High-End Giant Buying to Boost Growth
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Widely diversified LVMH Moet Hennessy Louis Vuitton (NASDAQOTH: LVMUY) has a growth problem. Although Sephora is expanding nicely, the rest of the company isn't keeping up. It just bought an Italian cashmere company to help right the ship; are more purchases on the way?
LVMH's Fashion and Leather goods division saw a sales advance of just 0.4% in the first quarter, year over year. That's a far cry from the 14% growth the group achieved in 2012. At around a third of the top-line, a slow down here is a big concern.
This group makes the company's iconic handbags and other fashion attire. It includes brands like Louis Vuitton, Fendi, Donna Karan, Marc Jacobs, and Thomas Pink. These are the crème of the crop fashion brands. For a little over $2.5 billion it just added Italian cashmere company Loro Piana. Clearly, this will push revenues higher in the near term, but it also expected to add to earnings from the get go.
That will help the company's slowing core, but the real gem at LVMH is Sephora, which accounted for around 30% of the top-line in 2012. Technically called the Selective Retailing Group, sales advanced 16% in the first quarter, eclipsing the growth in the Handbag division.
Investors looking at the success of Sephora, and the laggard performance elsewhere, might want to consider Ulta Beauty (NASDAQ: ULTA). The company has 550 stores in 45 U.S. states and is a virtual clone of Sephora. It is a pure play on the retail makeup segment.
The company's top-line has grown every year for the past decade, even through the 2007 to 2009 recession. Although the bottom-line fell slightly in 2009, it picked back up in 2010 and is now more than double its pre-recession levels. Ulta's profit margin has has more than doubled since then, too.
That type of growth doesn't come cheap, though. The shares trade with a price to earnings ratio of around 35. Aggressive growth investors looking to pick out the best of LVMH without having to take on the rest should consider it.
Serving Different Segments
The interesting thing about Sephora's success, and Ulta's for that matter, is that it caters to customers seeking lower price points. Although makeup can get quite expensive, most items can be bought for less than the cost of a leather handbag or high-end dress. So Sephora has something of a mass market aspirational appeal. The other parts of LVMH tend to cater to higher-end customers, but they appear to have become more fickle with their fashion.
Thus the purchase of Loro Piana, which opens up a new area for LVMH. This should be a solid acquisition for the company, but don't expect it to be the last one. Anemic growth in a core business obviously isn't acceptable to management.
LVMH has a habit of being opportunistic with its purchases, so a Tiffany (NYSE: TIF) acquisition would fit well right now. The famous jewelry store has seen a year and half of middling quarterly top- and bottom-line growth. In fact, in the company's October quarter last year, earnings fell to around $0.50 a share from about $0.70 the year before. Although earnings have since picked up, growth is still anemic at best. That said, the company is hardly struggling, posting earnings of $3.25 a share last year.
Tiffany would be an ideal fit because it is a premier brand with worldwide appeal. Indeed, it only has around 200 or so stores, so it still has an exclusive air to it. Investors looking for the next LVMH target shouldn't be surprised if it's Tiffany that gets boxed up. Even if it doesn't, growth oriented investors might want to take a look at this high-end jewelry retailer that caters to the rich and offers aspirational purchases for the masses. That has a similar feel to Sephora.
Clothing focused Burberry (NASDAQOTH: BURBY) is another solid publicly traded option. The recession led to lower top- and bottom-line results, but the company has since recovered. That said, sales and earnings were stagnant between fiscal 2012 and 2013, with sales advancing from $1.8 billion to $2 billion and share net falling from $1.18 to $1.14.
The shares trade hands with a PE of around 27 compared to Tiffany's 24, so it's a bit more expensive despite similar recent performance. However, it would complement LVMH's clothing brands and expand its presence in men's wear. Growth investors might want to keep an eye on this one, too, though a pullback in price would make it more appealing.
Dealing with Slow
LVMH is clearly taking action to deal with a slowdown in a core brand. That's exactly why investors should like this diversified retailer with a high-end focus. That said, investors looking at the best performing segment might want to check out fast-growing Ulta. Tiffany and Burberry, meanwhile, are worthwhile on their own for more aggressive types, with the potential of becoming acquisition targets for still expanding LVMH a back of the envelope possibility.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!