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LVMH Puts Focus On Its Core Assets

Less is more, at least according to luxury titan Bernard Arnault and LVMH’s 2002 annual report. Here’s what else was in there.

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PARIS — Less is more.

This story first appeared in the August 21, 2003 issue of WWD.  Subscribe Today.

That seems to be luxury titan Bernard Arnault’s latest mantra and the overarching theme of LVMH Moët Hennessy Louis Vuitton’s 2002 annual report and its accompanying financial and legal information, which were just distributed to U.S. shareholders.

In a mood to simplify his far-flung empire, Arnault last year handily disposed of once-touted acquisitions, including Michael Kors, Hard Candy and Urban Decay, to put the focus on tried-and-true brands.

The financial statements pinpoint that LVMH sold its 36 percent stake in Michael Kors for $13.9 million, to Silas Chou and Lawrence Stroll, through their company Sportswear Holdings Limited. Kors, the designer of the LVMH fashion and accessories house Celine since 1997, is expected to exit no later than March 2004 to concentrate on his signature business with his new partners.

Last year, LVMH also sold its remaining 27.5 percent stake in money-losing Phillips for a symbolic $1, while canceling the auction house’s debt. In return, LVMH received fixed assets and inventories. LVMH did not break out Phillips’ debt, but the “final cost of disposing of the residual shareholding” figures in a 161 million euro, $179.3 million, provision that also includes restructuring Moët Hennessy’s retail network, which numbers fewer than five locations, and the closing of certain other stores.

The perfume and cosmetics department was pruned as well. LVMH sold its Hard Candy and Urban Decay brands for $1 million. The report notes, however, “this amount may vary over three years due to a price index clause.”

In total, asset disposals at LVMH last year amounted to 269 million euros, or $299.7 million at current exchange. The sum reflects the sale of real estate — such as its corporate offices on Avenue Hoche here — as well as shares in Gant, Grand Marnier and Fininfo. The gain on the sale of its Pommery assets totaled $169.3 million, or 152 million euros, the report says.

And while Arnault made no acquisitions in 2002, the report divulges that LVMH spent 190 million euros, or $211.7 million, to up its stake in Fendi to 84.1 percent, buying it from the Fendi sisters. It also spent 32.5 million euros, or $36.2 million, to increase its stake in Italian shoemaker Rossi Moda to 97 percent from 45 percent.

Commenting on acquisitions consolidated in fiscal 2002, the report notes that Emilio Pucci was acquired for 38 million euros, or $42.3 million. Meanwhile, the total amount of its investment in the Donna Karan brand and the company came to $550.3 million, or 494 million euros. The goodwill on Karan, to be amortized over 20 years, amounts to $224 million.

Overall, goodwill amortization rose to 262 million euros, or $291.9 million, in 2002, up from 168 million, or $187.1 million, the previous year, due to the integration of Fendi and Donna Karan and the reduction of the amortization period for DFS to 20 from 40 years.

The report notes that both Fendi and Donna Karan were restructured last year. “In order to consolidate their newer, high-end strategy, the fashion brands of the LVMH Fashion Group have initiated a new positioning that will offer greater resistance to economic conditions, and will allow them to target investments based on profitability,” it says.

In his letter to shareholders, chairman and chief executive Arnault makes it clear LVMH’s future prosperity lies with sure bets: Louis Vuitton, Moët & Chandon, Veuve Clicquot, Hennessy and Christian Dior Parfums, brands he lauds for rising profitability and market share. The Christian Dior fashion house, which Arnault remains bullish about, is not part of LVMH.

After a buying binge in the Nineties that had it included in virtually every acquisition murmur, LVMH is now more often implicated in disposal talk, centering on everything from its giant DFS and Sephora retailing chains to niche fashion brands like Thomas Pink, the British shirt specialist in which its LV Capital unit acquired a 70 percent stake in 1999 for 42 million pounds, or $66.7 million at current exchange.

“While still carrying out the sale of nonstrategic assets, we will maintain strict management focus,” Arnault writes in the annual report. “We are continuing to deploy the organic growth strategy, which brought us results in 2002…The growth achieved by our flagship brands, which are at the heart of everything we do, is the consequence of our strategy of investment and focus on these companies.”

Louis Vuitton’s status as “the group’s star brand” is stated repeatedly and unequivocally in the documents. Citing Merrill Lynch estimates and the Yako Institute, the report boasts that Vuitton ranks first in Japan with a 21 percent share of the leather goods market, “ahead of Gucci with 5 percent, and Burberry, Hermes and Prada, which each hold 3 percent.”

The Christian Dior fashion house, even though technically owned by LVMH parent Christian Dior SA, also gets heavy play, with an image from the couture runway gracing the annual report’s cover and ads for “J’adore Dior” perfume and watches dotting the pages.

Marc Jacobs, majority owned by LVMH since 1997, is praised for sales rising 40 percent on a comparable-currency basis last year thanks to the brand’s popularity in America and Japan.

Underperforming brands receive scant mention. For example, Givenchy is praised for its “popular” and “expanding” ready-to-wear lines, but the restructuring of brand licenses there “weighed on sales,” the report says. Meanwhile, “Kenzo had a less favorable year in terms of sales,” it adds.

As for brands “that will one day become stars themselves,” the report lists only a handful of the almost 50 in its stable: Fendi, Berluti, Krug, Zenith, Chaumet and Parfums Kenzo. It says these have “the assets, reputation, creativity and product quality required for long-term growth.” It fails to mention such other fashion brands as Celine, Loewe, Christian Lacroix, Pucci (now designed by Lacroix), and Kenzo.

Of course, future stars need piles of money before they can burn brightly. LVMH notes that the ownership of prestigious brands requires “constant capital expenditures,” especially in communications, and that 11 percent of net sales goes to advertising and promotion.

Last year, LVMH’s total spend on advertising campaigns reached 1.44 billion euros, or $1.6 billion, about 5.3 percent more than in 2001 in euro terms.

Elsewhere, the report notes that marketing and selling expenses, totaling 4.71 billion euros, or $5.25 billion, remained flat based on comparable structure and stripping out the effects of currency. It says this reflects in part “its increasing selectivity in our advertising campaigns.”

LVMH knows both sides of the fickle world of advertising. The financial statements note that ad revenues fell more than 20 percent at La Tribune, the French financial daily owned by its DI Group media division. The report said distribution of the newspaper also fell because of a new format introduced late in 2002.

The troubled media businesses are recorded in the category “other activities,” which posted a total 207 million euro or $230.6 million operating loss last year. The report notes that losses stemmed from Phillips, the group’s “central expenses,” and its Web site eluxury.com, “whose business is growing rapidly while still being unprofitable.”

LVMH shelled out big bucks last year to build its retail network, particularly for its fashion and leather goods brands. Over the past three years, the expenditure totaled 2.4 billion euros, or $2.67 billion, the report says.

The 2002 report is rather stingy enumerating executive compensation. A chart of company officers details that Arnault received a total of 1.42 million euros, or $1.58 million, in fixed and variable compensation, plus director’s fees. Group managing director Antonio Belloni earned 1.44 million euros, or $1.6 million, while Pierre Gode, adviser to the chairman, pulled down 2.02 million euros or $2.25 million — with a company car to boot.

LVMH granted about 1.2 million stock options last year, roughly half of them to Arnault at an exercise price of 43.30 euros, or $48.24. Gode, Belloni and Nicolas Bazire, vice president and special adviser, each received 200,000 options at the same exercise price. Some 505,000 options were also granted to 10 employees, not corporate officers, but their identities were not disclosed.

But the report notes that no options were exercised by corporate officers during the year.

With ecological concerns high on the public agenda in France, LVMH always devotes a substantial part of its annual report to its “green” efforts. It notes, for example, that the group’s operations have little impact on water quality and “insignificant” pollution effects on soil. It even estimates greenhouse gas emissions based on the consumption of electricity used by factories that make its products — and notes that Arnault himself chaired a task force at France’s Montaigne Institute devoted to reducing emissions and fighting climactic change.

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