Analysis: LVMH and the Future

The two most visited posts on my blog are College Chic: The Messenger Bag and Louis Vuitton and the Economic Crisis. The first one I can’t do much about. The second one, however, is less about LV’s actually economic performance and more about its image. To benefit those who Google “louis vuitton and the economic crisis” I give you here a more robust analyst report compiled late at night, while doing laundry, by yours truly for LV’s parent company, LVMH. It’s neither comprehensive nor perfect. It’s probably more waxing and idealistic, but you get the point. Ask questions in the comment section, and I’ll be sure to get back to you.

LVMH Moet Hennessy Louis Vuitton (LVMH) – as traded on the Paris Stock Exchange (An ADR is available OTC in the US)
Price (11/09):          74.90 EUR
Market Cap:             36.7b EUR
Dividend:                 1.60 EUR
Yield:                         2.14%
52 Week Hi/Lo:      75.89/38.10 EUR

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LVMH Moet Hennessy Louis Vuitton is the world’s largest luxury company that, as a conglomerate, has existed since 1987, but, accounting for its numerous entities, can trace its roots to the 16th century. Now based in France and run by CEO Bernard Arnault, the company is divided into five major divisions: Wines & Spirits, Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewelry, and Selective Retailing. Notable brands under the LVMH umbrella include Moet & Chandon, Hennessy, Veuve Clicquot, Louis Vuitton, Givenchy, Guerlain, Sephora, Fendi, Pucci, Marc Jacobs, Thomas Pink and over 50 others. While its holdings are impressive, LVMH’s enormous reach into the global luxury market exposed the company to some of the harshest aspects of the recent global financial crisis. This same reach, however, may be just what helps move the company forward as 2010 comes around the corner.

Overall, if one were really to ask the question, “How did LVMH perform during the financial crisis?”, the answer would be, “Fairly well.” LVMH reported revenues of over EUR 17 million in 2008, a 4.3% increase from 2007. (See its Annual Report and Financial Statements.) Other than Hermes, it was the only global luxury retailer to report a net profit for 2008, though 4th quarter comparable sales were down year over year. The hardest hit division was Wine & Spirits. Perfumes and Fragrances were the primary sales drivers. Of total net sales, including all divisions of the company, 14% were generated in France, 24% in the rest of Europe, 23% in the US, 30% in Asia and 9% in the rest of the world.Though year over year profit was down for both the 2nd and 3rd quarters of 2009, LVMH has managed to increase its revenues and keep its operating margins relatively steady. Destocking of wines, spirits and department store inventories have contributed to this stability. Given that analysts predicted the luxury industry would shrink by at least 10% in 2009, LVMH’s performance, while not stellar, is to be commended.

The trepidation that surrounds LVMH today, consequently, has less to do with its financial efficiency and more to do with its place in the global luxury market at as a whole. At a recent Innovation Forum hosted by LuxuryLab, several luxury executives came to the conclusion that, “today, affluent consumers are becoming less interested in traditional status symbols and more interested in ‘content-rich status experiences.’” In other words, those who still care about luxury are less concerned with status symbols and more concerned with a way of life. I would argue that this is because Gen Y was raised with the “I have the luxury to do whatever I want” instead of “I have the luxury to buy whatever I want” mentality. And now, it’s Gen Y that’s taking the reins of the business sector. Some doubt whether or not LVMH will be entirely able to make the necessary shift to mirror this changing mindset.

According to an article in the Economist in September 2009, LVMH’s four elements are “product, distribution, communication and price.” As the article explains, the company hopes to do the first three so efficiently, people forget about price. And, for the most part, LVMH is succeeding. As far as fashion and leather goods are concerned, the products of the company’s various entities continued to be some of the most sought after high quality items in the world. And, given its global diversification, distribution also doesn’t seem to be a problem. Furthermore, in a recent analysis by LuxuryLab, Louis Vuitton has the highest “Digital IQ” of any other fashion brand because of its large social networking presence. Thus, it is price that is LVMH’s biggest concern. As unemployment and jobless claims rise and incomes continue to fall, many are unwilling to pay the large sticker prices of luxury goods, or at least unwilling to face the guilt associated with the purchases.

How does LVMH hope to combat anatogism towards its prices? By getting back to the “basics”. It’s much easier to justify spending an exorbitant amount of money on a watch when you know the profits are going to the person who helped hand make it and not to the construction of another lavish store with a purse bar or two. LVMH is at a distinct advantage, however, compared to most other luxury firms. Its status as a conglomerate means that it does not face the problems of smaller fashion houses, like Escada, that are backed by a single private equity group. And the fact that over 75% of its sales are outside of the US, the hardest hit market in the crisis, likely mean that the company will be able to recover faster as 2010 comes along.

Consequently, if LVMH is going to continue to come out of the economic crisis as strong as ever, it’s going to have to do as many, if not all, of the following: keep its margins tight, embrace the digital age as much as possible, communicate (but not necessarily sell) to as many people as possible, and accept a dynamic rather than static definition of luxury. We are at a point right now where global lifestyles are changing drastically and rapidly and a new generation of consumers is taking control: Gen Y. Gen Y, however, has no money because no one left any for us. What we have are our ideas, our creativity and our iPhones that we hope to be able to drool over the latest runway shows with. Despite its financial strength, LVMH, just like all other fashion houses, cannot afford to miss this shift, not after nearly five centuries of sales and innovation.