LVMH poised to pursue takeover on slow sales

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LVMH poised to pursue takeover on slow sales

LVMH Moet Hennessy Louis Vuitton is poised to pursue a takeover as revenue growth, led by sales of its eponymous handbags, slows the most in four years.

The $87 billion company could go after Burberry Group, the U.K.’s biggest luxury-goods producer, as a way to increase revenue while it works on repositioning the Louis Vuitton brand, Berenberg Bank said. After LVMH purchased Italian jewelry maker Bulgari SpA in 2011, it also could pursue Tiffany & Co., the New York-based jeweler with a market capitalization of $8.1 billion, according to Cantor Fitzgerald.

Chief Executive Officer Bernard Arnault, who helped to build LVMH into the world’s largest luxury-goods maker through acquisitions, “is going to need to buy growth,” John Guy, a London-based analyst at Berenberg, said in a telephone interview. “He’s going to need to buy time in order to sort Vuitton out.”

Purchasing another blockbuster brand would allow LVMH to reduce its reliance on smaller labels such as Fendi and Celine, while buying it time to burnish Louis Vuitton and develop its other fashion lines, about half of which Guy estimates aren’t profitable. LVMH’s sales are projected to increase 7.3 percent this year, the worst annual rate since 2009, according to data compiled by Bloomberg, as the Paris-based company slows expansion of its flagship brand to enhance Louis Vuitton’s image and exclusivity.



‘Delicate juncture’

LVMH, whose luxury offerings include Dom Perignon champagne and Guerlain perfume as well as high-end handbags, had worldwide sales of about 28 billion euros ($37 billion) in 2012. The company’s fashion and leather-goods division, anchored by Louis Vuitton, was its biggest generator of revenue and operating profit even as its so-called organic sales growth slowed.

Excluding currency swings and acquisitions, revenue from fashion and leather goods climbed 7 percent last year, the slowest growth since 2009. Louis Vuitton, which accounts for more than three-quarters of the unit’s sales, had organic revenue growth of 6 percent in 2012, down from 12 percent a year earlier and the smallest gain since at least 2001, according to research from Exane BNP Paribas.

Vuitton “is unquestionably at a delicate juncture,” Luca Solca, head of luxury goods research at Exane BNP Paribas in London, wrote in a January report.

Brand focus

After raising prices and including more leather in its handbag collections to increase their appeal, LVMH is focusing on improving existing Louis Vuitton stores and limiting new openings as it seeks to control the label’s growth rather than chase sales “at all costs,” Arnault said Jan. 31 on an earnings call. The company will also focus on service and increase the penetration of leather goods while putting fewer “LV”-logoed canvas handbags on the shelves, he said.

“What we are focusing on for the long term is the brand image and the satisfaction of our customers,” Arnault said of the Louis Vuitton strategy. “It’s not increasing revenue that we could of course increase far more than it is here. All it would take would be to open far more stores.”

Analysts project that LVMH’s companywide sales growth will slow to less than 8 percent a year on average through 2015, according to data compiled by Bloomberg.

That compares with average annual growth of more than double that amount during the past three years, the data show.



Burberry

appeal

Burberry, with annual sales of about $3 billion, would give LVMH a strong men’s clothing line as well as a beauty business that it could distribute through its Sephora retail chain, Berenberg’s Guy said. LVMH could strengthen the $9.2 billion company’s leather business and lift profit significantly by centralizing sourcing, distribution and other costs, he said.

Acquiring Burberry now “strategically for them makes so much sense,” Guy said.

LVMH also could pursue Tiffany to beef up its watch and jewelry division, said Allegra Perry, an analyst at Cantor Fitzgerald in London. LVMH sees more consolidation in the industry even if there is a shortage of companies for sale, Francesco Trapani, head of the company’s watch and jewelry unit, said in November. Last month, competitor Swatch Group AG agreed to buy the Harry Winston brand for about $1 billion.



‘No secret’

“LVMH has made no secret of wanting to build especially in the hard goods space,” Cantor’s Perry said in a phone interview.

Tiffany, even after missing profit estimates in four straight quarters for its worst earnings stretch in at least a decade, “is potentially an interesting acquisition to consider.”

Bloomberg



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