LVMH PROFITS SOAR 59%
PARIS — The 59 percent rise in first-half net profits at LVMH Moet Hennessy Louis Vuitton is impressive, but doesn’t begin to tell the full story of the improved climate in Asia for luxury goods or Sephora’s carpet-bombing campaign strategy for the U.S.
And if that’s not enough, Bernard Arnault says he’s not giving up on Gucci, either.
But perhaps the biggest news to come out of the LVMH analysts meeting Friday involved Sephora, when chairman Arnault unveiled a $140 million investment program to dramatically accelerate expansion of the perfumery chain in the U.S. and position the upcoming Sephora.com as the leading cosmetics Internet site in the world. The goal, Arnault said, is to quickly take Sephora.com public.
Arnault told analysts Friday that he would blow out the promotion of the site to include television commercials as part of a $25 million ad campaign.
“Even if these investments are costly, they are essential to getting the brand name out,” Arnault said to convince analysts who were concerned about when Sephora would break even. It won’t be until 2002, executives conceded after the meeting.
Arnault discussed Sephora’s expansion while presenting his group’s first-half results, which were strong, thanks in large part to the recovery seen in Asian markets. Arnault noted that LVMH’s operating profits should rise 20 percent for the full year, rather than the 15 percent originally projected. Operating income for the first half of this year rose 22 percent to $604.2 million, compared with $496.1 million.
Net profits rose 59 percent to $374.4 million, from $235 million a year ago. This includes a one-time gain of some $103 million, which takes into account the $318 million from the sale of shares in British beverage group Diageo and $206 million in provisions for restructuring costs, depreciation and risk.
Consolidated sales for the half were up 16 percent to $3.74 billion, from $3.22 billion last year, as previously reported.
Separately on Monday, Christian Dior announced that net profits rose 12.3 percent to $133.1 million for the first half of this year on consolidated sales of $3.8 billion. These figures largely reflect that part of LVMH that Dior controls.
Christian Dior Couture nearly broke even for the half compared with a loss of 5 million euros a year ago. Sales for the half were $99.8 million, flat compared with last year. The company attributed the results to a reorganization of Dior Couture’s activities, which included favoring sales to wholly owned stores rather than franchises or multibrand stores, and the buyback of licensed manufacturing businesses.
“The LVMH numbers are good not only because of a positive macroeconomic environment, but also because of the strength of the LVMH brands,” noted equity analyst Cedric Magnelia of Credit Suisse First Boston in London.
Still, analysts noted that the heavy investments earmarked for Sephora’s U.S. business will weigh against profitability in the group’s Selective Retailing division — just as sister company DFS is about to return to the black.
When pressed by analysts, Arnault shot back that he had been courted aggressively by every major investment bank, all of them eager to handle an initial public offering for Sephora.com.
“We are going to have a ball with this listing,” Arnault said. “They’re telling me it could be worth $1.5 billion, and we are not even up and running yet.” Sales for the site in its first year of operations are expected to reach $20 million.
“We bought Sephora for $254 million (1.6 billion francs) two years ago, francs not dollars. How can you complain about that kind of investment?” Arnault asked.
After the meeting, Myron Ullman, the newly named managing director of the group, said that quickly becoming the leading cosmetics web site was crucial to an IPO and to assure LVMH’s dominance in the cosmetics industry.
However, Ullman said the marketing firepower was only one of several elements that would catapult Sephora.com to the lead position at a time when there are 18 different beauty sites launching.
He said Sephora.com’s selection would be more complete, boasting 280 brands compared to 50 for most of the others and a total of 11,000 stockkeeping units. Plus, the growing network of freestanding Sephora stores will reinforce the brand name.
Under the accelerated opening schedule, Ullman said there will be 50 stores in the U.S. by the end of the year, concentrated in LVMH’s five target regions: New York, Southern Florida, Los Angeles, San Francisco and Las Vegas.
“We don’t need to be in every city once the web site is up,” Ullman said, adding that Sephora could have as many as 200 units in the U.S.
Ullman said the budgets had not been completed for next year, but he estimated there would be another $100 million spent on Sephora for growth in Asia and Europe.
Sephora and DFS are grouped into LVMH’s selective retailing division with other retail assets, including Paris specialty stores Le Bon Marche and Franck & Fils. Losses narrowed for the half to $12.5 million, from $30.2 million a year ago.
“We think we can restore DFS’s profitability to 10 percent of sales, the level it had when we bought it,” Arnault said. And it seems that DFS is on the right track, with sales already up about 30 percent for July and August. Restructuring measures, which have included giving up expensive airport concessions and instead favoring downtown locations, have drastically cut costs. Plus, sales are being fueled by the yen’s strength against the dollar. What’s missing now are tourism traffic levels, but Ullman said they traditionally lag six months behind a yen recovery and should pick up.
“DFS is a company whose sales were down sharply in the first half. Sales have rebounded and in two to three years, it could achieve an operating margin above 10 percent,” said Jacques-Franck Dossin, an analyst with Goldman, Sachs & Co. in London. He noted that people underestimate DFS’s exaggerated cyclical performance, and the upturn for the retailer should be quite strong.
In other news, Arnault says he still hasn’t given up on Gucci: “We are confident that we will again become the majority shareholder in Gucci,” referring to appeals the group has filed in Dutch courts to cancel Pinault-Printemps-Redoute’s position in Gucci.
The meeting was upbeat and it went beyond the announcement of the positive numbers. Not only was Arnault eager to talk about the Internet, he even took questions from analysts who were following the meeting live via LVMH’s corporate web site.
There was not a single visual in the slide show from an LVMH couture house; instead, the slides focused on the U.S. and the group’s activities there. Arnault lavished an unusual amount of time on the group’s recent niche beauty acquisitions of Bliss, Hard Candy and Benefit, and he said several times that while the luxury giant would be lending logistical and management expertise to these start-ups, the group would be hands-off when it comes to their creativity and entrepreneurial spirit.
Arnault announced that the U.S. was now the group’s largest market, representing 22 percent of total sales. (France is 20 percent; Asia outside of Japan is 19 percent; Europe is 16 percent; Japan is 15 percent and the rest of the world is 8 percent.) Overall sales for the U.S. were up 23 percent for the half, especially for leather goods and champagne. Louis Vuitton alone posted a 21 percent sales increase in the U.S.
Why the emphasis on the American market? Analysts say the group has been weak there and Arnault wanted to show investors his commitment to expanding sales in the world’s biggest market.
Vuitton performed particularly well during the half overall, with a 20 percent sales gain over last year. In July and August, Vuitton sales worldwide were running 50 percent ahead of last year thanks to the success of global stores and new products like the Monogram Vernis patent leather line, whose products are nearly out of stock worldwide.
During the first half, Vuitton opened stores in Hong Kong and Nagoya, Japan. The Nagoya store, which is smaller than Vuitton’s Paris flagship on the Champs Elysees, greets 10,000 visitors daily, or three times the Champs’ visitation rate. At the same time, the Hong Kong store has lines outside daily, “for the first time in two or three years,” Arnault said. At home, the Champs store is posting double-digit growth, he added.
The fashion and leather goods division posted an operating profit of $383.8 million for the half, up 15 percent from a year ago.
Asked whether he was concerned about the recent flurry of acquisitions by Prada and reports that PPR, via its Gucci holding, was targeting Fendi, Arnault responded with gusto.
“LVMH is by far the largest luxury group in the world and does not need to make any acquisitions,” Arnault said. He noted that five-year internal projections showed annual sales topping $15.9 billion and operating profits doubling from the current levels without any acquisitions.
In a thinly veiled reference to Gucci, which has $2.9 billion in cash from the new shares its created for PPR, Arnault said: “Others have money and they are condemned to spend that money. At a time when prices are spiraling upwards, that’s a scary stituation and we will not take part in this frenzy.”
But well-priced acquisition opportunities will not be disregarded, he said. Arnault pointed to the recent Tag Heuer watch firm purchase, noting that LVMH had already garnered a 50 percent stake in the company. Tag will allow LVMH to penetrate the high-margin watch industry, one of the sectors where LVMH is relatively absent, Arnault explained.
Arnault made a special point of praising the designers of Loewe and Louis Vuitton, Narciso Rodriguez and Marc Jacobs. And he seemed to go out of his way to mention Celine designer Michael Kors, and the 33 percent stake LVMH has in Kors’ U.S. business.
“Kors is a very talented designer. He has a sense of innovation and modernity; he pays attention to his client and has a strong business sense,” Arnault said.
While filled with praise for his designers, Arnault was stingy with numbers and none were broken out for the fashion business in this division, which also includes Christian Lacroix, Kenzo and Givenchy.
The Fragrances and Cosmetics division is finally enjoying the fruits of consolidation. Operating income for the half rose 45 percent to $27 million, from $18.7 million a year ago, thanks to economies of scale and other benefits resulting from the restructuring of this division. New launches in the half included Hypnotic Poison, Diorever, Vitalamine and Bodylight from Christian Dior Parfums; Acqua Allegoria and Kiss Kiss Douceur from Guerlain and Pi at Givenchy. The second half will see launches of the new J’adore women’s fragrance from Dior; the Time for Peace duo scent from Kenzo; and Indecence d’Organza from Givenchy.
The new beauty products contribute annually to sales, Arnault said, noting that “20 percent of the cosmetics products sold one year didn’t exist the previous year.”
Millennium fever helped operating profits at the Champagne and Wines division grow 39 percent to $124.8 million, from $89.4 million a year ago. But new products also fuel sales and profits, the company said.
The Cognac division had a decline of 3 percent in its operating profits to $99.8 million. Sales in the U.S. and cost-saving measures helped to offset a drop in sales in Japan, the company said.