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LVMUY AT A GLANCE

 

 

 

 

 

 

Moët Hennessy Louis Vuitton sells luxury goods such as wine, clothing, jewelry, and cosmetics. Its namesake brands - including Dom Pérignon, Fendi and Marc Jacobs - are famous worldwide. The Paris-based company received over 17 billion € ($24 billion) of revenue in 2008. ^[1] The high prices on LVMH's products lead to high profit margins: in 2008 the company earned a 65.0% gross margin and a 21% operating margin.^[2]

In addition to its luxury brand positioning, international diversity (38%, 30% and 23% of sales between Europe, Asia and the U.S., respectively)^[3] in 2008 also helps it sustain growth regardless of economic headwinds. For example, in 2008 LVMH grew revenue 4.32% while the United States and Europe, two of its largest sources of revenue, struggled with a recession. LVMH is vigilantly protective of its brands and has reacted aggressively to knockoffs and counterfeits of its goods around the world, especially in China. In 2008 the company won a lawsuit against the online auction site eBay for listing fake Louis Vuitton handbags and other LVMH products for sale.^[4]

Business Overview

Revenue, Operating Income and Operating Margin for LVMH FY04-08

LVMH was created in 1987 by the merger of Louis Vuitton and Moet Hennessy, creating a company with a wide and deep luxury product portfolio. The company is based in Paris, France, and owns world-class brands such as Hennessy, Dom Pérignon, Louis Vuitton, Fendi, Marc Jacobs, Christian Dior, Tag Heuer and De Beers. In 2008 the company grew revenue 4.32% to 17.2 billion € ($24 billion).^[1] The largest contributor to LVMH's business was fashion and leather goods which represented 35% of revenue and 49% of operating profit.^[1]

LVMH received 23% of its revenue from sales in the United States in 2008^[3], the largest proportion from any single country. By spreading its business out across different countries and regions, LVMH reduces its risk of being significantly hurt by any regional economic downturns. For example, the U.S. economy has been in a recession since 2008 but LVMH has continued to grow its sales and profits because it can rely upon its operations in other parts of the globe.

LVMH's net income in 2008 was $2.83 billion.^[2] Sales at fashion and leather goods increased 6.8%, wines and spirits sales fell by 3.1%, perfume sales increased by 5%, watches and jewelry rose by 5.5% and revenue at the selective retailing unit increased by 5.1%.^[1]

LVMUY has had income draw-downs in the first half of 2009, however. Comparing to the first half (through June 30th) of 2008, the retailer's net income decreased 23% to €687 million.^[5] LVMUY missed anlaysts' prediction of €734.6 million. The income reduction was due to LVMUY cutting back on inventories, particularly in its Tag Heuer watch and Moet wine businesses.^[5]

Business Divisions

As an organization, LVMH is divided into five distinct divisions with some brands operating in more than one: Wines and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewelry, and Selective Retailing. Each division operates semi-autonomously resulting in a separate CEO at the head of each division that reports to a central Executive Officer that also serves as the chairman of the board of directors.

Fashion and Leather Goods (Accounted for 35% of total divisional revenue in 2008, 49% of total operating profit in 2008)

Fashion and Leather Goods was LVMH's largest division in 2008, growing revenue 6.8% to 6 billion € ($8.4 billion).^[1] This growth can be partly attributed to an increase in its distribution network of retail stores which grew by 101 to total 1,090 stores by December of 2008.^[6] The Fashion and Leather Goods division earned a 32.1% operating margin in 2008^[3], the second-highest of all LVMH's divisions. The major brands that comprise this division are: Louis Vuitton, Fendi, Donna Karan, Loewe, Marc Jacobs, Celine, Kenzo, Givenchy, Thomas Pink, Pucci, Berluti, Stefanobi, Rossimoda, and eLuxury.

Wines and Spirits (18% of 2008 sales, 27% of 2008 profit)

This division can be further divided into two sub categories titled Champagne and Wines and Cognac and Spirits with brands such as Dom Perignon, Moet & Chandon, and Hennessy driving the majority of sales. Revenue from the Wines and Spirits division fell 3.1% in 2008 to 3.1 billion € ($4.4 billion).^[1] Wines and Spirits earned the highest operating margin, 33.9%^[3], of all LVMH's divisions in 2008. The company expanded upon its luxury cache by opening the Moet bar in Macau, a place meant to immerse consumers in the band experience. In addition, the company has opened temporary stores called "Ateliers Moet," where customers can personalize their own bottles.

In 2009, LVMH acquired 50% stakes in Cheval Blanc and La Tour de Pin. Both companies are involved in the production and sale of wines.^[7][8]

Perfumes and Cosmetics (17% of 2008 sales, 7% of 2008 profit)'

The brands that comprise LMVH's Perfumes and Cosmetics portfolio include Christian Dior, Guerlain, and Givenchy. Many brands based in the Fashion and Leather goods division have also started product lines that have become managed within this division. One of LVMH's smaller and its least profitable divisions, revenue from the Perfumes and Cosmetics segment grew 5% in 2008 to 2.9 billion € ($4.00 billion)^[1], on which LVMH earned only a 10.1% operating margin.^[3]

Watches and Jewelry (5% of 2008 sales, 3% of 2008 profit)^[9]

LVMH's smallest division, revenue from Watches and Jewelry grew 5.5% in 2008 to 879 million € ($1.23 billion)^[1], on which the company earned a 13.4% operating margin.^[3] The majority of sales in this segment come from the Tag Heuer and De Beers brands. In April 2008, LVMH announced its purchase of Hublot group, a Swiss watchmaker that saw rapid growth between 2004 and 2008.^[10] The acquisition of the Hublot brand will let LVMH take advantage of Hublot's efficient, selective, and well positioned distribution network of more than 300 stores worldwide.

Selective Retailing (25% of 2008 sales, 10% of 2008 profit)'

The main stores that operate within this division are DFS, Miami Cruiseline, Sephora, and Le Bon Marche. Selective Retailing is LVMH's second-largest division in terms of revenue and operating profit, as the segment's sales grew 5.1% to 4.4 billion € ($6.12 billion) in 2008.^[1] Due to high costs of operating store locations, including leases and employee expenses, Selective Retailing is LVMH's second-least profitable division as it earned an 8.9% operating margin in 2008.^[3] During 2008, Sephora opened its first stores in four countries: the Netherlands, Hong Kong, Kuwait and Singapore. The brand is also expanding its private label merchandise to offer more affordable options for its consumers.

Key Trends and Forces

LVMH's luxury status and ultra-wealthy clientele leads to constant sales

LVMH's brands target customers in the wealthiest ranks of the globe who buy luxury goods. In one of LVMH's biggest markets, the United States, comfortably affluent consumers (those that make between $100,000 and $149,999 a year) formed 12% of the nation in 2008. In addition, super-affluent (yearly income between $150,000 and $249,000) and ultra-affluent (yearly income greater than $250,000) made up 6 and 1.9 percent of the population respectively.^[11] LVMH's brands cater to an affluent consumer who, despite a recession, still have more disposable income than middle-to-lower income individuals. This level of stability in sales is seen only in the top tier luxury retail market, and distinguishes LVMH from near luxury brands and retailers such as Abercrombie & Fitch Company (ANF) and Nordstrom, which count on sales to aspirational customers from the middle class. This advantage has proven valuable in 2008 as the U.S. and European economies slid into a recession. Revenues decreased throughout the retail industry, however LVMH is one of few retailers whose revenue and net profits increased in 2008. Revenue grew 4.3% to $24 billion.^[1] In addition, due to its luxury image the prices for LVMH's goods are higher than those of retailers such as ANF and Nordstrom. This means they make a higher margin per item sold, leading to higher profits.

International diversification protects LVMH from regional downturns

LVMH's revenue is derived from operations spanning the globe, with the U.S. as its largest single contributor of revenue (23% in 2008).^[3] However, LVMH received 38%^[3] and 30%^[3] of revenue from Europe and Asia, respectively, in 2008, creating a diversified stream of revenue that protects LVMH from suffering significantly if one geographic region's economy trends downward. This has proven important as the U.S. economy has gone into a recession in 2008. Sales in the United States decreased by 166 million € ($232 million).^[12] In addition, sales in Japan decreased by 93 million € ($130 million).^[12] These sales decreases were more than compensated for by revenue increases in LVMH's other regions, namely Europe, Asia (excluding Japan) and Australia. Higher sales in those regions have resulted in overall increased sales for the company.

Counterfeits and knockoffs crowd out authentic sales and hurt LVMH's brand image

In June 2008 LVMH won a lawsuit against EBay (EBAY), in which the luxury retailer claimed the online auctioneer allowed auctions of fake LVMH products. The court system determined that eBay was a broker of sales, rather than a host for sales, that was accountable for misconduct engaged in through its brokerage. eBay was ordered to pay nearly € 40 million (approximately $63 million) to LVMH's brands.^[13] The decision verifies that online markets have an accountability to verifying that their sites do not permit or allow for unlawful commercial activities, a significant victory for manufacturers over black market sales and knock-offs. However, counterfeit goods are not only sold online, but also by street vendors in America (specifically New York City) and China. LVMH has taken additional steps to defend its brand image though seeking legal action against counterfeiters in countries such as China, Korea, Thailand and Italy. The company is seeking to stop the production of counterfeit products and sue those responsible for their sale and distribution.

LVMH's Luxury Goods Status Hurts Sales in Bad Times

As a company whose products have been synonymous with luxury, LVMH commands a high premium for its products. This premium and image has hurt LVMH in times of poor economic performance however. Following the 2008 Financial Crisis, LVMH saw sales shrink as the discretionary income of the rich worldwide decreased. The 2008 Financial Crisis financial crisis also produced a stigma associated with the buying of such luxury goods that has lasted into this year. If the economic climate does not further improve, LVMH may see its sales decrease permanently as its former customers choose to stop buying its products out of stigma or price concerns.

Competition

LVMH competes in the luxury market with an array of small private and publicly held companies that make designer clothing, wine, watches, and other luxury goods. Unlike LVMH, most of these companies usually have only one brand in their portfolios. The most direct competitors to LVMH are Pinault-Printemps-Redoute (PPR), a French luxury holdings company that includes such brands as Yves Saint Laurent and Gucci, and Compagnie Financière Richemont, a Swiss luxury company that includes such brands as Cartier and Montblanc.

• PPR is a French retailer and luxury goods company. It is very similar to LVMH in both size and earnings, both earning over $20 billion in revenue in 2008, but LVMH is much more profitable. Its 21% operating margin^[3] is over twice as large as PPR's 8.5% operating margin.^[14] One distinct advantage LVMH holds over PPR is international diversification: PPR relies upon European sales for 63% of its revenue^[14], whereas Europe represented 38% of LVMH's revenue in 2008.^[3] Though a majority of PPR's brands are luxury, the company also owns Puma, a sportswear line for men and women that is more affordable and as a broader consumer base, thereby increasing its market. The luxury brands that directly compete with LVMH fall under Gucci Group and are: Alexander McQueen, Bottega Veneta, Balenciaga, Yves Saint Laurent, Stella McCartney, Gucci, Boucheron and Sergio Rossi.

• Compagnie Financière Richemont is much smaller than LVMH in terms of revenue, but earned a higher gross margin and operating margin on its revenue in 2008.^[15] Richemont is primarily focused on watches and jewelry (51% of the company's 2008 sales were from the jewelry division^[15]), an industry that PPR is only tangentially involved in (some companies under Gucci Group produce watches and jewelry) and which constituted only 3% of LVMH's 2008 sales.^[1] Therefore, in its main business Richemont does not face stiff competition from either company. The most competition comes from the fashion and leather goods divisions, namely Dunhill, Azzedine Alaïa, Shanghai Tang, Chloé and the leather goods brand Lancel. All are luxury brands and compete directly with LVMH.

• Valentino Fashion Group S.p.A is an international luxury goods conglomerate. The company owns the prestigious brand Valentino as well as luxury brand Hugo Boss. It also has licenses for Marlboro Classics and M Missoni (a lower-priced line inspired by the designs of privately-owned Missoni). The company also has its own brands: Lebole, Oxon and Portrait. In addition, Valentino Fashion Group owns 45% of the luxury American brand Proenza Schouler. The company's 2008 income and operating margin were much lower than LVMH's, however its operating margin is higher than that of PPR. Like LVMH, Valentino owns a number of other luxury brands. Valentino and Hugo Boss produce apparel, accessories and fragrances for both men and women. Both conglomerates sell their goods side-by-side in luxury department stores as well as freestanding boutiques.

• Puig Beauty & Fashion group is one of Spain's largest couture and cosmetics companies. Puig owns the well-known brands Carolina Herrera, Nina Ricci and Paco Rabanne. The company also has licensing agreements with Prada and Comme des Garcons to produce fragrances jointly. Puig also owns the skincare companies Skinlab and Payot. Since it is a private company, much of its financial information is not publicly available. However, its focus on skincare and cosmetics, in addition to its position in the luxury market, place it in competition with LVMH. Puig is much smaller than LVMH in terms of sales and brand portfolio--94.5% of its 2008 income came from cosmetics and fragrance.

References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10} LVMUY 2008 Annual Report pg. 6  
2. ↑ ^{2.0 2.1} LVMUY 2008 Annual Report pg. 71  
3. ↑ ^{3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11} LVMUY 2008 Annual Report pg. 7  
4. ↑ Vogue, "LVMH wins eBay Case"
5. ↑ ^{5.0 5.1} Bloomberg, "LVMH Net Misses Estimates on ‘Massive’ Inventory Cuts," updated 07/28/09
6. ↑ LVMUY 2008 Annual Report pg. 26  
7. ↑ LVMH Moet Hennessy Louis Vuitton acquires 50% stake in Cheval Blanc
8. ↑ LVMH Moet Hennessy Louis Vuitton acquires 50% stake in La Tour du Pin
9. ↑ Moët Hennessy Louis Vuitton (LVMH) Annual Report 2007, Financial Highlights, pg. 6,7
10. ↑ BNet Business Wire: "LVMH Acquires the Swiss Watchmaker Hublot" 4/24/2008
11. ↑ Luxury Consumer Tracking Survey
12. ↑ ^{12.0 12.1 12.2} Translation of LVMH Financial Documents.
13. ↑ Moët Hennessy Louis Vuitton (LVMH) Press Release, "EBay Found Guilty of Gross Misconduct towards the LVMH Group
14. ↑ ^{14.0 14.1 14.2} PPR 2008 Annual Report pg. 6  
15. ↑ ^{15.0 15.1 15.2} CFR 2008 Annual Report pg. 1  
16. ↑ Valentino Fashion Group S.p.A Reports Earnings Results for the Year 2008.
17. ↑ Puig Beauty & Fashion-Figures.