Byline: Jennifer Weil / With contributions from Brid Costello

PARIS — Sniffing at ongoing rumors of acquisitions, Sephora is putting its nose to the grindstone and expanding its franchise Europe-wide, with a new, more detailed action plan.
“I think Sephora boasts a good recovery potential,” said Jacques-Franck Dossin, a luxury goods analyst at Goldman Sachs in London. “I think it can really improve its performance and profitability.”
Most analysts have been happy with the way Sephora’s strategy is shaping up so far under Serge Brunschwig, president and chief executive officer of Sephora Europe. He took the helm of the 393-door, LVMH Moet Hennessy Louis Vuitton-owned chain in March 2001, has been vocal about plans to bring the company’s operating margin to 8 to 10 percent in 2004, versus the current 1 to 3 percent today.
How will it be done? He’s put together a multistep approach, including:
Opening 23 new stores in Europe — including three in the Czech Republic and four in France — in 2002 and closing two doors. Last year, Sephora opened 27 and closed 24.
Concentrating on six regions where “we identified good potential,” said Brunschwig. Among them are France, Italy, Spain-Portugal, Eastern Europe, Greece and the U.K.
Renovating some stores. Already, in 10 revamped doors, Sephora has seen a 7 percent increase in the average transaction.
Removing some products. Sephora closed 2001 with 12,000 stockkeeping units, after eliminating 3,000 sku’s. It expects to jettison another 2,000 sku’s and end 2002 with 10,000.
Reorganizing its logistics and its stores. “We are making the supply chain more efficient,” explained Brunschwig. This includes packing stock alphabetically so it can be quickly arranged on alphabetized shelves. Staff can then spend twice as much time with consumers.
Further developing Sephora’s private label line, which currently represents 7 to 8 percent of the company’s sales. The first Sephora fragrance is due out in September.
Further, “in Europe, Sephora can increase profitability from a rather low level by better integrating the acquisitions it made over the past few years,” said Dossin. This, in part, includes having more Sephora-owned stores adopt the Sephora name and combining logistics and supply chains, coupled with a tourism recovery at the key Champs-Elysees store.
“What they are doing in the U.S. is significantly curtailing investments, getting more brands into the stores, cutting costs and being more regionally focused,” he continued, adding that as a result they have seen a 20 percent rise in comparative-store sales there.
“Globally, I think the best thing Sephora can do is to be a bit more oriented toward customer service,” said another analyst, who requested anonymity. But she said that the firm’s expansion plan is reasonable, particularly if new stores are in large towns.
As for its push into Eastern Europe, where it has 29 stores in Poland and three in Romania, she said: “It is a good thing if they don’t do it too fast.”
“Sephora is entering very promising markets, where margins are quite large,” said another analyst. “[Eastern Europe] is a virgin, underdeveloped market, which could provide strong growth in the medium term.”
But will LVMH hold on to Sephora until then? The jury’s still out. While some say the perfumery chain’s spring cleaning preempts a sale, others think that if there’s a turnaround at Sephora, LVMH might just keep the chain.

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