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HISTORICAL ANALYSIS OF THE COMPANY APRIL, 2016

In collaboration with:

Produced by: Darino Serena 064597 Palumbo Paola 062111 Rella Rosalba 063717 Serio Francesca 063929


Table of contents 1. Introduction ..........................................................................................................................................................2 2.a Consolidated Balance Sheet ...............................................................................................................................3 2.b Consolidated Income Statement ........................................................................................................................4 3. Measuring Financial Performance ........................................................................................................................5 3.1. Operating Profit Margin ................................................................................................................................5 3.2. Net Profit Margin ...........................................................................................................................................5 3.3. Return on Net Operating Assets ....................................................................................................................5 3.4. Return On Capital Employed .........................................................................................................................5 3.5. Return on Risk Bearing Capital ......................................................................................................................6 3.6. Debt Ratio ......................................................................................................................................................6 3.7. Interest Cover Margin....................................................................................................................................6 4. Analysis of financial performance ........................................................................................................................7 4.1 Financial Goals: Overview...............................................................................................................................7 4.2 Performance ...................................................................................................................................................7 4.2.1 Year 2012 .................................................................................................................................................7 4.2.2 Year 2013 .................................................................................................................................................8 4.2.3 Year 2014 .................................................................................................................................................9 4.2.4 Year 2015 .............................................................................................................................................. 10 5. The Luxury Jungle: comparison with the competitors ...................................................................................... 11 References ............................................................................................................................................................. 12

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1. Introduction The report aims to evidence the financial trend of the company LVMH, considering the historical analysis of the past 5 years. The analytical study of the Income Statement and Balance Sheet over the years allows a valuation of the success of the company. The analysis of the financial statement proceeds with the computation of the financial ratios that clearly support a basically positive trend, even in a period of strong structural changes. The story of the group LVMH begins with the fusion in 1987 of the two important firms: Louis Vuitton and Möet Hennessy. The company includes the five major sectors of the luxury market: Wines & Spirits, Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewelry and Selective Retailing. The internationalization strategy allows the company to embrace in its business an excellent variety of brands, such as Louis Vuitton, Fendi, Céline, Marc Jacobs and in the sector of Wine & Spirits Belvedere, Möet & Chandon and others, with a notable willing to improve the expansion that today counts almost 60 prestigious brands.

enhancing the value of each single brand. Louis Vuitton & Möet Hennessy's governance is characterized by intelligent synergies while respecting individual identity and autonomy of the single Houses. Present in over 50 countries, LVMH has consistently acted as a pioneer in new and emerging markets, and is arguably the most international luxury conglomerate. The Group dominates the market, reaching a total of 3860 stores around the world in the last year, and it is geographically distributed, pursuing a strategy of diversification, to withstand the impact of shifting economic factors. It demonstrated to have the skills to manage successfully all market’s weaknesses faced. In fact, the average percentages of revenues in all countries remained quite constant overtime, with slight dips of only 1% or 2%. The French holding situates itself as a leading company in the world of luxury and fashion as it is highlighted in the last section of the report, in comparison with its main contenders.

The limitless innovation, connected to the preserved heritage of high quality, is the main characteristics of the Group's products and services. All business groups maintain a strong importance in the market and the excellence reached by digital improvements keeps up the dynamism and innovation of the market,

Europe (excluding France) United States 18% 24%

Japan 7% Other markets 11% Asia (excluding Japan) 29%

France 11%

United States

France

Asia (excluding Japan)

Other markets

Japan

Europe (excluding France)

2


2.a Consolidated Balance Sheet 2015

%

2014

%

2013

%

2012

%

2011

%

13572

23,56%

13031

24,42%

12596

22,42%

11322

22,71%

11482

24,37%

Goodwill Property, plant and equipment Investments in joint ventures and associates Deferred tax Inventories and work in progress Income taxes Other current assets¹ of which Advances and payments on account to vendors of which Prepaid expenses of which Tax accounts receivable Total operating assets

10122 11157 729 1945 10096 384 1118 159 357 602 49123

17,57% 19,37% 1,27% 3,38% 17,53% 0,67% 1,94% 0,28% 0,62% 1,05% 85,28%

8810 10387 519 1436 9475 354 924 162 313 449 44936

16,51% 19,47% 0,97% 2,69% 17,76% 0,66% 1,73% 0,30% 0,59% 0,84% 84,21%

9058 9621 480 913 8492 223 811 173 283 355 42194

16,12% 17,13% 0,85% 1,63% 15,12% 0,40% 1,44% 0,31% 0,50% 0,63% 75,11%

7709 8694 483 952 7994 201 864 195 281 388 38219

15,46% 17,44% 0,97% 1,91% 16,04% 0,40% 1,73% 0,39% 0,56% 0,78% 76,67%

6957 8017 170 760 7510 121 880 163 249 468 35897

14,77% 17,02% 0,36% 1,61% 15,94% 0,26% 1,87% 0,35% 0,53% 0,99% 76,19%

Financing assets Non current available for sale financial assets Other non current assets of which Warranty deposits of which Derivatives of which Loans and receivables of which Other Trade accounts receivable Cash and cash equivalent² Other current assets³ of which Current available for sale financial assets of which Derivatives of which Other receivables Total financing assets

574 552 273 60 187 32 2521 3594 1237 385 297 555 8478

1,00% 0,96% 0,47% 0,10% 0,32% 0,06% 4,38% 6,24% 2,15% 0,67% 0,52% 0,96% 14,72%

580 489 236 75 156 22 2274 4091 992 253 304 435 8426

1,09% 0,92% 0,44% 0,14% 0,29% 0,04% 4,26% 7,67% 1,86% 0,47% 0,57% 0,82% 15,79%

7080 457 223 68 151 15 2174 3226 1045 171 494 380 13982

12,60% 0,81% 0,40% 0,12% 0,27% 0,03% 3,87% 5,74% 1,86% 0,30% 0,88% 0,68% 24,89%

6004 519 207 176 118 18 1972 2187 949 177 425 347 11631

12,04% 1,04% 0,42% 0,35% 0,24% 0,04% 3,96% 4,39% 1,90% 0,36% 0,85% 0,70% 23,33%

5982 478 185 143 125 25 1878 2303 575 145 147 283 11216

12,70% 1,01% 0,39% 0,30% 0,27% 0,05% 3,99% 4,89% 1,22% 0,31% 0,31% 0,60% 23,81%

Total assets

57601

100,00%

53362

100,00%

56176

100,00%

49850

100,00%

47113

100,00%

Interest bearing debt Long term borrowings Short term borrowings Total interest bearing debt

4511 3769 8280

14,18% 11,85% 26,04%

5054 4189 9243

16,65% 13,80% 30,45%

4149 4674 8823

14,68% 16,53% 31,21%

3825 2950 6775

15,71% 12,12% 27,83%

4132 3134 7266

17,44% 13,23% 30,68%

Non interest bearing debt Non current provisions Deferred tax Other non current liabilities Trade accounts payable Income taxes Current provisions Other current liabilities Total non interest bearing debt

1950 4685 7957 3960 640 421 3909 23522

6,13% 14,73% 25,02% 12,45% 2,01% 1,32% 12,29% 73,96%

2291 4392 6447 3606 549 332 3499 21116

7,55% 14,47% 21,24% 11,88% 1,81% 1,09% 11,53% 69,55%

1797 4280 6404 3297 357 324 2987 19446

6,36% 15,14% 22,65% 11,66% 1,26% 1,15% 10,57% 68,79%

1772 3884 5456 3118 442 335 2560 17567

7,28% 15,96% 22,41% 12,81% 1,82% 1,38% 10,52% 72,17%

1530 3925 4506 2952 443 349 2716 16421

6,46% 16,57% 19,02% 12,46% 1,87% 1,47% 11,47% 69,32%

Total debt

31802

100,00%

30359

100,00%

28269

100,00%

24342

100,00%

23687

100,00%

Risk bearing capital Share capital Share premium account Treasury shares and LVMH-share settled derivatives Cumulative translation adjustment Revaluation reserves Other reserves Net profit Total risk bearing capital

152 2579 -240 1137 949 16189 3573 24339

0,26% 4,48% -0,42% 1,97% 1,65% 28,11% 6,20% 42,25%

152 2655 -374 492 1019 12171 5648 21763

0,28% 4,98% -0,70% 0,92% 1,91% 22,81% 10,58% 40,78%

152 3849 -451 -8 3900 16001 3436 26879

0,27% 6,85% -0,80% -0,01% 6,94% 28,48% 6,12% 47,85%

152 3848 -414 342 2731 14340 3425 24424

0,30% 7,72% -0,83% 0,69% 5,48% 28,77% 6,87% 48,99%

152 3801 -485 431 2637 12770 3065 22371

0,32% 8,07% -1,03% 0,91% 5,60% 27,11% 6,51% 47,48%

1460

2,53%

1240

2,32%

1028

1,83%

1084

2,17%

1055

2,24%

57601

100,00%

53362

100,00%

56176

100,00%

49850

100,00%

47113

100,00%

Operating assets Brand and other intangible assets

Minority interest⁴ Capital employed

O Items that make up more than 10% of Total Assets O Items that make up more than 10% of Total Debt O Items that make up more than 10% of Total Capital Employed

3


2.b Consolidated Income Statement 2015

%

2014

%

2013

%

2012

%

2011

%

Operating revenues⁵

35664

Cost of sales

-12553

100,00%

30638

100,00%

29016

100,00%

27970

100,00%

23659

100,00%

-35,20%

-10801

-35,25%

-9997

-34,45%

-9863

-35,26%

-8092

Gross margin

-34,20%

23111

64,80%

19837

64,75%

19019

65,55%

18107

64,74%

15567

65,80%

General and administrative expenses

-2663

-7,47%

-2373

-7,75%

-2212

-7,62%

-2151

-7,69%

-1944

-8,22%

Marketing and selling expenses

-13830

-38,78%

-11744

-38,33%

-10767

-37,11%

-10013

-35,80%

-8360

-35,34%

-13

-0,04%

-5

-0,02%

-23

-0,08%

-19

-0,07%

6

0,03%

6605

18,52%

5715

18,65%

6017

20,74%

5924

21,18%

5269

22,27%

Operating income

Operating expenses

Income/loss from joint ventures and associates Operating income from sales before taxes (EBITDA) Other operating income and expenses Net operating income before tax (EBIT) Interest paid Interest paid after tax Tax expense⁶

-221

-0,62%

-284

-0,93%

-119

-0,41%

-182

-0,65%

-109

-0,46%

6384

17,90%

5431

17,73%

5898

20,33%

5742

20,53%

5160

21,81%

-75

-0,21%

-116

-0,38%

-112

-0,39%

-154

-0,55%

-152

-0,64%

-50,25

-0,14%

-84,68

-0,28%

-77,28

-0,27%

-104,72

-0,37%

-106,4

-0,45%

-1993,75

-5,59%

-2304,32

-7,52%

-1787,72

-6,16%

-1870,28

-6,69%

-1498,6

-6,33%

of which Tax reported (income taxes)

-1969

-5,52%

-2273

-7,42%

-1753

-6,04%

-1821

-6,51%

-1453

-6,14%

of which Tax on interest expense

-24,75

-0,07%

-31,32

-0,10%

-34,72

-0,12%

-49,28

-0,18%

-45,6

-0,19%

4390,25

12,31%

3126,68

10,21%

4110,28

14,17%

3871,72

13,84%

3661,4

15,48%

Cost of net financial debt

-78

-0,22%

-115

-0,38%

-101

-0,35%

-138

-0,49%

-151

-0,64%

Other financial income and expenses

-336

-0,94%

3062

9,99%

-97

-0,33%

126

0,45%

-91

-0,38%

-414

-1,16%

2947

9,62%

-198

-0,68%

-12

-0,04%

-242

-1,02%

24,75

0,07%

31,32

0,10%

34,72

0,12%

49,28

0,18%

45,6

0,19%

-389,25

-1,09%

2978,32

9,72%

-163,28

-0,56%

37,28

0,13%

-196,4

-0,83%

-428

-1,20%

-457

-1,49%

-511

-1,76%

-484

-1,73%

-400

-1,69%

3573

10,02%

5648

18,43%

3436

11,84%

3425

12,25%

3065

12,95%

Operating income after tax Financing income/expenses

Net financing income/expense Taxes (remaining) Net financing income/expense after tax Minority interests Comprehensive income

O Items that make up more than 10% of Operating Revenues

¹ Other current assets is split in operating assets and financial assets, according to the nature of their subheadings. See footnote n. 12 in LVMH’s Financial Statements. ² Cash and cash equivalents is made up of deposits, SICAV and FCP money market funds and ordinary bank accounts (footnote n. 14 in LVMH’s Financial Statements). ³ See footnote n. 1. 4 Minority interest is always reported in a separate line. 5 Values reported in the reformulated statement are adjusted after the introduction of the new statutory accounting rules introduced in 2014. 6 Tax allocation is computed with the effective tax rate of each year because of lack information about the marginal tax rate (footnote 27 in LVMH’s Financial Statements).

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3. Measuring Financial Performance 3.1. Operating Profit Margin = OI (after tax)/ Operating Revenues The operating profit margin gives information to investors about the company's ability to turn a dollar of revenue into a dollar of profit, after accounting for all the expenses required to run the business. 2015 12,31%

2014 10,21%

2013 14,17%

LVMH’s operating profit margin is, on average, stable over the five years with a slight dip in 2014. This is due to the increase in the amount of tax expense, linked to the Hermès distribution shares operation. 2012 13,84%

2011 15,48%

3.2. Net Profit Margin = Comprehensive Income/Operating Revenues With an average net profit margin of 11.77%, the company shows an excellent cost control, leveling off the expenses over the years. It is worth noticing that 2015 10,02%

2014 18,43%

2013 11,84%

2014 is an outlier because of the Group’s comprehensive income being affected for 2,677 million euros by Hermès transaction. 2012 12,25%

2011 12,95%

3.3. Return on Net Operating Assets = Operating Income (after tax)/Net Operating Asset The RNOA has been analyzed to distinguish the portion of returns referable to the investment in Net 2015 17,15%

2014 13,13%

2013 18,07%

Using the decomposition Du Pont model to analyze the drivers of RNOA, we can highlight the relation between the Asset Turnover and the Profit Margin: LVMH demonstrates to have a not significant asset 2015 1,39

2014 1,29

2013 1,28

Operating Assets: it is the ability of NOA to generate sales. 2012 18,75%

2011 18,80%

turnover, but a high profit margin, which drives the RNOA at being very noteworthy. Here we report the ATO (= Sales/NOA) values over the years. 2012 1,35

2011 1,21

3.4. Return On Capital Employed = EBIT/Capital Employed The company’s profitability from operating and financing activities is evidenced by the ROCE, that reveals a rather constant rate over the years, meaning that the Group is employing its capital effectively to 2015 2014 2013 11,08% 10,18% 10,50%

manage its investments. ROCE shows lower values than RNOA, reflecting stronger earnings in the operating asset. 2012 11,52%

2011 10,95% 5


3.5. Return on Risk Bearing Capital = Comprehensive Income/Total risk bearing capital The trend of the return on equity is basically steady, demonstrating the capability of the company to generate incomes without pouring new capital into the business. The 2014, again, shows an evident exception because of the decrease in the total risk bearing capital 2015 2014 2013 14,68% 25,95% 12,78%

due to the share transaction of Hermès. Nevertheless, the value of the ROE indicates a potential growth for the company: even if the company loses capital in 2014, it has good prediction for the future. 2012 14,02%

2011 13,70%

3.6. Debt Ratio = Total debt/Total asset The debt ratio has an average of around 52%: the value is not so high because, as evidenced before, the company concentrates its business on the operating activities. In fact, the ratio considers also the operating 2015 55,21%

2014 56,89%

liabilities that contribute for the 71% in the total debt amount. This leverage does not represent the volume of the pure indebtedness, because it concerns also the day to day operation of the business.

2013 50,32%

2012 48,83%

2011 50,28%

3.7. Interest Cover Margin = EBIT/ Interest expense (loss) The company shows an easy coverage of the interests on outstanding debt. A particularly positive mention should be done for the 2013 and 2015, when the 2015 85,12

2014 46,819

2013 52,6607

interest expenses, lowered for the decline of the interest rates on borrowing, letting the Group face an inferior interest burden. 2012 37,2857

2011 33,9474

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4. Analysis of financial performance 4.1 Financial Goals: Overview Thanks to its brand development strategy and the expansion of its international retail network (more than 3000 stores worldwide), LVMH has had a strong growth dynamic since its creation in 1987. The mission of the LVMH group is to represent the most refined qualities of Western "Art de Vivre" around the world, enlarging continuously its market share. In view of this mission, each year, the Group supports the strategic development and creative dynamic of its brands:  Wines & Spirits strengthens its position in emerging markets, driven by its best performer Möet & Chandon and Hennessy;  In Fashion & Leather Goods Louis Vuitton and other fashion brands’ development accelerate their growth;  Christian Dior and Guerlain drive the good momentum of Perfumes & Cosmetics;  Watches & Jewelry, thanks to Bvlgari, expands around the world, showing excellent performances;  Selective Retailing’s DFS and Sephora accelerate their international expansion with new retail networks worldwide.

LVMH continues to be synonymous with both elegance and creativity. It shows a constant growth over the years, mainly thanks to investments in the operating activities, taking special care to its marketing actions to maintain its brand and corporate image. The consistent goal of gaining more importance in the market is evidenced through the years with the acquisitions of participations in companies such as Bvlgari, Loro Piana, Luxola, Repossi, L Catterton: the Group confirms during time the strategy of expansion. Furthermore, LVMH’s portion of debt is not so prominent compared with equity, showing a good control in supporting company’s business. Yet holding more financial assets than financial obligations increases tax charges. In 2014 the Group is negatively affected by exceptional events in Hermès’ shares transaction, aimed at restoring the climate between the two companies (LVMH and Hermès). But in 2015, they managed successfully the market again, flattening the shock caused by this extraordinary event, and being able to exploit the shifting economic situation.

4.2 Performance 4.2.1 Year 2012 Bernard Arnault, Chairman and CEO of LVMH, said: "2012 was another remarkable year for LVMH, especially in the context of the economic slowdown in Europe. All of our businesses demonstrated excellent momentum”. Consolidated Revenue for the fiscal year 2012 was 27,970 million euros, up 19% over the previous year. It was favorably impacted by the appreciation of the Group’s main invoicing currencies against the euro, in particular the US dollar, which appreciated by 8%. Each sector demonstrated in the recurring operations a basically positive rise: • Wines & Spirits saw an increase in revenue of 17% due to higher sales volumes and a sustained policy

of price, in line with the ongoing value-creation strategy, along with Asia’s demand; • Perfumes & Cosmetics performance in revenue increased by 8%; • Watches & Jewelry saw the consolidation of Bvlgari, with effect from June 30 2011, boosting the business group’s revenue by 34%; • Fashion & Leather Goods significantly participated in the revenue growth thanks to the solid results achieved by Louis Vuitton, which recorded doubledigit revenue growth; • Selective Retailing, with its main driver Sephora, saw considerable growth in revenue across all world regions. In the Income Statement, the Group posted a Gross Margin of 18,107 million euros, up 17% compared to 7


the previous year. As a percentage of revenue, the gross margin was 65%, a decrease of 1 point: this decrease reflected a change in the structure of revenue by brand and the lower margins of the companies acquired in 2011, Bvlgari and Ile de Beauté. The Group experienced an increase in Marketing and Selling Expenses, totaling 10,013 million euros, mainly due to higher communications expenditures by the Group’s main brands, but also to the ongoing development of the Group’s retail networks. Among these Marketing and Selling Expenses, Advertising and Promotion had a significant impact representing the 12% of revenue. The Group’s Comprehensive Income totaled € 3,425 million with an increase with respect to the previous year. The Net Financial Expense for the scale year was 14 million euros, compared with a Net Financial Expense of 242 million euros in 2011, and it has been affected by:

• The increase in the average net financial debt, offset by a lower average borrowing cost; • The increase in Other Financial Income and Expenses, due to dividends received in the connection with the Group’s shareholding in Hermès, increased significantly as a result of the payment of an exceptional dividend. LVMH’s Consolidated Balance Sheet totaled 49.9 billion euros at 2012, representing a 6% increase from 2011. The ratio of net financial debt to equity, which was 20% in 2011, fell 3 points to 17%. This favorable change was due mainly to a 2.1 billion euros increase in equity, but also to a 0.4 billion euros reduction in net financial debt. Gross Borrowings after derivatives totaled 6.6 billion euros in 2012, representing a 0.5 billion euros decrease compared to 2011. In fact in June, LVMH issued five-year bonds in a total nominal amount of 681 million euros.

4.2.2 Year 2013 Consolidated Revenue for the fiscal year 2013 was 29,016 million euros, up 3.7% over the previous fiscal year. Revenue was impacted by the depreciation of the Group’s main invoicing currencies against the euro, in particular the Japanese yen, which depreciated by 27%. On a constant consolidation scope and currency basis, revenue increased by 8%. Group’s revenue by business sector changed appreciably: • Wines & Spirits saw an increase in revenue of 6%, even though the net impact of exchange rate fluctuations has lowered Wines & Spirits revenue by 5 points. This performance was made possible by higher sales volumes and a sustained policy of price; • Fashion & Leather Goods revenue was up 5%, continuing to benefit from gains made by Louis Vuitton, Céline, Kenzo, Givenchy and Berluti; • Revenue for Perfumes & Cosmetics increased by 7%, seeing an appreciable growth in the United States and Asia, particularly China;

• Revenue for Watches & Jewelry fell 2% because of the economic uncertainty and a competitive market, causing a slowdown in purchases by multibrand watch retailers; • The main drivers of Selective Retailing increasing performance were Sephora and DFS, which made excellent progresses, spurred by the integration of three major concessions at the Hong Kong airport, and by the continuing development of Chinese tourism, boosting business at its stores in Hong Kong and Macao. In the Income Statement, the Group posted a Gross Margin of 19,019 million euros, up 5% compared to the previous fiscal year, thanks notably to effective control over the cost of goods sold. Net Financial Expense rose significantly. It comprised: the aggregate cost of net financial debt, showing a decrease (the increase in the average net financial debt outstanding during the fiscal year was offset by a lower average borrowing cost); and other 8


financial expenses, which increased compared to the previous fiscal year. LVMH’s Consolidated Balance Sheet totalled 56,176 million euros, representing a 12.7% increase from 2012. Specifically, tangible and intangible fixed assets growth was notably linked to the acquisition of Loro Piana; other non-current assets increased mainly because of an expansion in the value of the investment in Hermès International.

year bond, each with a nominal value of 0.5 billion euros, and a public bond with a nominal value of 0.6 billion euros maturing in seven years. Total Risk Bearing Capital increased, reflecting the strong earning achieved by companies across the Group. The ratio of net financial debt to equity rose 2 points up to 19%: the growth in equity was less rapid than the increase of net financial debt, as a result of the acquisitions for the year, particularly of Loro Piana.

Gross Borrowings after derivatives increased too: during the year, LVMH issued a three-year and a six-

4.2.3 Year 2014 With an increase of 6% over the previous fiscal year, total Revenue of the Group reached a peak of 30,638 million euros. As in 2013, depreciation of yen and ruble (the most affected currencies) continued to impact the revenue. The breakdown of Group’s revenue by business sector showed: • Wines & Spirits suffered of decline in volume sales in China, falling by 1 point to 13%, because of the de-stocking of Cognac distributors; • Fashion & Leather Goods, with a contribution of 35%, took advantage from Louis Vuitton exceptional performance, while Kenzo, Givenchy and Loro Piana confirmed the profitable growth momentum; • Perfumes & Cosmetics increased by 7% with respect to the previous year with an appreciable revenue growth in the United States and Asia, particularly China, and was boosted by the excellent performances of Perfumes Christian Dior, Benefit and Guerlain; • Watches & Jewelry, despite the economic uncertainty and the slowdown in purchase by multi-brand watch retailers, registered an increase of 4%;

Referring to the Income Statement, it can be noticed that Gross Margin continued its positive trend, with an increment of 4% over 2013. The most significant event, which had a relevant impact on the financial data of the company for the 2014, was the exceptional distribution in kind of Hermès International shares to its own shareholders. This decision followed the "Settlement Agreement" entered into with Hermès International itself, approved on September, 3. The main effects of this operation were: • A capital gain of 3,2 billion euros, that led the Net financial Income reaching 2,947 million euros; • An increase in the Group's Comprehensive Income, up of 64% compared to 2013; • A decrease in the total equity of 4,9 billion euros, which highlighted a sharp fall of 7% on the total amount, that this year counts 23,003 million euros, with a consequent growth in the ratio of net financial debt to equity of 2 points. On balance, the distribution in kind of Hermès shares had a negative impact of 6.8 billion euros.

• Selective Retailing revenue's share, thanks to a value-enhancing strategy pursued by the Group, increased by 8% with respect to the previous year.

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4.2.4 Year 2015 In 2015 LVMH recorded Revenue of 35,664 billion euros, an increase of 16% over the previous year. The organic revenue growth counted a percentage of 6%. The group faced the consequences of the particular contrasting background of the Chinese implosion, although it managed successfully its effects. It is worth to say that the changes in the currency this year produced a favorable impact of 769 million euros on profit, thanks to the Group's policy of hedging. On a constant consolidation scope, currency and foreign exchange hedging basis, the Group’s profit from recurring operations was up 2%. Each sector demonstrated in the recurring operations a basically positive rise: • Wine & Spirits higher sales volumes and control of costs helped limit the effects related to lower business activity in China; • Perfumes & Cosmetics performance was up 26% compared to 2014. The drivers of this growth were Christian Dior, Benefit, Guerlain and Make Up For Ever, all of which posted improved results, thanks to the success of their flagship product lines and strong innovative momentum; • Fashion & Leather Goods posted organic growth of 4%. This business group’s performance continued to benefit from gains made by Louis Vuitton, the top performer; • Watches & Jewelry moved up 53% with respect to 2014. This upsurge was the result of the excellent performance posted by Bvlgari, which led to a 3point increase in the business group’s operating

margin as a percentage of revenue. A particular focus should be done on the TAG Heuer too, that in the partnership with Google and Intel, launched the first smartwatch; • Selective Retailing profit from recurring operations was 934 million euros, up 6% compared to 2014, thanks to its main driver Sephora, which gained growing importance in the market share worldwide, facing strong innovation in the digital market, also thanks to the acquisition by the Group of the 95% stake of the e-commerce site Luxola. Other Investments (for a total of 240 million euros) included the acquisition of the newspaper Le ParisienAujourd’hui en France and investments in Repossi and L Catterton in particular. The ratio of net financial debt to equity, which was 21% as in 2014, dropped significantly, falling by 5 points to 16%, due to the combined impact of the increase in equity, for 2.8 billion euros, and the reduction in net financial debt, for 0.6 billion euros. Total Equity amounted to 25.8 billion euros, up 2.8 billion euros compared to 2014. This change primarily reflected the strong earnings achieved by the Group, distributed only partially, representing a net increase of 2.1 billion euros. In addition to this, a positive impact of 0.8 billion euros was recorded, due to exchange rate fluctuations on the reserves of entities reporting in foreign currency, mainly US dollars, Hong Kong dollars and Swiss francs. As of December 31, 2015, total equity was equal to 45% of total assets, compared to 43% of 2014.

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5. The Luxury Jungle: comparison with the competitors Luxury market, in which LVMH operates, is highly competitive and particularly demanding, due to the exigent category of customers it refers to and to the need of continuous innovation it requires. The sector experiences three dominant trends that determine the success of a group or a firm: globalization, consolidation, and diversification. Globalization is a result of the increased availability of these goods, in order to widen the consumer’s segment; consolidation involves the creation of bridges among segments of luxury goods within a group; diversification guarantees limited risks and an even wider portion of customers. In our analysis we firstly compare our company to the market in which it operates, in order to underline the size of LVMH. A significant index, to prove it, is the Market Capitalization index, along with Annual Revenues. Our data are 2014’s because of their reliable accuracy and availability.

LVMH owns the 14,93% of the total Market Capitalization of the whole Luxury Goods sector and the 9,2% of its Annual Revenue. These percentages are particularly significant considering that according to the Dow Jones Luxury Index LVMH stands firmly at the first place in the list of 30 top performers in the above-mentioned sector. Our analysis will now concern LVMH’s direct competitors: Richemont, the owner of Cartier and Chloé, and Kering (formerly PPR), which owns Gucci and Saint Laurent. These three group are easily comparable due to their similar composition, by being made up of several companies, pursuing the trend of consolidation. Moreover their portfolios include a wide variety of product categories, and their individual brands are managed autonomously. Belonging to a group lead to few cost benefits, generated by centralizing support functions such as operations and

logistics, finance and real estate management. However, researches suggest that the real source of the groups’ value and the reason why their brands excel at design and business innovation, is the way they exploit their diverse business portfolios (pursuing the trend of diversification). We decided to consider the Market Capitalization and the Annual Revenue in the competitors’ analysis too, in order to underline the different sizes and positions they hold in the market. Moreover we consider meaningful the Operating Profit Margin [for availability of data we took a before tax Operating Income] because it is a good indicator of management’s efficiency and the EBITDA because it can be used to analyze and compare profitability between companies since it eliminates the effects of financing and accounting decisions.

The above table shows the leading position of LVMH in almost every index considered, coherently with the characteristic of each company. However Richemont's Operating Profit Margin is higher than LVMH’s, due to the particular contingency of the geographic situation and the different goods sold (even though both companies had their OPM decreased with respect to 2013, due to unfavorable exchange rate effects). These three groups are considered the best performers in the Luxury Goods Sector; however because of its composition, Kering is considered the direct opponent of LVMH. Luca Solca, head of luxury goods at Exane BNP Paribas, compared the two, observing that LVMH couples higher structural appeal with a higher stock market multiple, whereas Kering offers one of the most compellingly low valuations in the sector. These factors suggest Kering’s favor in the short-term, though LVMH scores higher for long-term structural appeal, also because brands of the former group are not as prominent as the latter’s are. 11


References [1] LVMH. (February 2016) "Documents financiers 2015". Retrieved on March, 2016 from https://r.lvmh-static.com/uploads/2016/02/documents-financiers-2015-lvmh_va.pdf [2] LVMH. (February 2015) "Financial documents 2014". Retrieved on March, 2016 from https://r.lvmh-static.com/uploads/2015/02/lvmh-financial-documents-2014.pdf [3] LVMH. (February 2014) "Financial documents 2013". Retrieved on March, 2016 from https://r.lvmh-static.com/uploads/2014/10/lvmh_2013_financial_documents_va.pdf [4] LVMH. (February 2013) "Financial documents 2012". Retrieved on March, 2016 from https://r.lvmh-static.com/uploads/2014/10/documents_financiers_2012_va.pdf [5] Luca Solca. (February 23,2015) "LVMH vs Kering: Which Player is Best Positioned for Growth?", The Business of Fashion. Retrieved on March, 2016 from http://www.businessoffashion.com/articles/intelligence/lvmh-vskering [6] "S&P Global Luxury Index", S&P Dow Jones Indices. Retrieved on March, 2016 from http://us.spindices.com/indices/equity/sp-global-luxury-index [7] Arthur Zaczkiewicz.(December 30,2015) "LVMH, Richemont Top List of Biggest Fashion Firms by Market Cap", WWD. Retrieved on March, 2016 from http://wwd.com/business-news/forecasts-analysis/lvmhrichemont-fashion-apparel-ranking-10303382/ [8] M.N. Corominas, R.M. Armegol. (2011) "Qualitative and Quantitative Analysis of Lvmh", University of Barcellona

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