LVMH SOARS, IN ITS FASHION

Byline: Miles Socha / With contributions from Robert Murphy

PARIS — It was warm and sunny in Paris on Wednesday and there was an unusually long line in front of the Louis Vuitton store on the Champs-Elysees at 11 a.m.
That’s what Bernard Arnault saw on his way to an LVMH Moet Hennessy Louis Vuitton analysts’ conference, and it explained his upbeat mood in announcing record profits in 2000 and predicting few bumps in the road in 2001.
Citing strength across all of its divisions, with the exception of champagne, the luxury giant said net income from continuing operations — excluding startups, acquisitions and other businesses not considered comparable on a year-to-year basis — increased 15 percent, to $786.8 million, while operating income leaped 27 percent, to $1.82 billion. Net income was up a more modest 4 percent, to $568.7 million, but its two-year growth rate, inflated by a number of extraordinary items, stood at a staggering 170 percent.
Shares in LVMH closed at $58.78, down 1.6 percent, on the Paris Bourse. (All dollar figures are converted from the euro at current exchange rates).
“The year was quite exceptional and we feel extremely confident for the future,” Arnault told an audience of analysts and journalists assembled at the Georges V hotel here. Taking issue with analysts and other market observers who are “down in the mouth” over the U.S. downturn and the fall of the dollar against the yen and euro, he said LVMH is taking a “medium-term” view.
“The first half of this year may be slightly impacted by this feeling, due to the Nasdaq and the sense that there is a weak economy in the U.S.,” he said. “But things should look up during the second half of the year.”
He characterized American consumers as capricious — miserable one day and buoyant the next — and said there is a distinct possibility of a full rebound at any moment. In fact, he said sales of its luxury brands in the U.S., again with the exception of champagne, have not been affected in 2001 by fluctuating consumer confidence and other economic variables. LVMH said sales in January and February rose 13 percent, on par with a year ago.
Arnault forecasted double-digit sales and profit growth in 2001 and said the company should be able to double its volume and profitability in five years, aided by growing wealth in developing markets and LVMH’s ability to increase its market share with innovative products.
Certainly the company had lots of momentum in 2000, when, as reported, sales leaped 35 percent, to $10.9 billion.
While citing strength across all brands, LVMH singled out the exceptional performance of Louis Vuitton, Hennessy cognac and the perfume and DFS divisions. The new J’Adore fragrance by Dior, which logged sales of $120.9 million last year, was cited as an example of the group’s successful product launches.
Louis Vuitton remains the star profit performer of LVMH’s stable of fashion and leather goods brands, with sales advancing 37 percent and operating margins inching up to 46 percent in 2000, an increase of 1 percent. LVMH credited new product launches, innovative advertising and the success of its “global store” concept, in which all product categories are represented, for the strong numbers.
But the company said its other fashion houses made “palpable” progress, too, noting that Kenzo’s operating income increased 18 percent, while Loewe’s skyrocketed 75 percent, thanks to new products and a winning boutique concept.
Yves Carcelle, head of LVMH’s fashion and leather goods division, told the assembly that operating income for the division was up 41 percent for 2000, outpacing Louis Vuitton and underlining the strength of brands like Kenzo, Celine and Loewe.
He characterized accessories as an underdeveloped category for brands like Givenchy and said there is potential to expand the retail networks for most of its brands. For example, LVMH plans to open more Celine stores in the U.S. and several Christian Lacroix locations in Japan, starting with a major flagship opening in Tokyo in May.
On the retail front, LVMH made “considerable” investments to expand its distribution network, especially for Louis Vuitton and Sephora. The store count at yearend stood at 1,286, up from 1,005 at the beginning of 2000.
Operating profits at the perfumes and cosmetics group increased 26 percent, to $171.1 million last year, aided by new product launches like J’Adore, improved presentation in department stores and a strong performance by niche brands.
Patrick Choel, head of the perfumes and cosmetics division, said new products accounted for more than 20 percent of sales in 2000, led by fragrances such as J’Adore, Flower by Kenzo and Guerlain’s Issima. J’Adore ranks ninth among prestige fragrances in the U.S., he said, and fifth in stores where it is carried. Not far behind are Kenzo, which is experiencing triple-digit growth, he noted.
Operating results for LVMH’s selective retailing unit approached the break-even point. LVMH said investments in its store network, especially for Sephora, continue to hurt results. Profits at DFS reached more than $93.3 million, with profitability reaching 6 percent. The chain has rapidly expanded from 57 locations in France three years ago to 461 locations in 12 countries. “We now have a strong foothold in important markets,” Choel said.
Operating income in LVMH’s new watch and jewelry division reached $54.9 million, exceeding targets. Meanwhile, operating income for wines and spirits rose 9 percent, to $655.9 million. LVMH said the 2000 results reflect the so-called millennium hangover and expect the champagne business to return to normal in 2001.
Analysts said the results were largely in line with their expectations and said they were heartened to learn that LVMH’s luxury sales have not shown any sign of slowing down this year.
“LVMH acknowledged for the first time that the first half might be difficult and that they are looking to the second half to recover,” said Claire Kent, luxury analyst at Morgan Stanley. “But I was impressed that the only sign of slowdown in the U.S. for two months was champagne and not luxury goods.”
Nathalie Schneider, luxury analyst at Natexis Capital, agreed, saying: “It’s reassuring that LVMH says luxury sales have not slowed down in the first two months.”
Myron Ullman, group managing director, stressed that LVMH is well positioned to weather a more difficult environment given its diverse activities, from auction houses to retail shops on cruise ships, and the fact that its sales are spread across many geographic regions.
Although Arnault has used past analysts meetings to disclose fresh acquisitions, on Wednesday he stressed that internal or organic growth would be the priority in 2001. For example, increasing production capacity for Louis Vuitton is a priority, since the company was not able to meet demand during the fourth quarter of last year, restricting sales growth in the period to 19 percent. “Demand is such that in some stores, like the one on Champs-Elysees, you have to wait several hours to make a purchase,” Arnault said. And, showing an image from the spring ad campaign featuring a travel bag decorated with graffiti-style logos by Stephen Sprouse, he said there are long waiting lists for the item and “maybe in six months you might be able to obtain your bag, but you can’t be sure and not in all colors.”
Indeed, in stressing the importance of building the brands LVMH already controls, Arnault went so far as to subtly criticize other wannabe multibrand empires.
“We were the first to launch a multibrand strategy and some have embarked on a similar path,” he said. “Time will show that for some of them, it might not work out. You have to have stable brands in your group. You have to have brands that are timeless such as Louis Vuitton, Christian Dior and Dom Perignon.
“True luxury brands, there are not many more than a dozen and a good many of them are in our group,” he continued. “Our strategy is based on these stable brands and what can be built around them.”
Among LVMH’s long list of acquisitions last year were Miami Cruiseline Services, the department store La Samaritaine, the cosmetics brand Fresh, Pucci and Gabrielle Studio, owner of the Donna Karan trademarks.
During a brief question-and-answer period, Arnault was asked to comment on its ongoing legal battles with Gucci Group. LVMH holds a 20.6 percent stake in Gucci and is urging a cancellation of Gucci’s alliance with Pinault-Printemps-Redoute, controlled by Arnault archrival Francois Pinault. The Enterprise Chamber of the Amsterdam Court of Appeals was slated to announce today whether or not it will grant LVMH’s request for an investigation into mismanagement at Gucci.
“We are confident,” Arnault said, stressing LVMH’s willingness to negotiate a solution. As reported, LVMH disclosed during testimony in Dutch court in January that it would be willing to tender its shares at $100 each if PPR launched a full bid for Gucci.
“We didn’t start the battle and it’s up to our opponents to put a stop to it,” he said.