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LVMH Considering Calvin Klein

October 15, 1999
Like a giddy shopper flinging francs on Paris' 8th arrondissement, luxury goods giant LVMH Moet Hennessy Louis Vuitton (Nasdaq: LVMHY) buys, buys, and buys with the seeming intention of adding all of the world's top brands to its stable.

The beat is likely to go on, given a company spokesman's confirmation of Chairman Bernard Arnault's interest in an alliance or merger with New York clothes, accessories, and fragrances maker Calvin Klein, which had $5.4 billion in global retail sales last year. Perhaps not coincidentally -- although LVMH hasn't always waited for an engraved invitation; just ask Gucci (NYSE: GUC) -- Calvin Klein earlier this month called on investment bank Lazard Freres to help examine options.

Arnault has also shown an interest in French watchmakers Ebel and Chaumet, suggesting the possibility of synergies not only with its Fred jewelry and timepieces marque but with Swiss watchmaker Tag Heuer (NYSE: THW), which LVMH offered to buy last month.

When considering LVMH -- a sprawling conglomerate of apparel, wines, spirits, luggage, fragrance, and jewelry makers -- investors should question whether their company (traded in the U.S. in the form of American depositary receipts worth one-fifth of a share) hasn't given up on internal growth in exchange for hasty acquisitions. Also worth consideration is whether the company is seeing its purchases and partnerships pay off.

Not all "strategic partnerships" bear fruit as corporate cultures often clash and "partners" turn out to be hesitant about sharing key strategic information and customers with competitors.

That's especially important taken in context of deals like LVMH's latest, a just-announced joint venture by which LVMH and Prada, in an unusual partnership, will acquire 51% of Italian fashion apparel and accessories designer Fendi.

The deal isn't expected to have a major impact on earnings in the short term, but what investors should really look for are increased synergies in terms of distribution, added expertise in the Italian market, and a boost in leather operations from which Fendi gets most of its sales.

Don't worry, the company said; the aforementioned spokesman told Bloomberg News that LVMH is focused on internal growth and won't make major purchases without "strong strategic justification."

That should be the key for LVMH, as always. While revenue growth has increased by about 10% in each of the last five years on a compounded basis, gross margins have just barely held pace and operating income has improved by only 2.1% in that same period. The company's cash hoard, meanwhile, has fallen while long-term debt has nearly doubled.

With the company constantly folding in new operations, one would hope for added profitability, but LVMH would likely respond by saying it's been busily positioning itself as the world's number one in luxury goods -- which it has. Eventually, however, all that work will need to pay off on the earnings statement and balance sheet, or investors might begin to find less comfort in the lap of LVMH's luxury.

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