By and  on March 10, 2005

PARIS — Bernard Arnault likes to talk about billion-dollar brands, but on Wednesday, he had new bragging rights: billion-dollar profits — and then some.

Demonstrating accelerating profitability in 2004 despite a dismal currency situation, LVMH Moët Hennessy Louis Vuitton said net profits rocketed 40 percent to 1.01 billion euros, or $1.26 billion at average exchange rates, reaching the 10-figure threshold for the first time in the luxury giant’s history.

“The year 2004 was an excellent one for the group,” an upbeat Arnault told an audience of analysts and journalists Wednesday night at LVMH headquarters here. “This was obtained in spite of very unfavorable currency impact.”

Indeed, the weak dollar shaved 276 million euros, or $343.3 million, from the bottom line, which LVMH said it was able to offset thanks to improvements in its pricing, product mix and tight cost controls.

Operating profits rose 11 percent to 2.42 billion euros, or $3.01 billion, slightly besting analysts’ expectations. At constant exchange rates, the increase stood at 24 percent.

The lion’s share of the boost came from LVMH’s selective retail division, where profits more than doubled to 244 million euros, or $303.5 million, thanks to improved Asian tourism and expense reductions. Sephora’s sales and profits were up “sharply” in Europe and the U.S., according to Antonio Belloni, LVMH’s group managing director.

The watches and jewelry division also showed a dramatic uptick, moving from losses of 48 million euros, or $64 million, in 2003 to profits of 13 million euros, or $16.2 million, last year.

Thanks go partly to Brad Pitt who, as the star of a recent Tag Heuer campaign, was credited for a sharp increase in sales of its timepieces. “We have a number of other stars supporting our brand,” Arnault quipped, dropping such names as Uma Thurman, star of Louis Vuitton’s ad campaigns, and Tiger Woods, who also endorses Tag.

He said such celebrities practically guarantee success. “Of course, one of our board members hadn’t heard of Brad Pitt,” Arnault acknowledged, prompting a round of laughs and chuckling himself. “I won’t name him, but he’s not the youngest member.”While pessimistic about the prospect for any about-face in the euro’s strength and the dollar’s decline in 2005, Arnault called the beginning of this year encouraging, citing “double-digit” growth of its star brands. He noted, for example, that monogram Louis Vuitton bags overprinted with cherries — the fruit of its ongoing collaboration with artist Takashi Murakami — are “very difficult to find. It’s almost sold out worldwide.”

LVMH pegged organic sales growth at 12 percent for January and February, and again set a “tangible” increase in operating profits as its target for the full year.

Arnault also trumpeted the fact that LVMH’s debt stood at 4.6 billion euros, or $5.72 billion, at the end of 2004, reaching a target of 50 percent gearing.

Asked during a question-and-answer period if the strong financial position — including cash flow last year of 2.1 billion euros, or $2.62 billion — might foretell another round of acquisitions, Arnault replied: “We are not really takers right now. We’ve got to be cautious.”

He acknowledged LVMH might be interested in brands if they came “at a price we can’t refuse. This could well happen in two or three years. Let’s wait and see.”

As for the likelihood of disposing struggling assets, Arnault also brushed off the suggestion, insisting loss-making companies such as Givenchy and Loewe are only “marginally” unprofitable. “We are working on these brands to find the winning formula,” he said. “We go full steam ahead only when we know we have the road wide open.”

Most concerns, however, centered on the bigger problem children: Donna Karan and Fendi. Market sources estimate Fendi had losses of about 25 million euros, or $31.2 million, last year.

“Both companies show great potential,” Arnault said, predicting Fendi could reach breakeven in two years, “if not earlier.” Donna Karan, while still characterized as being in a reorganization phase, is already at breakeven.

Looking ahead, Arnault said LVMH would not waver from its recent focus on star brands such as Vuitton, Moët & Chandon, Hennessy, Veuve Clicquot, Tag Heuer and Christian Dior Parfums. “The investment in companies with the strongest position and the best profitability has paid off,” he said.French companies report sales and earnings separately. LVMH’s sales for 2004 rose 5.6 percent to 12.63 billion euros, or $15.71 billion, as reported.

By division, operating income in euros increased 18 percent for fashion and leather goods, 10 percent for wines and spirits and 3 percent for perfumes and cosmetics.

While citing strong sales of Dior Pure Poison perfume, signs of recovery at Guerlain and plans to launch high-riding Benefit Cosmetics in Europe and Asia, LVMH said it would restructure its Sephora business in the U.K., possibly closing some doors. The retrenchment came to light when LVMH was explaining 126 million euros, or $156.7 million, of “other income and expenses,” saying the amount included some assets depreciation.

Separately on Wednesday, the Christian Dior fashion house said operating income spiked 25 percent to 50 million euros, or $62.2 million, last year. Christian Dior SA, the holding company that includes LVMH and the Dior fashion house, also set as a 2005 target a tangible increase in operating income.

As reported, sales of Dior fashions and accessories totaled 595 million euros, or $740.1 million, a 14 percent increase on a reported basis.

Wednesday’s results were disclosed in Paris after the close of trading. Shares in LVMH eased 1.2 percent to close at 57.20 euros, or $75.50, on the Paris Bourse.

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