LVMH v. HERMES
The Drama Explored from a Financial Standpoint Anne Chen Financial Management Parsons the New School for Design July 2013
Anne Chen
Final Project
Financial Management
7/16/2013 Introduction
On September 4, 2012, “Luxury 360” section of The Financial Times contained the following report from Paris, France, titled “Hermès and LVMH dispute escalates”: “The long-running dispute between two of France’s best-known luxury houses picked up steam on Tuesday after Hermès filed a legal suit relating to LVMH’s purchase of its shares in 2010 and LVMH counter-sued for defamation. Hermès group – best known for its silk scarves and Kelly and Birkin bags – revealed that on July 10, 2012 it had filed a complaint with the Paris prosecutor. The legal complaint, while addressing “the way in which LVMH entered the capital of Hermès”, also alleged insider trading and manipulation of the share price, according to a person familiar with the situation. LVMH, headed by billionaire Pierre Arnault, responded swiftly, saying in a statement that it filed a counter-complaint for ‘slander, blackmail and unfair competition’. In October 2010, LVMH announced it had acquired 17.1 per cent of the tightly held capital of the 175-year-old Hermès group. The family-controlled company described the shareholding as an ‘attack’ and has periodically called on LVMH to withdraw. LVMH, maker of Louis Vuitton bags, says the shareholding is friendly and has continued to stake-build. It now holds 22.3 per cent of Hermès’ shares while the Hermès family has 73 per cent.”1 Hermès International S.A., a well-recognized name in the fashion community, has been at the forefront of the international upmarket fashion and luxury goods industries since its birth in 1837. Currently helmed by Executive Chairmen Patrick Thomas and Émile Hermès SARL, the
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company has substantially branched out its product offering since its humble start by harnessmaker Thierry Hermès. Today, the company designs, produces, and distributes personal luxury accessories and apparel – including leather, scarves, men’s apparel, ties, women’s fashions, perfume, watches, stationary shoes, hats, gloves, and jewelry – and operates three-hundred twenty-three boutiques under the Hermès name.2 LVMH Moet Hennessy Louis Vuitton S.A. is a diversified luxury goods conglomerate. The company produces and sells wines and spirits, fashion and leather goods, perfumes and cosmetics, and watches and jewelry. In the words of Chairman and CEO Bernard Arnault, the Company has continued to see success in its many business lines because of LVMH’s “highly effective business model and robust [2012] financial position.”3 LVMH became the world’s largest luxury goods maker though acquisitions – that is, purchasing other companies. Interestingly, an analysis of its financial statements reveals that the company experienced its slowest growth in sales since 2009 in 2012 (7%). It appears that LVMH has attempted to acquire Hermès, its biggest rival, to address the issue – taking over another blockbuster brand would allow LVMH to simultaneously reduce its reliance on its smaller labels and strengthen its other fashion lines, such as Louis Vuitton, as, according to analysts, half of these are not profitable.4 A comparative analysis of the two companies’ financials may further reveal why LVMH has targeted Hermès, and why Hermès reacted by fighting to protect its independence.
Analysis A quick summary of ratio comparative analyses based on numbers provided by Bloomberg (see Appendix H and Appendix I): Hermès has higher liquidity by all three ratio
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measures; Hermès has better asset-utilization with higher turnover ratios; Hermès has lower financial leverage with very strong interest coverage; Hermès has higher profit margins and superior return on assets and return on equity; the market assigns higher multiples to Hermès due to its superior balance sheet, profit margin, and operating; and finally, Hermès has consistently out-performed LVMH within the last ten years. For a complete listing of each company’s ratios and financial statements, please see the accompanying Excel document. All numbers provided by Bloomberg. I. Liquidity Liquidity ratios measure the ability of a company to meet its short-term obligations to creditors. Among Current Ratio, Cash Ratio and Quick Ratio, Cash Ratio is the most conservative measure as it only includes cash and cash equivalents in the measure. LVMH has Current Ratio of 1.51; Hermès’ is 2.09. LVMH’s Cash Ratio is 0.23; Hermès’ is 0.81. Finally, LVMH’s Quick Ratio is 0.44, while Hermès’ Quick Ratio is 1.05. A company with a higher Quick Ratio is in a better position than one with a lower one. All of Hermès’ liquidity ratios are substantially higher than that of LVMH’s, indicating a superior short-term financial condition (see Appendix A). II. Asset Utilization Efficiency Asset-management ratios measure the extent to which a company’s assets are used to support sales. They are indications of the quality of a company’s inventory strategy and credit strategy. A higher Asset-Turnover Ratio, for instance, usually shows that a firm is efficiently utilizing its assets, which will lead to higher profits. LVMH has an Asset-Turnover Ratio of 0.58; Hermès’ ratio is 1.05. LVMH’s Inventory Turnover Ratio is 1.36; Hermès’ ratio is 1.76. LVMH’s Accounts Receivable Turnover is 14.55,
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and Hermès’ ratio is 18.20. All of Hermès’ turnover ratios are higher than that of LVMH’s, indicating a superior current asset management (see Appendix B). III. Leverage Leverage ratios measure the extent a company uses borrowed funds to finance its operations. The Total Debt-to-Asset Ratio of a firm should not be very high – too high a number would mean the company has high interest payments and be limited in obtaining any more debt funding. Hermès has very little debt (its Debt-to-Asset Ratio is 1.13), while LVMH has a debt-toasset ratio of nearly 14%. Further, Hermès has a much higher Interest Coverage Ratio (a staggering 745.80, which makes LVMH’s Interest Coverage Ratio of 35.67 look quite miniscule), indicating a strong position in using earnings to service interest expenses. On the other hand, LVMH is in a weaker position, likely due to both less earnings and higher borrowings (see Appendix C). IV. Profit Margin Included in the profit ratio analysis are Operating Margin, Net Profit Margin, Return on Assets (ROA), and Return on Equity (ROE). These ratios show a company’s ability to generate returns on its sales, assets, and equity. Hermès again has much stronger performance in this area. Its strong net profit margin (21.24) reflects a stronger operating margin as well as lower debt level and lower interest expense. Indeed, Hermès’ interest expense is 100th that of LVMH (1.5mm/166mm). Given the higher operating efficiency and higher net profit margin, it is not surprising that Hermès’ ROA and ROE (22.24 to LVMH’s 7.06 and 31.77 to LVMH’s 14.57, respectively) are almost more than three times as high as those of LVMH’s (see Appendix D).
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V. Market Value Market value ratios measure how the market values a company’s business. How the market values a business depends both on a company’s financial strength and its long-term profitability. Companies with higher Price-to-book Ratios, for example, typically have better financial statements than companies with lower ratios. Hermès has experienced sustained growth of ROE and net profit margin. LVMH, on the other hand, has experienced a slow-down of ROE and margin compression in the last few years (see Appendix E and Appendix F). Not surprisingly, all three market value ratios (P/E ratio, Price-to-book ratio, and Tobin’s Q ratio) indicate that the market fairly rewards Hermès’ superior performance with substantially higher stock prices (see Appendix G). LVMH’s Price-to-book Ratio, for instance, is only 2.73, while Hermès’ ratio is 11.23; Hermès’ Tobin’s Q Ratio is also higher (7.23 versus LVMH’s 1.90).
Conclusion It appears that LVMH has attempted to “buy growth” by acquiring Hermès. It also appears that Hermès has a strong reason to maintain independence: it is a well-run company in superb financial condition. Unsurprisingly, then, continues Scheherazade Daneshkhu’s Financial Times article: “Last year [2011], Hermès reinforced its defenses by establishing a holding company with a majority stake in the French luxury goods group and recently named Axel Dumas, a family member, as the successor to Patrick Thomas when the latter retires as chief executive next year.”5 Remaining independent perhaps is thus the best way for Hermès to preserve its franchise value for its shareholders.
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Recent news updates on the LVMH v. Hermès case announce that the luxury conglomerate has been fined 8 million Euros, though LVMH has sought to appeal the verdict. Perhaps such shocking business controversies, in which rival firms battle each other in the public eye, can serve as reminders of the importance of understanding finance and the invaluable role of the institutions – such as France’s stock market regulator, AMF – that seek to preserve an effective and honest financial system.
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Appendix
Liquidity Ratios 2.50 2.00 1.50 1.00 0.50 0.00 Current Ratio
Cash Ratio
LVMH Moet Hennessy Louis Vuitton SA
Quick Ratio Hermes International
Appendix A
20.00
Asset-management Ratios
15.00 10.00 5.00 0.00 Asset Turnover
Inventory Turnover
LVMH Moet Hennessy Louis Vuitton SA
Appendix B
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Receivable Turnover Hermes International
Financial Leverage Ratios 745.80
800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00
13.64 1.13 Debt to Asset
1.95
35.67
1.44
Asset to Equity
LVMH Moet Hennessy Louis Vuitton SA
Interest Coverage Hermes International
Appendix C
Profit Ratios 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Operating Margin
Profit Margin
LVMH Moet Hennessy Louis Vuitton SA
Appendix D
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ROA
ROE
Hermes International
Return on Equity 35 30 25 20 15 10 5 0 FY 2003
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
LVMH Moet Hennessy Louis Vuitton SA
FY 2009
FY 2010
FY 2011
FY 2012
Hermes International
Appendix E
Net Profit Margin 25 20 15 10 5 0 FY 2003
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
LVMH Moet Hennessy Louis Vuitton SA
Appendix F
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FY 2009
FY 2010
FY 2011
FY 2012
Hermes International
Market Value Ratios 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 P/E
Price to Book
LVMH Moet Hennessy Louis Vuitton SA
Appendix G
Appendix H
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Tobin Q Ratio Hermes International
Appendix I
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Works Cited
1. Daneshkhu, Scheherazade. “Hermès and LVMH dispute escalates.” The Financial Times. Last updated 4, Sept. 2012. Web. 12, July. 2013. <http://www.ft.com/intl/cms/s/0/988f2d82f685-11e1-9fff-00144feabdc0.html?goback=%2Egde_4611451_member_160071817#a xzz2ZGGTWl1t>. 2. Hermès: 2012 Annual Report. Hermès International. Paris, France. Web. 14, July. 2013. <http://finance.hermes.com/var/finances/storage/original/application/858b2a56a2e10d87 3f4dca9e5930e5da.pdf>. 3. LVMH: 2012 Annual Report. LVMH Moët Hennessy Louis Vuitton. Paris, France. Web. 14, July 2013. < http://www.lvmh.com/uploads/assets/Comfi/Documents/en?RA_LVMH_Co mplet_GB_2012.pdf>. 4. Roberts, Andrew. Bloomberg. “As LVMH Sales Growth Slows, Will Bernard Arnault Go on a Buying Spree?” 22, Feb. 2013. Web. 12, July. 2013. <http://www.businessoffashion.com/ 20/02/as-sales-slow-will-lvmh-go-on-a-buying-spree.html>. 5. Daneshkhu, Scheherazade. “Hermès and LVMH dispute escalates.” The Financial Times. Last updated 4, Sept. 2012. Web. 12, July. 2013. <http://www.ft.com/intl/cms/s/0/988f2d82f685-11e1-9fff-00144feabdc0.html?goback=%2Egde_4611451_member_160071817#a xzz2ZGGTWl1t>.
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