PARIS -- LVMH Moet Hennessy Louis Vuitton's 2001 earnings may have evaporated, but it's sticking with its game plan in anticipation of a "soft recovery" in the second half of this year.
Although its net group income tumbled dramatically -- 98.6 percent -- to a mere $8.7 million in 2001, the luxury giant is forecasting a "significant rebound" in its fortunes this year as it stresses organic growth and improved profitability.
"We're focused mainly on cash generation, which is very important to our long-term strategy," LVMH chairman Bernard Arnault told an audience of analysts and journalists gathered at the Hotel George V here Friday. "Our results will bounce back considerably....When we have problems, that stimulates us. We take the bull by its horns."
Arnault predicted a "soft recovery in the second half" and downplayed the market perception that LVMH is overly dependent on Japanese consumers. "I don't think Japan is going to cave in," he said.
The slim net income figure was a sliver compared with record earnings of $631.1 million a year ago, a 98.6 percent drop. In line with its guidance, LVMH's operating income fell 20.4 percent last year to $1.36 billion, against $1.71 billion in 2000. As reported, 2001 revenues increased 5.6 percent to $10.69 billion. Dollar figures are converted from the euro at current exchange rates.
Yet LVMH said the limited slowdown in operating income was evidence of its resilience to the economic slowdown and the drop in travel in the wake of Sept. 11.
Taking great pains to reassure investors, who have been impatient with the French group's money-losing retail division, LVMH reported that sales in January and February are ahead 9 percent. And Arnault trotted out all his key deputies to deliver upbeat speeches, emphasizing the familiar LVMH themes of product innovation and "star brands."
Slammed by a drop in tourist travel and a weak yen, LVMH saw operating losses in its selective retailing division balloon to $169.6 million, up from a loss of only $1.8 million a year ago. The retail group comprises DFS, Sephora and the Paris department stores The Bon Marche and Samaritane. Also, losses from "other activities" and write-offs more than doubled to $325.2 million, about half of that stemming from a failed try to make the auction house Phillips a contender against the giants Sotheby's and Christie's.LVMH reduced its stake in Phillips last month to 27.5 percent, which investors applauded, goosing LVMH shares in recent weeks. The stock inched up 0.1 percent to close Friday at $52.67 on the Paris Bourse.
Arnault didn't rule out shedding DFS and Sephora, moves urged by many investment firms. "This is not the time to sell off these assets," he said. "They need to be restructured, and it's going to take some time. And then we'll see how we should react."
Arnault said Sephora, which has been losing money in the U.S., should break even this year and be in the black by 2003.
Last year, LVMH trimmed $150 million from DFS's fixed costs, closing smaller stores and renegotiating concession contracts. As part of its restructuring efforts, LVMH took a charge of $188 million for DFS and $126 million for Sephora.
LVMH's fashion and leather goods division, headlined by Louis Vuitton, saw its operating income jump 9 percent last year to $1.11 billion. All other business groups saw operating income drop: 19 percent to $131 million for perfumes and cosmetics, 54 percent to $24 million for watches and jewelry and 5.6 percent to $595 million for wines and spirits.
LVMH described Kenzo as a major emerging brand for its cosmetics franchise, with sales up 35 percent and operating profits up 57 percent last year. By contrast, profits slipped at Parfums Givenchy due to a difficult fourth quarter in the U.S. and a drop in travel retail.
Yves Carcelle, head of the fashion and leather goods business group, characterized 2001 as an "exceptional" year, with sales ahead 13 percent, besting its main luxury competitors: Prada Group, Gucci Group and Hermes. In addition, he cited growth potential at Donna Karan International and Fendi, in particular, and the footwear and men's wear categories across all brands. He noted that the group sold more than one million pairs of shoes last year.
During his address and a lively question-and-answer period, Arnault took pains to address what he views as lingering misconceptions about the group, particularly its dependence on the Louis Vuitton brand, which accounts for some 60 percent of profits, and its reputation as a collector of brands."People are always worried that Louis Vuitton is going to run out of breath, but we are not running out of steam at all," he said, noting the brand will launch watches and eyewear in the next year or so.
What's more, "we do have a lot of brands making money," Arnault said, citing operating margins of 20 percent at Tag Heuer as an example. "Kenzo has always been very profitable."
As for the so-called "buying frenzy" that has seized the luxury sector, Arnault said LVMH has spent only about $1.3 billion on acquisitions in the past decade, if you also consider investments it exited, such as its 20.6 percent stake in Gucci, which earned it cash proceeds of about $1.9 billion.
Its acquisitions in recent years included Loewe, Pucci, Ebel, Hard Candy and Bliss.
Peppered with questions about Phillips, Arnault smiled, leaned back in his chair and said he has no regrets about his costly auction adventure. "We liked the idea of fighting these two huge behemoths," he said of Sotheby's and Christie's. "But as someone once said: 'In business, you need to persevere and be tenacious, but not be obstinate."'
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