury brands. Discussing the Lacroix business, LVMH’s annual report says growth is based “on licensing agreements signed with the best designers, notably in perfumes, footwear and tableware.”

As for perfumes and cosmetics, LVMH trumpets that it ranks third worldwide in the upscale perfume segment, fourth in the United States and first in France with a market share of 20.4 percent.

In luxury watches, LVMH ranks fourth worldwide with a 9 percent market share, the report says.

LVMH remains a huge advertiser, and the report tallies 2003 communication expenses across all brands, including public relations, marketing and advertising at 1.41 billion euros, or $1.72 billion at current exchange. While this is less than the 1.44 billion euros, or $1.75 billion, spent in 2002, the 2003 total represents 11.8 percent of net sales, up from the 11.4 percent for the year earlier.

Capital expenditures — on real estate, stores, factories and equipment — totaled 578 million euros, or $703.4 million, last year, slightly more than the 559 million euros, or $680.3 million, spent in 2002, but far less than the 984 million euros, or $1.2 billion, dispensed in 2001. All dollar figures are at current exchange.

Most of the investments were devoted to expanding the store networks for Louis Vuitton and Sephora, as well as renovation of the La Samaritaine department store and related retail development in its environs.

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