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LVMH Moet Hennessy L.V. (LVMUY)Stock (Fashion Industry, Luxury Industry)
 The image associated with the brands of LVMH puts it in a different category than near-luxury retailers and brands like Nordstrom and Abercrombie & Fitch, whose consumers will often reduce consumption in times of economic hardship; LVMH's customers are the wealthiest in the market, often with net worths high enough to allow these individuals to maintain their high levels of spending despite economic downturns that can significantly detract from the spending power of middle-class consumers.[citation needed] For example, in the first quarter of 2008, same store sales fell 6.5% and 3% at Nordstrom and Abercrombie & Fitch, respectively, while same store sales for LVMH's Selective Retailing division increased 15%.[4][5][6] In addition to its luxury brand positioning, international diversity (37%, 30% and 25% of sales between Europe, Asia and the U.S., respectively, in 2007[7]) also helps it sustain growth regardless of economic headwinds. For example, in 2007 LVMH grew revenue 10% while real GDP in the U.S. only grew 2.2% .[8][9] 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.[10] [edit] Business Overview   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 2007 the company grew revenue 10% to 16.8 billion € ($24.8 billion) of revenue in 2007.[14] The largest contributor to LVMH's business was fashion and leather goods which represented 34% of revenue and 51% of operating profit.[15] LVMH received 25% of its revenue from sales in the United States in 2007, the largest proportion from any single country.[16] 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 teetering on the brink of a recession since mid-2007 but LVMH has continued to grow its sales and profits because it can rely upon its operations in other parts of the globe. In the first quarter of 2008, LVMH's total revenue grew 5% (12% on an organic basis with constant exchange rates and comparable structure). A portion of LVMH's revenue growth can be attributed to new stores, particularly in growing markets such as China. LVMH is expanding the boundaries of the luxury goods market into emerging markets for luxury consumption, such as Central Europe, Russia, and China where exploding economic growth is creating a new generation of young and wealthy individuals.[17] [edit] Business DivisionsAs 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. The fiscal year of 2007 ended with gains in revenue and net profit within all divisions.[18] [edit] Fashion and Leather Goods (Accounted for 34% of total divisional revenue in 2007, 51% of total operating profit in 2007)Fashion and Leather Goods was LVMH's largest division in 2007, growing revenue 7.8% to 5.2 billion € ($8.2 billion).[19] This growth can be partly attributed to an increase in its distribution network of retail stores which grew by 35 to total 989 stores by December of 2007.[20] The Fashion and Leather Goods division earned a 32.5% operating margin in 2007, the second-highest of all LVMH's divisions.[21] The major brands that comprise this division are: Louis Vutton, Fendi, Donna Karan, Loewe, Marc Jacobs, Celine, Kenzo, Givenchy, Thomas Pink, Pucci, Berluti, Stefanobi, Rossimoda, and eLuxury. [edit] Wines and Spirits (19%, 30%) [22]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.[23] Revenue from the Wines and Spirits division grew 7.7% in 2007 to 3.2 billion € ($4.7 billion).[24] Wines and Spirits earned the highest operating margin, 32.8%, of all LVMH's divisions in 2007.[25] In 2007, Moet Hennessy acquired a 55% stake in Wen Jun Spirits, a producer of high end white alcohols and has since completely remodeled the marketing and packaging of Wen Jun Spirits in order to bring this product in line with the luxury status and caliber of the other brands under this division.[26] [edit] Perfumes and Cosmetics (17%, 7%)[27]The brands that comprise LMVH's Perfumes and Cosmetics portfolio include Christian Dior, Guerlain, and Givenchy.[28] 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 8.4% in 2007 to 2.7 billion € ($4.022 billion), on which LVMH earned only an 9.4% operating margin.[29] [edit] Watches and Jewelry (5%, 4%)[30]LVMH's smallest division, revenue from Watches and Jewelry grew 13.0% in 2007 to 833 million € ($1.2 billion), on which the company earned a 16.9% operating margin. 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.[31] 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. [edit] Selective Retailing (19%, 12%)[32]The main stores that operate within this division are DFS, Miami Cruiseline, Sephora, and Le Bon Marche. [33] Selective Retailing is LVMH's second-largest division in terms of revenue and operating profit, as the segment's sales grew 7.0% to 4.1 billion € ($6.1 billion) in 2007.[34] 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 a 10.5% operating margin in 2007. During 2007, DFS expanded for the first time into the Asian market by opening a store in Vietnam. For 2008, further expansions of the DFS brand are slated for both India and Macao. Sephora also gained significant market share in FY07 by expanding into the Middle East market. DFS is expected to join Sephora in the region by opening a duty-free boutique in the Abu Dhabi airport. [edit] Key Trends and Forces[edit] LVMH's luxury status and ultra-wealthy clientele leads to constant salesLVMH's brands target customers in the wealthiest ranks of the globe who buy luxury goods. Many LVMH customers have individual net worths in the millions of dollars and incomes that remain high regardless of economic conditions, allowing these individuals to continue purchasing LVMH's premium-priced products when middle- and lower-class consumers are forced to cut back on their spending habits.[35] This level of stability in sales is seen only in the top tier luxury retail market, including such brands as Tiffany's, 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 2007 and 2008 as U.S. real GDP grew at annual rates of 2.2% in 2007 and 1.0% in the first quarter of 2008, but LVMH was still able to grow revenue 10% in 2007 and 5% in the first quarter of 2008.[36] [edit] International diversification protects LVMH from regional downturnsLVMH's revenue is derived from operations spanning the globe, with the U.S. as its largest single contributor of revenue (25% in 2007). However, LVMH received 37% and 30% of revenue from Europe and Asia, respectively, in 2007, 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 been on the brink of a recession since mid-2007 and LVMH has been able to continue to gain revenue from its operations in Europe and Asia. In particular, LVMH hedges some of its exchange rate risk by receiving payment for sales in a variety of currencies and as the U.S. dollar has depreciated, LVMH has made up some of the loss with the appreciation of the Euro and the Japanese Yen. [edit] The mortgage market meltdown has restricted LVMH's ability to borrow and acquire other companiesThe amount of capital available for buyouts and acquisitions in the fashion industry has decreased by approximately 50%, forcing many firms to pursue deals that are valued near $100 million as opposed to the traditional benchmark of $250 million. [37] Since the late 1990's, the successful purchase and acquisition of external brands has been strongly correlated with long term financial growth and stability in this industry. [38] While this effect decreases as firms become larger, half of the acquisitions made by the firm between Q4 2007 and 2008 have fallen below the $250 million cutoff. [edit] Counterfeits and knockoffs crowd out authentic sales and hurt LVMH's brand imageOn September 21, 2006 LVMH filed suit against the online auction site eBay for allowing auctions of fake Louis Vuitton purses and other LVMH products, after a test purchase from eBay conducted by LVMH of more than 300,000 Dior products and 150,000 Louis Vuitton products revealed that more than 90% of the items up for sale were fakes.[39] LVMH won the suit in June 2008, as 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.[40] 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. [edit] CompetitionLVMH 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 Mont Blanc. LVMH and PPR are similarly sized companies, each with over $20 billion in revenue in 2007, but LVMH is much more profitable. Its 20.4% operating margin is nearly three times as large as PPR's 8.6% operating margin.[41][42] One distinct advantage LVMH holds over PPR is international diversification: PPR relies upon European sales for 67% of its revenue, whereas Europe represented 37% of LVMH's revenue in 2007. 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 2007.[43]
Note: 1) All figures for 2007. 2) Revenue growth assuming constant exchange rate. 3) All figures converted from Euro to US Dollar with exchange rate as of December 31, 2007.
[edit] References
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