LVMH Apart Recessions Come and Recessions Go,

¶ … LVMH Apart

Recessions come and recessions go, but luxury never goes completely out of style, even if sales were subdued in the early 2000's. Some individuals with deep pockets and high ambitions are always willing to spend prodigiously on common items like handbags and watches, provided they get what they want in return: quality, fashion and the envy of their friends. While the past couple of years have been difficult for the luxury category as a whole, LVMH has managed to distinguish itself from its competitors. It posted a 30% jump in profits in 2003 while the company's stock has risen 50% in the past 12 months. This tremendous rate of growth can be explained through brand protection and limiting underperforming stores.

LVMH is all about the power of brand, and its stable is jammed with famous names: Upscale leather goods retailer Louis Vuitton, its largest unit; wine and spirit makers Moet & Chandon and Hennessy cognac; fashion lines Donna Karan, Fendi and Givenchy, and others -- watchmaker TAG Heuer, for example, and shirtmaker Thomas Pink. The company's strength owes a lot to customer loyalty -- especially to Louis Vuitton, which analysts estimate accounts for about 60% of LVMH's earnings. Demand for its products -- from $100 coin purses to the new $5,500 Theda multi-buckled, gilt-trimmed handbags in colors such as turquoise and pink -- is so strong that Vuitton's margin topped 45% last year; its U.S. sales alone grew 38%. To meet the demand, Vuitton is expanding. In February 2003 it opened its largest retail center ever, an opulent 14,000-square-foot, four-story store at Fifth Avenue and East 57th Street in Manhattan. It will open an even larger "global" store in Paris at the end of the year, as well as stores in Shanghai and Tokyo's Ginza district. The company also will enlarge a number of leased departments in Saks and Neiman Marcus stores and will double the size of its Rodeo Drive store in Beverly Hills, he says. Overall the outlook for an expansion of LVMH's fashion brands is positive. In October 2004 it will open stores for three of its fashion lines -- Thomas Pink, Pucci and Celine -- in the expanded Forum Shops at Caesars Palace in Las Vegas, and next year will bring Louis Vuitton stores to Atlantic City and Las Vegas.

LVMH's brands "are very well sought after within shopping centers," says Joe Tagliola, senior executive vice president of Westfield America, which has LVMH retailers in about 10 of its 66 properties. "It helps us get additional tenants in the centers. They are a great complement to any of the majors." John Schroder, Westfield's joint chief operating officer in the U.S., notes that Louis Vuitton operates in its Century City center in Los Angeles, its Valley Fair mall in Santa Clara, Calif. And in several others, and that negotiations are under way for more. Of Westfield's properties, he says, "my guess is that LVMH and its stable of brands is probably appropriate in 10 or 11," adds Tagliola. "We'd love to do more business with them where it's appropriate." Vuitton also is paying careful attention to new and emerging markets. Last year it opened a store in New Delhi, its first in India, and two in China. "China, where the economy is booming, is a market with considerable potential for cognac, fashion and perfumes," LVMH chairman, Bernard Arnault, told stockholders this year.

Beyond Vuitton and other bright spots such as wines and spirits, there have been challenges as LVMH balanced growth with the need to prune underperforming operations. After the luxury category slowed in 2001, Arnault began selling some weaker lines. In the past year, LVMH unloaded Pommery champagne and Ebel watches. Another problem area has been the company's DFS duty-free shops. DFS's operations at about 150 airports were slammed in the late 1990s by a drop in Asian tourism, and the problems grew worse after September 11. To reduce losses, LVMH has restructured its operations and closed shops, including one in San Francisco, and has renegotiated airport leases. In Guam, for instance, it cut its fees in half. As a result of such cost-cutting, DFS earned money last year, LVMH says. These are significant problem areas the LVMH must look to address in the years ahead.

Meanwhile, the Sephora perfume stores turned a profit for the first time in 2003 as LVMH opened 24 new stores, 10 of them in the United States. (It also closed some underperformers.) It plans 15 more U.S. stores this year, three of which opened in California in April, at the privately owned Vintage Oaks center in Novato, the Manhattan Village Shopping Center in Manhattan Beach and Taubman Centers' Beverly Center in Los Angeles. "We do a good business with Sephora," says Tagliola, adding that the retailer "is really hitting on all cyclinders."Among the biggest changes have been in the Donna Karan line, which LVMH acquired in 2001 and immediately began restructuring. The goal was to strengthen the brand by making it less mass-market, in part by removing it from discount stores. In 2002, shortly after buying the business, LVMH restricted its men's wear distribution to freestanding Donna Karan stores in an effort to bolster perceptions of exclusivity in the brand. Last year LVMH continued its reworking by closing unprofitable Donna Karan stores, which reduced sales for the line by 30%. (There are now 13 Donna Karan stores in the United States, along with three Donna Karan Collection stores.) It also reduced its merchandising licenses and focused more on high-end retail outlets. Donna Karan "was overstored," says LVMH's Slavinsky. "There were way too many outlet stores. Our first job was really to close a number of those locations. In a true outlet scenario, for every 10 stores you might have one outlet. We had pretty much the reverse of that." LVMH is working to get its Fendi line "back on track" by renovating all eight stores across the U.S., a job that will be finished next year. After that, "We'll look at new locations," he says.