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A Bullish Arnault: Despite Weak Spots, LVMH Chief Upbeat on ’07

Likening the fashion business to Formula One racing, Bernard Arnault says having a fast car is no guarantee of getting to the finish line first.

PARIS — Likening the fashion business to Formula One racing, Bernard Arnault says having a fast car is no guarantee of getting to the finish line first.

“You need a driver who can take all the twists and turns — and at high speeds. It’s not all that easy,” the luxury kingpin told a meeting Thursday of shareholders of LVMH Moët Hennessy Louis Vuitton.

Arnault was explaining why many of the group’s brands have yet to reach “star” status, urging shareholders to be patient as LVMH seeks the right combination of management and creativity for such “works in progress” as Donna Karan, Celine and Givenchy. “There’s no point throwing money at a brand unless we have the right combination, the right mix,” he said.

Sounding relaxed and upbeat, Arnault voiced confidence for the high-flying luxury sector, boasting, for example, that 1,000 euro ($1,348 at current exchange) bottles of Chateau d’Yquem wines sell within minutes “and we’re running out of them.”

“The prospect for the year is pretty good,” he told a packed audience at the Carrousel du Louvre. “It’s a positive and stable economic period we are enjoying.”

As reported, first-quarter sales at LVMH jumped 7 percent, to 3.8 billion euros, or $5.03 billion, from 3.56 billion euros, or $4.27 billion. Stripping out the impact of exchange rates, the increase stood at 13 percent.

At the meeting, Arnault acknowledged currency fluctuations remain the chief bugbear for the luxury sector and held out hope the European Central Bank would consider the long-term impact of a strong euro. In the meantime, he said LVMH would employ currency hedging and leverage its pricing power to compensate for sales in dollars and yen. “We’re lucky enough to be in a business where we can increase prices over time,” he said.

Arnault also trumpeted growing appetites for the finer things in emerging markets and expressed confidence in strong economic growth around the world, peppering his talk with the word “remarkable” to describe the sales and profit performance of the group’s various companies.

“India itself is now coming into the fold with significant development,” Arnault said. He added that Chinese sales were up 40 percent last year: “That indicates there is a tremendously great potential in the medium-term in that country.”

What’s more, LVMH is “head and shoulders” above its competitors in China and India, he boasted. “We are already profitable there,” he said. “There are many people investing in China who are not making any profits at all.”

Arnault reiterated that organic growth would remain LVMH’s core strategy.

Having achieved its goal of doubling operating profits from recurring operations in five years, the luxury titan pledged to repeat the feat.

“This may sound a bit boring year after year, but I always have the same strategy and vision,” he said, describing an emphasis on maximizing growth for LVMH’s star brands, an elite circle that includes Louis Vuitton, Moët & Chandon, Parfums Christian Dior and TAG Heuer.

“The first pillar of the strategy is developing these brands, investing all we can in the sustained growth of these brands,” he said, as images of clinking Champagne glasses and stacks of Vuitton leather goods flashed on a giant screen.

Arnault touted Fendi as the newest star, while acknowledging some rough patches when the Roman fashion and leather goods house was first acquired jointly with Prada Group in 1999. (LVMH gained complete control in 2001.)

“Today we find the company shows tremendous potential,” Arnault said. “I have every confidence in the years to come.”

Some 4,000 shareholders submitted questions before Thursday’s assembly, many expressing concerns about future prospects at Donna Karan. While highlighting the brand’s prestige, Arnault acknowledged that its “profitability is not as good as we hoped.…It might take a few years until we get all it takes to make it a successful venture. We are mostly in the business of European luxury and the business model [at Karan] is much more American.”

While alluding repeatedly to sluggishness in France, Arnault voiced confidence in the Continental economy. “It looks good for 2007,” he said. “The European market is very dynamic.”

Despite a real estate slump in the U.S., Arnault said he was confident for “sustained growth” in American and Asia. As for Japan, he cited a “slight weakness…but I still think that will pick up.”

Arnault, whose personal investment vehicle Groupe Arnault joined with Colony Capital to acquire a 9.1 percent stake in Carrefour last March, made an unexpected plug for the giant retailer, noting that he recently visited the Mall of the Emirates in Dubai, which boasts not only Vuitton and Dior outlets but a branch of Carrefour, “which is also a good brand,” he said, flashing a big smile. He also suggested the hypermarket operator could, like LVMH, double its profits in five years.

Subsequently, Arnault was peppered with inquiries about Carrefour, such as: “Will the supermarkets start to carry LVMH products?”

“Actually, they do already,” Arnault retorted, mentioning a particularly upscale location near the Porte D’Auteuil in suburban Paris that stocks Dom Perignon Champagne. “Well, at Christmas time, anyway,” he clarified, to a round of laughs.

He also delighted shareholders by inviting them to an upcoming exhibition of Albert Giacometti at the Centre Pompidou being sponsored by LVMH.

Arnault downplayed the likelihood of acquisitions by the luxury conglomerate, while acknowledging he remains active with personal funds. To wit: He confirmed plans to jointly invest about 22 million euros, or $29.9 million, in shares in China’s Belle International Holdings Ltd., a shoe retailer that plans a listing later this month.

“They make 50 million pairs of shoes a year,” Arnault marveled, jesting: “We’d better give their address to the Carrefour people.”

Asked to comment on LVMH’s environmental efforts, Arnault noted the firm ships goods by boat wherever possible to reduce carbon emissions, and that new Vuitton stores have been engineered to consume 40 percent less energy.

A union representative from a French apparel factory interrupted the meeting, announcing that 147 workers were outside awaiting an explanation why LVMH planned to shift production to Poland. Arnault had earlier explained to a shareholder that LVMH had made efforts to renegotiate with the factory, ECC, rather than cancel its contract entirely, as other brands have done.

He also handled preposterous inquiries calmly and with aplomb. Asked by one shareholder if he might consider inviting archrival François Pinault of PPR and Gucci Group to join the LVMH board, Arnault replied: “I’m not quite sure the name you supplied would gather unanimous approval.”

Another shareholder, identifying himself as a retired Chanel employee, inquired why Vuitton has yet to launch a fragrance. “We’re not going to do that, at least in the short term,” Arnault replied, explaining the brand’s policy is to sell its products only in its stores and never go on sale. “It might indeed be a tremendous success, but honestly we don’t need it now.”

Later, at the shareholders’ meeting for LVMH parent Christian Dior SA, Arnault was asked why Dior parted ways with its men’s wear designer Hedi Slimane, who was replaced last month by Dior Homme alum Kris Van Assche. Arnault said he made every effort to retain Slimane, but talks failed over plans for Dior to back a signature fashion house. “He thought we could finance the launch of his name without having any financial interest in the brand,” Arnault said. “I wish him good luck in his new activities.”