LVMH Investors Find the Price of Luxury Is Sometimes Too High

LONDON -- LVMH Moet Hennessy Louis Vuitton (LVMHY Quote), the luxury goods group run by Bernard Arnault, may target a class of people who can never be too rich.

Now several analysts and money managers are arguing that LVMH's share price, which is trading near a 52-week-high of 19 13/64, has become just that. On Thursday, the shares traded around 16 5/8.

Their concerns include slowing revenue growth as well as currency issues that are likely to turn less favorable for LVMH. They also worry that the group has overpaid for a series of acquisitions and may be unable to generate the expected synergies.

An LVMH spokesman, needless to say, argues that most of these concerns are unfounded.

As Good As It Gets

Arnault has boasted that he could double LVMH's revenue in five years to 15 billion euros by 2002. To reach that goal, the company has been growing fast both internally and through acquisitions. But such a pace of double-digit sales growth is difficult to sustain year after year, and now there are signs that the pace is slowing.

"We believe that Q1 was the peak in terms of growth for LVMH," wrote Claire Kent, an analyst with Morgan Stanley Dean Witter, who downgraded shares of LVMH on May 15 to neutral from outperform. (Her firm hasn't performed underwriting services for the company.) In the second half of the year, "We expect to see a slowdown in both sales and EBIT [earnings before interest and tax] growth."

En Vogue? LVMH's Key Measurements
	1999A	2000E	2001E
Sales	8,547	11,552	12,662
Growth Rate	23%	35%	9.60%
Net Profit	693	794	993
Growth Rate	159%	14.6%	25%
Net Debt	7.5
Net Debt-to-Equity	80%
Note: All figures are in millions of euros with 1 euro equally about $0.95 Source: Enskilda Securities

David Cooley, managing director of Gratry & Company, is inclined to agree. His Cleveland firm has been reducing its stake in LVMH, although it's still a major shareholder.

"Currently the fundamentals are very positive and are likely to get less positive," Cooley says. "We haven't been adding to our position recently, because we're worried about a few factors."

One of Cooley's chief concerns is the impact currencies have on LVMH's share price. He says the euro-dollar and euro-yen rates "explain 40% of what happens to LVMH's share price."

Since the company manufactures most of its products in Europe, its costs decline as the euro weakens. And because LVMH sells most of its goods in Asia and the U.S., its sales strengthen when those economies are robust. With the euro near all-time lows, and with the Asian recovery well under way and the U.S. economy continuing to roar ahead, LVMH is benefiting on all fronts.

Sizing Up the World LVMH's Sales by Region
France	20%
Europe (x-France)	17%
U.S.	22%
Japan	15%
Asia	17%
Other	9%
Source: Company Reports

The problem, Cooley says, is that these conditions are as good as it is likely to get.

"I'm concerned that the euro could recover and impact their margins going forward," he says, adding that the U.S. economy is already showing signs of slowing and the Asian recovery is fully reflected in LVMH's share price.

Philip Chitty, European economist with ABN Amro, says he expects the euro to gain strength next year. How quickly it picks up is anyone's guess, but "we're unlikely to see it fall any further," he says. Indeed, the euro has recovered from its May low of 0.89 euro to the dollar to stand on Thursday at 0.95 euro to the dollar.

With 10 manufacturing plants in Europe, a strengthening euro "increases our costs," admits the LVMH spokesman. He adds that such a trend could be offset by stronger buying power for Europeans, which could translate into stronger sales on the Continent.

Napoleon of Luxury

As the economic backdrop prepares to turn less rosy for LVMH, the company is in the midst of integrating more than two dozen acquisitions made over the past 18 months. In many respects, this strategy is nothing new for LVMH. CEO Arnault, dubbed the "Napoleon of luxury" for his reputation as a takeover master, built the company through acquisitions of underdeveloped brands or ones that had been damaged from overexposure, and strengthened them through controlled distribution and tight cost management.

His track record has been spotty. Sometimes, as was the case with Christian Dior or Louis Vuitton Malletier, results exceeded expectations. Other times, as with Celine, which joined the LVMH fold in 1987, it took 10 years before hot designer Michael Kors revamped the brand and jumpstarted sales.

In addition to fashion names, LVMH also owns liquors, under the Hennessy Cognac and Moet and Dom Perignon champagne names; airport Duty Free Shops; and a growing stable of beauty companies, including the successful Sephora chain of retail stores. In recent months, with the purchase of Tag Heuer, Ebel, Chaumet and Zenith, LVMH became one of the largest watch purveyors in the world. Arnault, both through LVMH and a private investment vehicle, Europ@Web, has also been an aggressive buyer of Internet companies. He is launching eLuxury, an online retailer, and was a backer of Boo.com, which went bankrupt.

In the Bag Some of LVMH's Recent Purchases
Company	Products
Fendi*	Italian leather
Tag Heuer	Watches
Miami Cruiselines	Retail
Phillips	Auction house
70% Thomas Pink	Men's shirts
*LVMH owns 51% of Fendi as part of 50/50 joint venture with Prada

Now with the pace of acquisitions having quickened, investors wonder what results LVMH will generate from its new catches.

Small Earnings Contribution

To complicate matters, most of these purchases were small, less than 1% of revenue, so LVMH wasn't required to disclose the purchase price or specify financial targets, which makes it difficult for investors to judge the deals' impact on future sales and earnings.

Taken individually, the acquisitions may not have much impact, but taken together they start to add up. Of the 23% sales growth that LVMH recorded in its most recent year, a hefty 9% came from acquisitions. Yet, the impact on earnings has been far less.

"Clearly, the contribution to earnings has been very little," says an analyst in Paris, who asked not to be named. He rates shares accumulate and his firm hasn't provided underwriting for the company. The acquisitions have been "dilutive much more than accretive."

Moreover, with the luxury sector enjoying an upswing, most companies are being valued at their peak, which means LVMH is paying top dollar, this analyst notes.

For instance, LVMH, through a joint venture with Prada bought 51% of Fendi for a price that valued the Italian leather house at six times trailing sales. That's extremely steep considering most retailers have been purchased for, at most, twice sales.

The LVMH spokesman argues that the company bases its price on what Fendi will become, not on what it has been. "You have to take the price that we pay and judge it against the synergies that we will achieve," he argues.

Investors will have to wait a year to learn the substance of those synergies, since LVMH isn't publishing financial targets for this acquisition for at least 12 months, the spokesman says.

If time is indeed money, investors, while they wait for that disclosure, may judge that they could put theirs to better use elsewhere.