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Times Rich for the Luxury Sector Close Window MARCH 6, 2006 Luxury Goods By Carol Matlack Rich Times for the Luxury Sector Europe's purveyors of high-end goods are enjoying solid profits, thanks to booming global travel and Asia's expansion. Will they go shopping for acquisitions? Olivier Theyskens, the young Belgian who designs for Rochas, unveiled a fall/winter collection inspired by Edwardian chimney sweeps. At Yves St. Laurent, Roberto Pilati added playful bows to jackets and evening gowns. John Galliano of Christian Dior opted for gothic black with oversized belt buckles. All that and more drew "oohs" and "aahs" during the Paris Fashion Week runway shows, which ended on Mar. 5. But for investors, the most beautiful creations this season may be the numbers coming out of luxury goods companies. On Mar. 2, Paris-based LVMH Mo?t Hennessy Louis Vuitton reported a 21% jump in profits, to $1.7 billion, on sales of $16.6 billion -- up 11% over 2004. The Paris-based PPR group, which owns Gucci, Yves St. Laurent, and other high fashion labels, will report results on Mar. 9. Analysts say profit growth could top 30% in PPR's luxury business, which saw a 16% increase in sales in 2005, to $3.6 billion. Luxury purveyors are riding high, thanks to an upturn in global travel, continued economic recovery in the U.S., and strong expansion across much of Asia. "Globally, there's an economic structure that is generating more wealthy people. High-profile spending, especially on these traditional [luxury] brands, is very much a priority with them," says Simon Raggett, a London-based luxury goods analyst with the brokerage Williams de Broe. WEAR IT WELL. Luxury goods conglomerates like LVMH and PPR have used slick advertising and celebrity marketing to reposition venerable brands such as Louis Vuitton and Gucci, which in the past would have been considered too stuffy for young fashionistas. Now, they're all the rage with young shoppers. Clothes and accessories -- handbags, most of all -- are the mainstays of these companies. But sales of other high-end products, from expensive perfumes to cognac and champagne, are booming, too. LVMH reported fivefold a increase in profits from its luxury watch business, which includes the Tag Heuer brand. With all this money rolling in, will the big luxury groups start shopping for acquisitions? After all, there haven't been many big deals in this sector since the travel industry took a nosedive in 2001. For now, the companies are sounding a cautious note. LVMH Chairman Bernard Arnault told investors recently that the emphasis this year would be on organic growth. Robert Polet, the head of PPR's Gucci Group, also is focusing on building its existing businesses. SOLID AT THE CORE. There's good reason for this caution: The big groups loaded up on acquisitions during the 1990s in the hopes of nurturing new "stars", as a way to reduce their dependence on longer-established brands. But that goal has mostly eluded them. Although LVMH doesn't break out figures for individual brands, analysts reckon that Vuitton accessories and clothes accounted for almost $4.3 billion of the $5.7 billion in sales at the company's fashion and leather-goods division, its most profitable business. At PPR, despite solid growth at smaller houses such as accessories-maker Bottega Veneta, the core Gucci brand still accounts for almost 60% of the group's overall luxury goods sales. Rather than shopping for acquisitions, the companies may first move to unload some poorly performing businesses. PPR's YSL Beaut perfume business, where sales were flat last year, is one candidate. EUROPE'S TOUGHER TURF. And while LVMH's beauty products retailer Sephora is doing well in the U.S., it is suffering in Europe's stagnant economy. LVMH might seek a buyer for some of the European stores, analysts say. But those are minor worries when compared with the soaring fortunes of the companies' stronger brands. So enjoy the runway shows, but remember: The biggest fashion trend of 2006 could be profits. Matlack is BusinessWeek's Paris bureau chief Edited by Cristina Lindblad Advertising | Special Sections | MarketPlace | Knowledge Centers Terms of Use | Privacy Notice | Ethics Code | Contact Us Copyright 2000- 2006 by The McGraw-Hill Companies Inc. All rights reserved.

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