Paris - Neverfull – the name of Louis Vuitton’s best-selling handbag – sums up well its parent LVMH: even if it snapped up all of the world’s last remaining independent luxury brands, it would still have room for more.
The French group’s appetite for acquisitions has been tolerated by investors while its cash cow Louis Vuitton, which contributes half of group profit, grew revenues more than 10 percent annually in the past two decades.
But this year Louis Vuitton’s sales growth has halved as it failed to anticipate consumers’ move away from logo-branded luxury goods, Chinese demand cooled and it put the brakes on expansion. Uncertainty about the brand’s future growth heightened last week when a source close to LVMH said its star designer, Marc Jacobs, was leaving.
LVMH, the biggest luxury goods group with more than 60 brands, from Dior to Hennessy cognac, has never built a major brand from scratch and is one of the industry’s worst stock market performers.
Its stock has nudged up just 5 percent since the start of the year, compared with a 20 percent rise across the rest of the luxury goods sector. The analyst consensus for LVMH’s earnings a share growth for 2013 is 6 percent, compared with 15 percent for the sector.
Jacobs’ departure, to take his eponymous own label public, is part of a series of leadership changes at Louis Vuitton, the most significant in two decades, as it tries to reposition itself as a more exclusive, less ubiquitous brand.
In a sector where forecasts of sales rather than earnings growth have tended to drive share performance, LVMH’s problem is that with Louis Vuitton already making e7.3 billion (R97bn) in annual sales, it is too big to buy substantial growth.
Its rival Kering, the owner of Gucci, has been able to get a bigger boost than LVMH from its other brands, such as Bottega Veneta, which makes revenue of around e1bn, and Yves Saint Laurent with sales of nearly e500 million because Gucci makes half of what Louis Vuitton makes, or e3.6bn.
Comparatively, LVMH’s Celine and Fendi are estimated to make around e500m while fast-growing Marc Jacobs makes nearly $1 billion (R10bn) in annual sales including licence revenue – and some of those sales would be lost in the event of an initial public offering.
LVMH is unlikely to find the answer to faster growth among its smaller fashion brands such as Berluti, Kenzo, Givenchy, Donna Karan and Loewe. Although it is ploughing millions of euros into their expansion, it could take a long time for some of them to have an impact on the group’s sales growth profile – if ever.
LVMH has recently started investing in budding fashion labels with the hope that one day they will become global brands.
The group recently gobbled up some of the world’s most exclusive luxury names – Roman jeweller Bulgari in 2011 and Italian cashmere maker Loro Piana in July. But analysts say it will have to be patient before it gets a good return on such investments, which should be higher than the 10 percent weighted average cost of capital in the luxury sector.
LVMH declined a request to be interviewed for this report. The group has a policy of never commenting on share price performance.
Given that LVMH’s existing drinks, watch and jewellery businesses are also leaders in their fields, there remains only one area in which LVMH could still buy growth: cosmetics. The company has small beauty brands Benefit, Nude and Make Up for Ever and has developed skin-care lines for Dior and Guerlain.
But the theory goes that if it bought a top skincare brand, it could leverage its network of Sephora and duty-free shops and tap into China’s booming skin-care market – the prize for every big cosmetics group – and into rising tourist flows in Asia.
“LVMH could create a [cosmetics] brand of its own but it would gain time if it bought an existing brand,” said one LVMH associate who declined to be named.
“Everybody expects Clarins will be put on the market,” said Francois Arpels, a managing director at investment bank Bryan, Garnier & Co in Paris.
Arpels noted that Clarins still had a relatively small presence in China and the Courtin-Clarins family, who took the business private in 2008, “have always let people know that eventually, they would be looking for a way to sell out”.
The Courtin-Clarins family declined to comment. – Reuters