LVMH Needs to Mix and Match; The French Fashion House Depends Heavily on Its Louis Vuitton Brand, Which May Cause Problems for Investors Unless It Can Find Another Star

LVMH Needs to Mix and Match

The French Fashion House Depends Heavily on Its Louis Vuitton Brand, Which May Cause Problems for Investors Unless It Can Find Another Star

JOHN JANNARONE

Updated Oct. 16, 2013 3:21 p.m. ET

These days, investors in LVMH Moët Hennessy Louis Vuitton MC.FR -4.25% could do with a little variety. Shares of the French fashion house fell 4.3% Wednesday after the company issued disappointing third-quarter revenue. The culprit: a mere 3% rise in currency-adjusted sales from the key fashion and leather-goods division, which makes almost all of its profit from the Louis Vuitton brand. While LVMH has some other red-hot brands such as Celine, they were unable to make up for a soft performance from Louis Vuitton, which accounts for about half of operating profit overall.Unfortunately, heavy reliance on Louis Vuitton could be an issue for some time to come.

In China, for instance, the luxury market has become considerably more challenging in recent years. In the past, luxury consumers mainly shopped for a few brands such as Louis Vuitton, Gucci and Hermès. These days, malls in major cities are loaded with options for increasingly sophisticated shoppers, says Frank Yao of SmithStreetSolutions, a consultancy.

Another problem: LVMH has been slow to win online sales, which have surged at rival luxury labels such as Burberry. It is understandable that LVMH wants to have close control over the in-store luxury-shopping experience. But the Internet will increase the knowledge of wealthy shoppers quickly and probably encourage them to expand beyond their old favorites.

What can Louis Vuitton do in response? Its current strategy seems to be protecting itself from competitors by becoming even more exclusive. In recent quarters, the company has begun focusing more on ultraexpensive soft leather to reduce its reliance on canvas bags emblazoned with the “LV” logo.

Such a shift makes sense—in the long run. But those canvas bags probably help Louis Vuitton maintain very high margins that it would have to sacrifice. Indeed, Thomas Chauvet of Citigroup estimates the brand has an operating margin of 42%, well above the industry average.

Ultimately, the real solution is for LVMH to actually make its conglomerate model work by nurturing the various brands it has acquired into big moneymakers.

But for every star like Celine, there has been at least one dud like Donna Karan. And given the premium valuation multiples put on proven successes Salvatore Ferragamo and Tod’s, finding new targets at a good price would be tough. Until LVMH can master the art of diversification, investors should browse elsewhere.