PARIS — Could Hermès International one day cooperate with LVMH Moët Hennessy Louis Vuitton, its biggest and most reviled shareholder?
This story first appeared in the February 7, 2011 issue of WWD. Subscribe Today.
Bernard Arnault extended that olive branch Friday as he disclosed record 2010 results for the world’s largest luxury conglomerate and vowed that it would be a “peaceful but not passive” shareholder in the maker of Birkin bags and silk scarves.
“Don’t count on us to be aggressive,” he told a rapt audience of analysts and journalists hungry for fresh signals about LVMH’s intentions. “We are very pleased to be a shareholder in this very fine company. We want to support the family shareholders, and we want to support the management.”
That said, Arnault held out hope that his company’s prickly relations with Hermès, which views LVMH’s stake-building as hostile, would improve, allowing the two luxury players to collaborate in a way “that is constructive and beneficial to the company.” Analysts have suggested Hermès could benefit from LVMH’s clout in buying advertising space and rental property, for example.
In a veiled riposte to Hermès — which claims its corporate culture and commitment to high craftsmanship is unique — Arnault peppered his talk with repeated references to LVMH’s obsession with quality, its workshops and artisans.
He opened the morning session at LVMH’s in-house auditorium here with a video montage of men and women cutting leather, driving nails into trunks, carving wood and massaging labels onto Champagne bottles. And he trumpeted Louis Vuitton’s unique business model, with no licenses, no discounts and large, impressive stores before which tourists frequently pose for vacation snaps.
“No other luxury company has this elite strategy,” he said. “We never have duty free shops in airports like other brands.”
Hermès operates 46 stores in airport locations, according to a tally of those listed on the firm’s Web site.
Arnault later acknowledged Vuitton products are sold at one airport location, Seoul’s Incheon, yet he characterized it as an anomaly LVMH inherited when it took control of Vuitton.
During the meeting, Arnault deflected repeated queries about the compatibility of LVMH’s corporate culture and that of Hermès. “I find it pointless to compare cultures. It’s like asking, ‘Do you prefer Victor Hugo or Molière?’ They’re different writers, you can’t compare,” he retorted.
What’s more, he touted the decentralized nature of LVMH — “more like a constellation than a federation” of brands — and stressed, “We can guarantee the preservation of [Hermès’] culture in the long term.”
Despite his reputation as one of the business world’s shrewdest financial strategists, Arnault painted himself at the meeting as someone easily befuddled by the complexities of currency gyrations and financial instruments such as the equity swaps that landed him a commanding chunk of Hermès.
“Day in, day out, we focus on high-quality products,” he said. “The financial performance is the logical outcome.”
And to wave off any lingering perceptions that LVMH is a money-hungry marketer, he reminded the audience that when the group bought famed Sauternes vineyard Château d’Yquem in 1999, it reinforced the sweet dessert wine’s upscale reputation and didn’t start producing “T-shirts and other horrendous things.”
Arnault clarified that LVMH has not purchased any more shares in Hermès since the disclosure in December that the company had increased its stake to 20.2 percent. He also stressed that LVMH has no plans to exit from its investment.
Hermès declined to comment on Arnault’s various declarations, but the company has repeatedly characterized LVMH’s investment as unwelcome.
Hermès’ family shareholders plan to group 50.2 percent of its capital into a nonlisted holding company in order to fend off a potential takeover bid. The move has been green-lighted by France’s stock market regulator AMF, but is being appealed by minority shareholders.
Also on Friday, Hermès announced a reorganization of its executive committee, elevating two family members. It said Axel Dumas, currently managing director of the saddle and leather métier, would join the executive committee and become chief operating officer; while Guillaume de Seynes, executive vice president, would head a new production and participations division including all leather and textile manufacturing.
Gains on its investment in Hermès, achieved through cash-settled equity swaps the AMF is also scrutinizing, and a favorable currency environment padded out LVMH’s net profit last year, which rose 72.7 percent to 3.03 billion euros, or $4.03 billion. It would have risen 30 percent without the Hermès transactions.
Profits from recurring operations rose 29 percent to 4.32 billion euros, or $5.74 billion. Dividends are to increase 27 percent.
Dollar figures are converted from euros at average exchange rates for the periods to which they refer.
Revenues for the full year advanced 19.2 percent to 20.32 billion euros, or $26.98 billion, touted as a record level. Sales in the three months ended Dec. 31 jumped 19.6 percent to 6.11 billion euros, or $8.33 billion. Friday’s results were slightly ahead of consensus expectations.
Arnault said January business has accelerated from 2010’s pace, bolstering his optimism for smooth sailing for the luxury business for the next few years.
“We certainly expect 2011 to be as good a year as 2010,” he said. “We have reasons to be optimistic. Ever since 2010, we have entered into a new economic cycle…a resumption of growth.”
Last year, all business groups logged double-digit gains: 12.2 percent for perfumes and cosmetics; 18.6 percent for selective retailing; 19 percent for wines and spirits; 20.3 percent for fashion and leather goods, and 28.9 percent for watches and jewelry, which doubled operating profits.
The pivotal Vuitton brand, which accounts for about half the group’s earnings, posted double-digit gains throughout 2010. Chief executive officer Yves Carcelle said Vuitton would open fewer than 10 new locations this year, and greatly expand the scale of its boutiques in Rome, Cannes and Munich. “We want to offer increasingly luxurious premises for our customers,” he said.
Asia continued to drive luxury sales at LVMH, with sales there advancing 20 percent in local currencies, compared with 14 percent for the U.S., excepting Hawaii, and 12 percent for Europe. Stagnant Japan logged a 5 percent decline in local currencies, with a slight improvement in the fourth quarter.
The French group ended 2010 with a debt-to-equity ratio of 15 percent and a free cash flow of 3.07 billion euros, or $4.22 billion at current exchange. Still, Arnault downplayed the likelihood of acquisitions, reiterating LVMH’s strategy to invest heavily in its high potential brands. Asked about its second-tier fashion brands, the luxury titan highlighted strong results at Celine and Loewe, and said there were no plans for disposals.
LVMH stock closed Friday down 2.4 percent to 114.05 euros, or $154.80 at current exchange.
Separately on Friday, Christian Dior SA, parent of LVMH and Christian Dior Couture, reported results that underscore the strength of luxury’s rebound.
Revenues at the Dior fashion house grew 15 percent in 2010 to 826 million euros, or $1.1 billion, while profits vaulted 169.2 percent to 35 million euros, or $46.5 million.
Sidney Toledano, Dior’s president and ceo, said a stronger full-price business and less reliance on the wholesale channel improved Dior’s gross margins. Sales in Dior’s own boutiques advanced 22 percent last year, or 16 percent at constant exchange.
Toledano cited strength across women’s and men’s ready-to-wear and leather goods, with the brand’s New Look and Granville bags emerging as “new pillars” beside the perennial Lady Dior bag.