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The Facts and Figures on LVMH

PARIS — Hey, big spender.<br><br>Bernard Arnault, chairman and chief executive officer of LVMH Moët Hennessy Louis Vuitton, may have eased up on acquisitions lately, but he continues to shell out major bucks in support of his vast stable of...

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PARIS — Hey, big spender.

Bernard Arnault, chairman and chief executive officer of LVMH Moët Hennessy Louis Vuitton, may have eased up on acquisitions lately, but he continues to shell out major bucks in support of his vast stable of luxury companies.

The group spent some $1.35 billion last year on communications, primarily on advertising campaigns. Meanwhile, operating investments in store networks and production totaled $2.36 billion over the past three years.

(All dollar figures are converted from euros at current exchange rates.)

Those are just some of the revealing tidbits that can be gleaned from LVMH’s glitzy annual report and its accompanying legal and financial information, recently distributed in North America. The factoids provide some key perspectives on the relatively secretive firm as it prepares to divulge its first-half profits, tentatively scheduled for Sept. 12. The interesting details range from LVMH granting Arnault stock options totaling 600,000 shares to the names and backgrounds of every LVMH board member to the fact that Arnault and his father, Jean Arnault, owned 60.7 percent of the voting rights of LVMH.

The financial notes also trumpet how LVMH’s buying binge has given way to an organic focus. Last year, Arnault spent $1.06 billion on acquisitions, primarily for Donna Karan, the La Samaritaine department store and increasing its Fendi stake. This compares with $1.12 billion on acquisitions in 2000 and $1.69 billion in 1999. The difference in those years was that the group bought many more companies than it did in 2001.

“After an acquisitions phase that allowed LVMH to expand its incomparable brand portfolio, in 2002 the group will concentrate on internal growth, profitability and cash flow,” the report says. “With an uncertain economic environment that could persist in 2002, LVMH will focus its efforts on the growing of its luxury products and the promotion of its major brands.”

At recent addresses to shareholders and analysts here, Arnault has given only a few hints as to which of his 50-some brands are the favored children — the ones that throw off cash and those that merit future investments. The annual report enumerates them more definitively.

“We are nurturing the growth drivers of the future,” Arnault writes in his chairman’s message. “The development model of the ‘icons’ of the luxury universe — Louis Vuitton, Christian Dior, Dom Perignon, Fendi, Tag Heuer — to mention a few, is the inspiration for our flourishing rising stars — Donna Karan, Fresh, Pucci or Zenith. We acquired these companies recently because they have strong potential and all the qualities necessary for profitable, long-term growth.”

Brands including Christian Lacroix, Thomas Pink and Givenchy merit few mentions over the 200-some pages of the two documents — the annual report itself and the more revealing companion volume on financial and legal information. And while the others may all be equal in Arnault’s eyes, one gets Arnault’s clear vote of confidence: Christian Dior by John Galliano, long the LVMH chairman’s favorite of his many brands.

Louis Vuitton may be the cash cow for the group, contributing some 60 percent of operating profits, but it’s Dior that gets the cover, the inside cover and three other full-page visuals of the annual report. The report also notes proudly that sales of Christian Dior perfume and cosmetics exceeded about $984.2 million for the first time, and generated a “significant” increase in sales and operating profits. (Sales at Christian Dior Couture, which markets women’s and men’s clothing and accessories and operates a retail network, catapulted 44 percent in the first half to $218.4 million, as reported.)

In the perfumes and cosmetic sectors, LVMH ranks third worldwide and first in France, according to the report. It also notes that LVMH ranks third worldwide in watches and jewelry and controls 19 percent of all champagne shipments and 64 percent of premium vintages.

LVMH rarely discloses specifics about individual brands within its business groups, especially volume breakdowns; however, the documents allow some exceptions.

Divulging key financial information about 2001 acquisitions in fashion and leather goods, LVMH reports that: Emilio Pucci Srl has sales of $3 million and posted losses of about $1 million; Acqua di Parma has sales of $6.9 million, but its income was not disclosed, and footwear maker Rossimoda SpA had sales of $59.1 million and net income of $5.9 million. Income figures are for the year 2000.

French companies are also stingy about disclosing how much key executives are paid. The report says that members of the executive committee, which comprises 12 people, had salaries amounting to $35.4 million last year, roughly $3 million per head. But it also notes that up to half of the compensation for the likes of fashion and leather goods chief executive Yves Carcelle and perfumes and cosmetics head Patrick Choël is dependent on the generation of cash, operating profits and the return on capital employed in the business groups and companies for which they are responsible. In total, profit sharing and incentive schemes last year totaled $53.1 million.

As reported, Arnault earned $1 million in salary last year, less than many of his European counterparts. But he was also the biggest recipient of stock options in 2001, granted 600,000 shares at an exercise price of $64.16 last January. The total value of the options, at least on paper, is a cool $38.5 million.

The financial notes do not identify all the recipients of stock options in 2001, but the group granted some 4.4 million, of which about 10 percent were exercised. Most of the options are priced between $60 and $65. In total, the group had some 13.7 million outstanding and exercisable options at yearend and about 10.3 million authorized options yet to be allocated.

Only two officers of the company exercised options last year, most notably Arnault’s key adviser Pierre Gode, who cashed in 110,000 shares, which had an exercise price of $33.61. The Arnault family has been the main shareholder of LVMH since 1989, with Arnault and his father, Jean, owning 47.5 percent of shares and 60.7 percent of the voting rights. French institutional investors control 17.9 percent of shares, foreign institutional investors 16.9 percent and treasury stock 6.9 percent. That leaves independent shareholders holding a slim 10.8 percent stake.

LVMH stock is currently trading around $42 on the Paris Bourse. It peaked in January 2001 at $74.31, but fell sharply after the Sept. 11 terrorist attacks and the ensuing economic slowdown.

When put before an audience of shareholders and/or analysts, Arnault is never shy about delivering a rousing sales pitch for the stock, which has been battered along with other luxury issues. On cue, the report cheerfully notes that if someone bought $984 worth of LVMH stock on Jan. 1, 1999, it would be worth $1,497 at the end of 2001, factoring in a 1-for-10 stock dividend in June 1999 and reinvested dividends. Over the three years, that represents an average annual return of 15 percent, which has become the magic number for Arnault when talking about the goals for such potential stars as Fendi or Tag Heuer.

No doubt, Arnault will talk up the stock when analysts congregate to hear the first-half results. Goldman Sachs is forecasting net profit before goodwill of $365.1 million, an increase of 17 percent.

Sales in the first half ended June 30 inched up 2 percent to $5.89 billion, with second-quarter sales dipping 2.5 percent to $2.9 billion, as reported.

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