LVMH Moet Hennessy Louis Vuitton is seeing growth in its handbag division slow according to Bloomberg. However, at the same time, its Sephora stores are doing quite well. These trends have big implications for other retailers.
The Biggest Division
Fashion and Leather goods is LVMH’s largest division, representing about a third of the company’s top line in the first quarter. Sales in the group inched up just 0.4% in that quarter. The division saw 14% growth in 2012.
The company’s handbag arm is clearly important to its overall business, so slowing growth rates here is a big deal. Luckily, the company is widely diversified, selling everything from alcohol to makeup, so it can handle the slowdown. In fact, such slowdowns aren’t uncommon in the fashion world as fickle customers go from one hot brand to another.
Diversification, however, isn’t as broad at a company like Coach, Inc. (NYSE:COH). There’s no doubt that the handbag company’s revenues are continuing to head higher, but there is also no denying that Coach, Inc. (NYSE:COH)’s sales growth has slowed. For example, the holiday season in 2011 saw year over year sales growth of nearly 15%, 2012’s holiday sales grew at just a 4% clip.
The first quarter saw a pickup in quarter over quarter growth, but it is still running at about half of the level seen in the prior year. Clearly, what’s happening in the handbag division of LVMH is also taking shape at Coach, Inc. (NYSE:COH). Without the diversification that LVMH has, a sales slowdown will have a bigger impact at Coach, Inc. (NYSE:COH).
Coach, Inc. (NYSE:COH) is still a good company, and it is trying to diversify its product offerings while staying true to its core handbag image. Still, shareholders should keep a close eye on the top line. If sales continue to slow, the share price could come under increasing pressure.
While expensive handbag sales are slowing, LVMH’s Selective Retailing Group saw sales advance 16% in the first quarter. At around 30% of revenues, the group is nearly as important as handbags. Growth here is the perfect example of why the company’s diversification is so important to its overall results and luxury industry dominance.
The growth in this division is being driven by Sephora, a makeup retailer. While running out and buying a $1,000 or more handbag may be something that comes in and out of style, makeup is a whole different ballgame. Not only is makeup consumable in nature, thus requiring frequent replacement, but it is also relatively inexpensive.
So, you can go to your local drug store or grocery store and buy a $3 mascara or you can go to Sephora and buy one for $20 to $30 and have a salesperson do your makeup while you’re in the store. It may cost more to go to Sephora, but the total experience is much better. It is an affordable luxury. The Sephora store concept has been doing so well, that it looks like it will overtake the handbag group as the largest contributor to LVMH’s results in the next year or two.
Another Makeup Store
For investors looking at the success of Sephora, another option could be Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA). The company’s stores look and feel just like a Sephora, but selling makeup is all that the company does. It has 550 stores in 45 U.S. states.
The company’s sales have grown every year for the past decade, with earnings trending higher, too. Notably, the 2007 to 2009 recession didn’t have much impact on the top line. Though earnings dipped slightly in 2009, they picked back up again the next year. Sales are now more than double their pre-recession levels.