LVMH PROFITS SOAR, ARNAULT VOWS TO KEEP FLYING IN CYBERSPACE
Byline: Sarah Raper
PARIS — LVMH Moet Hennessy Louis Vuitton Thursday announced that net profit more than doubled to $665 million last year, and chairman Bernard Arnault pledged to step up the group’s online presence so that “LVMH will also become an Internet stock.”
The earnings signaled the end of the Asian crisis for LVMH and beat even the most optimistic analysts’ projections. LVMH shares closed up 3 percent to $368 on the Paris Bourse Thursday, on what was a hot day for a number of luxury stocks, including Gucci, which rose 5 3/16 to 91 3/16 on the New York Stock Exchange.
All dollar figures are converted from euros at current exchange rates.
As reported, LVMH sales rose 23 percent to $8.2 billion. French companies report sales and earnings separately. Excluding acquisitions, sales growth was 15 percent. Operating income rose 31 percent to $1.48 billion.
Until now, Arnault has funneled most of his enthusiasm and investments in the Net through Europ@web, which is the online investment vehicle owned by his family holding company, Groupe Arnault. But on Thursday, he told analysts and journalists at the group’s annual briefing here that the world’s largest luxury goods conglomerate would soon be getting a bigger piece of the action.
Arnault said 30 LVMH brands have or will soon launch e-commerce sites and he gave more details on LVMH’s Eluxury.com portal, which launches in the U.S. in mid-April. There are plans to expand Eluxury worldwide and eventually to spin it off in an initial public offering, he said.
Arnault plans to unveil a secret online project for Japan involving Louis Vuitton’s marketing expertise. It might take the form of a portal dedicated to women, he suggested, but other executives said several other ideas were still under consideration.
“We have a unique positioning there and significant databases,” Arnault said.
However, he would not be pinned down on how much business LVMH would do on the Net or what would be its eventual contribution to the bottom line.
“LVMH is interested in this market because we have the very best contacts in the industry with clients who have high purchasing power, and we think we can be a leader in certain sectors online, especially selective retailing,” Arnault said.
“Frankly, I don’t understand how some companies whose entire strategy is based on price will ever earn money online,” he continued. “Our strategy is to be a leader in selective retailing, and I believe we can one day make money. We will keep the same margins that we have in stores.”
Arnault said Thomas Pink shirts — LVMH acquired a majority stake in Pink last year — were perfect for e-commerce. “Thomaspink.com is already showing excellent results, and we produce them and control their distribution, so there’s no question of discounting the shirts.”
Arnault said Europ@web so far had spent about two-thirds of its $500 million in seed money. He confirmed that an IPO was planned for Europ@web within the year, but declined to discuss its valuation.
He also said Sephora.com would be spun off either in the fourth quarter or in the first quarter of 2001, depending on market conditions. Group managing director Myron Ullman noted that Sephora.com had 78 percent more visits in February than in December, while maintaining gross margins in line with those at the store.
Arnault said there were more than a million hits each day and that LVMH was now ready to accelerate growth and become a partner with other online players to bring more traffic to the site.
Arnault said LVMH was investing around $50 million to get Eluxury up and running, and Ullman said he expected to see it break even after three years. Arnault suggested that LVMH would hold less than 50 percent of Eluxury and would bring in other Internet specialists as investors — including Europ@web — as well as perhaps some of the participating luxury brands. Currently the site is being tested “by family and friends,” Ullman said.
For Eluxury, the group has signed on 30 international brands, including Vuitton and other LVMH labels, as well as Ferragamo, Bulgari, Wolford, La Perla, Dean & Delucca, upscale linen brands and cigars. There are no watches — even though LVMH, after the Tag Heuer and Ebel purchases, is the world’s third-largest watch group — and there are no wines or spirits because of regulatory red tape. Surprisingly, Prada, LVMH’s new partner in Fendi, is not among the 30. Not so surprising — Gucci is not participating either.
“Maybe they’ll come though,” said Arnault after the meeting. “Why not? We sell them at DFS.”
Gucci might be last year’s news, but it just kept coming up during the meeting. During the presentation, financial director Patrick Houel flashed up a visual showing a ranking of luxury groups by sales.
“Of course, Gucci, you will notice, lags behind at number nine,” he said. It was his only commentary about the list, which was zapped from the screen before anyone in the audience could really study it. It also just happened to be the only visual in the presentation not included in handout materials.
Arnault confirmed that he still held 20 percent of Gucci and fielded questions with unexpected good humor about his ongoing lawsuit in the Netherlands. He is seeking to wrest Gucci away from French retail group Pinault-Printemps-Redoute, which swooped in last year to rescue the Italian company from a hostile takeover by LVMH.
“We are pursuing our lawsuit and we can always imagine other [legal] actions that could be taken. Our lawyers are very optimistic,” he said. “As you know, my influence on Gucci is not enormous. They overpaid for Saint Laurent and I calculate that they will lose money for five years, so you really can’t say that we are satisfied with things there,” he continued. “Then again, it’s not so easy to get rid of these shares.”
There were also signs of new interest in the men’s side of the business. Ullman stressed that the Internet would be a new opportunity for LVMH to reach men with other brands. Yves Carcelle, who took over the fashion division last summer, noted that Vuitton’s first men’s show would pump up volume in its men’s wear and he said the group would soon reinforce its men’s business at Kenzo by strengthening ties with its licensee.
The group said it had set an operating profit growth target for 2000 of at least 20 percent. Business is already up 41 percent in the first two months of the year, Arnault reported. “We are on track to our five-year goal for 2004 of doubling sales and operating profits,” said Ullman. That’s without acquisitions, but 1999 was a busy one for the group in terms of takeovers.
“People are always saying, ‘You are buying too many companies.’ This is not really true,” Arnault argued. “There are a series of emerging countries with completely new consumers, the quality of life and buying power continues to rise in developing countries and there are all sorts of changes in buying habits. We are trying to meet all of those challenges.”
Arnault said many of the investments were startups, which had as much as 50 percent growth.
“When people say there are too many acquisitions, I want to remind you that all these startups together totaled only $10 million. I don’t really think anyone would call that excessive.”
Arnault noted that the U.S. was the group’s leading market and he said he expected business there, which now accounts for 22 percent of LVMH sales, to rise to 33 percent of group sales by 2004.
Ullman stressed the importance of new products in the business. He singled out three recent launches: Hennessy Pure White cognac, a mixer that is performing well in the U.S.; Vuitton’s patent leather monogram accessories line, which was designed by Marc Jacobs and did $200 million in sales last year, and the launch of Dior’s women’s fragrance, J’Adore, which did $55 million in three months last year.
“It is the first time in a long time that Dior has the number-one fragrance in France,” said Arnault.
In all divisions, profit growth outpaced that of sales and the operating margin of the group as a whole improved by a point to 18 percent last year, Ullman noted. He said at yearend, the group had more than 1,000 stores worldwide, including 300 Sephora outlets and 261 Vuitton stores.
Louis Vuitton, which contributes half the group’s profits and where sales rose 36 percent, was a standout in the group. Sales for the brand were not disclosed. Overall, operating profits in the fashion and leather goods division, which comprises 12 brands, including Celine, Givenchy, Loewe, Kenzo and Christian Lacroix, rose 33 percent to $791 million. Operating margins gained two points to 36 percent and sales were up 25 percent to $2.19 billion.
Carcelle stressed that the group had taken advantage of market conditions during the Asian crisis to improve store locations and terms on its leases. Overall, he said his main goal was to focus on the positioning of each brand. “I believe each can occupy its own territory and we can avoid cannibalization,” he said.
He said LVMH and Prada would be moving quickly on Fendi. The company is taking direct control of its franchised boutiques and space has been leased for new stores on the Avenue Montaigne in Paris, in Bangkok and in Sydney. A deal is close on a space in London.
In the fragrances and cosmetics division, operating income rose 33 percent to $140 million last year on a sales gain of 24 percent to $1.63 billion. Excluding the acquisitions of Bliss Spa and Laflachere, the mass market hair accessories maker, sales would have risen 10 percent. This year, four more recent beauty startup buys — Hard Candy, BeneFit Cosmetics, Urban Decay and Make Up For Ever — will be folded in.
Division president Patrick Choel said sales were picking up steam.
“They were up 19 percent in the first half of 1999, up 29 percent in the second half and that trend is continuing,” he said, pointing out that its growth was well ahead of the overall market’s of 4.5 percent last year.
The Dior fragrance J’Adore is currently being launching in the U.S. and is set to do $100 million in sales worldwide this year, he said.
“It is the whole mix that is working. It is an excellent product. I found the name, and it is perfect for Dior. The bottle is great and the advertising is superb, and we put a lot of money behind it.”
Costs have been drastically slashed in the division — purchasing synergies alone have saved $48 million — but Choel said most of that was being pumped back into advertising.
Ullman noted that improvements in duty free had contributed to the increases in the beauty division and he said the abolition of intra-European duty free had had no impact on sales.
In the selective retailing division, which includes Sephora, DFS Group and two new retail concepts for sunglasses and watches called Solstice and Synchrony, LVMH cut operating losses from $33 million last year to $28 million this year.
Sales were up 21 percent to $2.09 billion. While DFS profits improved — LVMH did not disclose a figure — investments in new stores for Sephora ate into the bottom line. DFS sales started picking up in the third quarter with a 27 percent increase, and in the fourth quarter with a 29 percent rise over the same periods a year earlier.
Christian Viros, president of the new watch and jewelry division at LVMH, said sales last year totaled $4.8 billion and he expected strong single-digit growth in the coming year. LVMH did not release operating profits for the division since most of the brands were acquired late in the year.
Viros said there were 10 attractive takeover targets in the sector, although he declined to name them, and said LVMH would look at all of them, but did not feel pressed to add on brands.
In the wine and spirits division, operating income rose 22 percent to $629 million and LVMH executives noted that the U.S. was the leading market. LVMH said the increases came despite high levels of marketing and advertising expenditures linked to the Year 2000 celebrations.
Sales were up 17 percent to $2.15 billion. Executives also boasted that LVMH had been among the most successful groups in managing stocks in the run-up to New Year’s Eve and had ended 1999 with near-zero inventory remaining, without dipping into the reserves set aside for 2000.