Arnault: LVMH a “Pacifist” Shareholder in Hermes

In Reports, What's New, Industry News by Accessories Staff

Paris—Bernard Arnault, chairman of LVMH, struck a conciliatory tone late last week about his company’s stake in Hermès, which has been viewed as hostile by the majority shareholders, mostly family members of Hermès’ founders.

Speaking to French publication Challenges, Arnault reiterated previous statements from LVMH that its stake in Hermès is “friendly.” LVMH surprised Hermès executives and the French stock market last October with the announcement it had built up a 17% stake in Hermès, later increasing it to about 20%.

Meanwhile, majority shareholders who fear a takeover attempt by LVMH, received a special exemption earlier this month to form a holding company in an effort to thwart LVMH. Patrick Thomas, Hermès’ ceo, has said LVMH could be a shareholder of Hermès “but 20% and more, it is too much.” Family representatives even asked LVMH to sell back its shares.

‘A Pacifist, no Passive’ Shareholder

While Arnault maintains LVMH’s stake is friendly and actually prevented other foreign companies from buying into the French brand, he said LVMH, the world’s largest luxurygoods company, could help Hermès in the future. LVMH reported Friday that its full year sales broke through 20 billion euros (about $27 billion) mark for the first time, thanks to soaring sales at its Louis Vuitton fashion and leathergoods unit.

“We can bring them (Hermès) a number of advantages both strategically and operationally without anything in return other than our presence as a shareholder,” Arnault said.

LVMH has said it wouldn’t seek representation on Hermès board of director. Arnault says LVMH will be” a friendly, not an activist shareholder. “We are a pacifist shareholder, which does not mean that we will be a passive shareholder,” Arnault said. “We can establish, if conditions improve, constructive relations with the family and management (of Hermès).”

Hermès Full Year Revenue Up 19%

Arnault’s comments came just hours after Hermès posted its fourth quarter sales, announcing it once again lifted its full yearforecast,

Sales for the three months ended Dec. 31 climbed 25% to 736 million euros (about $1.02 billion), from 587.3 million euros, Hermès said. Analysts’ average estimates were for 709.4 million euros. Excluding currency moves, full-year revenue advanced 19% to 2.4 billion euros, beating a November forecast of about 15% growth.

Fourth-quarter sales at Hermès’ stores advanced 28%, while wholesale revenue climbed 7.6%. Much of the sales increases were driven by “extremely strong business momentum” at its own stores, Hermès said, adding 10 more stores will be added this year.

The company called its U.S. sales growth was “brisk,” spurred by its first Hermès men’s store on Madison Avenue. France, lead the 18% increase in Europe and the Americas rose 36% in the Americas. The rest of the Asia-Pacific region, which includes China, surged 45%, reflecting a similar lurch in sales that other luxurygoods brands have reported recently. Even in Japan, where luxurgy sales continue to be sluggish, Hermès reported a 17% increase.

By category, leathergoods increased 30%, scarves and other silk businesses rose 25%, apparel and fashion accessories rose 13%. Tableware increased 23% but fragrance sales fell 3%.

Hermès has gained 54% in trading on the French bourse in the past 12 months, valuing the company at 15.9 billion euros. “Hermès has been one of the best top-line performers in the luxury industry and we expect this to continue in 2011 and 2012,” Antoine Belge, an analyst at HSBC, wrote in a report.

LVMH Sales Break 20 Million Euros

However, noting the high valuation shows strong investor support for the Hermès brand, others warn that the rebounds seen in 2010 figures won’t necessarily continue. Paul Swinand, analyst at Morningstar, said, “For 2011 we expect strong luxury trends to continue but the rate of growth to decelerate…The positive effects of destocking and pent-up demand, as well as highly successful openings–such as the men’s store in New York–will not provide the same tailwinds as in 2010. Nor will buyout speculation drive the stock price, now that the new share holding company structure is virtually assured.”

While the French stock market regular Autorite des Marches Financiers (AMF) gave allowed Hermès majority shareholders to go ahead with a plan to create a new holding company that would own more than 50% of Hermès, the ruling has been challenged by a group of minority shareholders. The AMF also is investigating how LVMH acquired its stake without having to disclose it until it reached 17%.

Commenting on LVMH’s acquisition which Hermès executives and family members called “surprising” and “shocking,” Arnault said he understood Hermès’ surprise when it found out LVMH had become a shareholder, saying that “we, ourselves were surprised to find ourselves shareholders” of Hermès.

Arnault said the stake was acquired through bankers who offered LVMH complicated derivatives called equity swaps, which were transformed into Hermès shares. LVMH built up its Hermès stake from 2008 partly through derivatives, which allowed it to avoid having to declare the size of its holding to market regulators.

“These were a bit tongue-and-cheek comments,” Luca Solca, luxury analyst at Bernstein, said of Arnault’s remarks.

In other remarks on Friday, Arnault hailed his company’s 2010 sales. “2010 was a great vintage for LVMH. The quality of our poruducts, the originiality of our brands and the talent of our teams bolstered by the economic recovery allowed us once again to gain market share throughout the world.”  Revenue for the year jumped 19% to 20.3 billion euros, up from 17.05 billion euros the year before. Operating profits on recurring operations rose 29% to 4.3 billion euros, up from last year’s 3.4 billion.

Its leathergoods division’s operating profit jumped 29% to 2.56 billion euros, on revenues that rose 20% to 7.58 billion euros. In addition to what LVMH called a “record year” at Louis Vuitton, “Fendi also performed well in all of its product categories and continued to consolidate its distribution network. Donna Karan progressed in the US. Céline and Loewe had great success. The other fashion brands continued their expansion.”

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