According to a new Morgan Stanley research report, fast-growing Dior has become an appreciable earnings driver for parent LVMH Moët Hennessy Louis Vuitton, though it still trails Chanel in terms of profitability. But “we see no structural reason for Dior’s profit contribution not to get close to that of Chanel’s today [currently 3x higher].”
Analysts Edouard Aubin and Elena Mariani decided to compare the financial performance of Dior and Chanel, which recently began publishing its accounts as part of the move of its financial headquarters to London.
Both brands have outpaced the industry by posting double-digit top-line growth in recent years — and not by increasing third-party distribution, according to their calculations.
“Rather it was done by building up desirability via massive communication spend [frequency and magnitude of shows, sponsoring of exhibitions, etc.] and product creativity,” the analysts wrote in a report Thursday, noting that Chanel still does not sell any fashions or leather goods online.
Dubbing Dior a “real standout in the industry,” Morgan Stanley said it expects total sales to grow 18.7 percent in 2019 to 6.3 billion euros, with operating profits reaching in excess of 1 billion euros, more than five times higher than they were a decade ago. Aubin and Mariani noted that this strong momentum allows parent LVMH “to reduce its risk profile by diversifying away from Vuitton,” long the cash cow of the group.
For comparison, Chanel reported operating profits of close to $3 billion last year, up 8 percent from the previous year, representing an operating profit margin of 27 percent. This lags behind competitors such as Gucci, at 39.5 percent, and Hermès, with a margin of 34.3 percent. (Morgan Stanley forecasts Dior’s 2019 EBIT margin at 17.3 percent.)
Morgan Stanley attributes Chanel’s lower margins to the fact that a substantial share of its sales — about 35 percent in 2018 — are generated by cosmetics, mostly sold to third-party retailers. (It estimates cosmetics account for 53 percent of Dior’s sales.)
Chanel revenues totaled $11.12 billion in 2018, up 10.5 percent at comparable rates.
“Critics would argue that Dior’s growth is excessively reliant on Chinese Millennials [and] Gen Zers, heavily targeted by the use of social media influencers such as Angelababy,” the report says. “[But] perception rankings remain very favorable. Furthermore, in recent quarters, sales in the U.S. seem to have outperformed sales in China [a large market where Dior underindexes the most significantly to Chanel in both sales and profits — hence the opportunity].”
Citing a proprietary survey of the cosmetics market in China earlier this year, the report noted that 21 percent of respondents said they were very likely to use Dior makeup products over the next year, up from 16 percent at the time of the study. Chanel ranked fifth in future use indications with 19 percent in the year ahead versus 13 percent today.
In fragrances, “Dior is second with 18 percent of respondents saying they were ‘most often’ using Dior fragrances. This compares to 23 percent for Chanel [at the top].”
The investment bank said it considers Dior Chanel’s most comparable peer as both couture houses were “founded in Paris in the first part of the 20th century by legendary fashion designers, both sit firmly at the top of the luxury pyramid, having consistently pursued a brand elevation strategy for three decades or more (after falling from grace post the passing away of their founders), and both brands have fashion and cosmetics divisions of roughly similar size.”