Overall Business Analysis of Louis Vitton Mot Hennessy - Case Study Example

? Business Analysis Part III Table of Contents III. Conclusion for Overall Business Analysis 3 A. Revisiting the Financials 3 B. Impact of Recent Economic Trends on the Business 7 C. Strategies Donna Karan Employed/Could Have Employed, To Adapt to Changing Markets 8 D. Tactics Donna Karan Employed/Could Have Employed, for the Achievement of Business Goals 9 E. Donna Karan HR's Role for Aiding in the Achievement of Business Goals 10 F. Investment Decision 10 References 12 III. Conclusion for Overall Business Analysis A. Revisiting the Financials The literature tells us that the fashion giant LVMH has effective majority control of Donna Karan, even as Donna Karan the business entity and Karan the person and creative force of the firm retain a large measure of artistic and creative control. This being the case, a proper review and assessment of the financials of Donna Karan ought to start with a review of the LVMH financials (Google, 2012). It is noteworthy that the key competitors listed for Donna Karan International are ANN Inc .and Giorgio Armani (Hoovers, 2012). Most of the other firms that are grouped with Donna Karan, meanwhile, are private firms, including Calvin Klein, Marc Jacobs, Louis Vuitton North America, Roc Apparel Group, and Lands' End Inc. (Google, 2012). As with ANN and Giorgio Armani, given the private nature of the entities, there is a dearth of information relating to their financials (Hoovers, 2012; Google, 2012). The data on LVMH is more comprehensive financially, and it is from the parent firm that we are able to glean insights into the nature of the financials of LVMH, and indirectly Donna Karan, from the financial statements. From the perspective of the parent firm a few players stand out as the real competition, with comparable market capitalizations. LVMH has the most recent valuation of about US 82.73 billion dollars. This compares with its competitors Christian Dior, at US 25.9 billion dollars; TSI Holdings, at US 56.27 billion dollars; and Hermes, at US 30.45 billion dollars. We can see that among the competitors, LMH has the largest market capitalization, and therefore the largest clout among the firms. A look at the movement of the share price of LVMH over the past five years shows that the share price is about 25 percent off the highs it achieved in 2008, but generally the price is on an upward trend from its lowest points in 2009. At the current price/earnings ratio of 18.63, the share price is undervalued in comparison to competition, such as Lancy, with a P/E ratio of 25.7, even as it is overvalued in comparison to Shejiang Semir, with a P/E ratio of 14.63. Given the high P/E ratio of Lancy, one can make the assumption that there are elements in the underlying financials of LVMH/Donna Karan that has resulted in analysts undervaluing the share price to the level that it stands at present, commanding that kind of P/E ratio. The table below details the comparison of top competitors in the space of Donna Karan/LVMH. It is surprising that LVMH is not commanding a higher share price and P/E ratio, given that its EPS is high in comparison to Lancy (Google, 2012b): Valuation Company name Earnings per share P/E ratio Mkt Cap LVMUY LVMH Moet Henness... 1.78 18.63 82.73B CHDRF CHRISTIAN DIOR S A F 25.90B MMO1V Marimekko Oyj 0.26 55.63 116.82M 002612 Lancy Co Ltd 1.27 25.70 6.55B 3608 TSI Holdings Co Ltd -204.41 56.27B HESAF HERMES INTL SA 30.45B LTAN Le Tanneur & Cie SA -0.13 27.43M DPT S.T. Dupont SA 0.01 64.86 153.22M 002563 Zhejiang Semir Ga... 1.54 14.63 15.13B TAM Etam Developpemen... 1.83 7.89 115.27M 065060 GNCO Co., Ltd. Table Source: Google, 2012b From the growth ratios, meanwhile, one can see that LVMH has been on a growth tear, plowing back money into growing the business, with the attendant advantages that such growth can bring, including economies of scale, and the ability to rapidly expand profits in the future, from a large revenue base (Reuters, 2012)..   Company Industry Sector Sales (MRQ) vs Qtr. 1 Yr. Ago 25.98 13.75 14.56 Sales (TTM) vs TTM 1 Yr. Ago 22.41 10.03 10.53 Sales - 5 Yr. Growth Rate 9.10 21.29 4.92 EPS (MRQ) vs Qtr. 1 Yr. Ago 23.45 126.09 1,721.01 EPS (TTM) vs TTM 1 Yr. Ago 0.15 -- -- EPS - 5 Yr. Growth Rate 9.61 22.49 23.83 Capital Spending - 5 Yr. Growth Rate 17.80 3.21 -2.92 Table Source: Reuters, 2012 Of particular interest is the high rate of capital spending growth for the parent firm over the past five years, at 17.8 being about six times the industry average, even as sales growth has likewise outpaced the industry and the sector by a factor of 2 to 1. The profitability ratios, meanwhile, point to further signs of robust health for Donna Karan/LVMH (Reuters, 2012):   Company Industry Sector Gross Margin (TTM) 65.14 23.43 25.00 Gross Margin - 5 Yr. Avg. 64.46 29.65 24.51 Operating Margin (TTM) 20.94 4.79 8.72 Operating Margin - 5 Yr. Avg. 20.48 6.49 6.43 Pre-Tax Margin (TTM) 20.59 4.84 10.19 Pre-Tax Margin - 5 Yr. Avg. 19.95 6.59 6.54 Net Profit Margin (TTM) 14.76 3.21 7.63 Net Profit Margin - 5 Yr. Avg. 14.12 4.53 4.70 Table Source: Reuters, 2012 Comparing the financials of Donna Karan/LMH with the other fashion behemoth in the space, TSI Holdings, we see that while gross margins are comparable, the rest of the profitability ratios are not as good, and its operating and net profit margins are actually negative, even as sales is exploding. What we see is a picture of a firm that is growing by leaps and bounds through acquisitions, like LVMH, but not managing the acquisitions for profitability at the moment, concentrating on sales growth. In this respect LVMH/Donna Karan is on better footing, because it is growing at a pace that still allows the firm to remain highly profitable in the process (Reuters, 2012b): TSI Holdings Profitability Ratios- Competition to LVMH   Company Industry Sector Gross Margin (TTM) 49.84 23.43 25.00 Gross Margin - 5 Yr. Avg. -- 29.65 24.51 Operating Margin (TTM) -11.84 4.79 8.72 Operating Margin - 5 Yr. Avg. -- 6.49 6.43 Pre-Tax Margin (TTM) -11.34 4.84 10.19 Pre-Tax Margin - 5 Yr. Avg. -- 6.59 6.54 Net Profit Margin (TTM) -12.61 3.21 7.63 Net Profit Margin - 5 Yr. Avg. -- 4.53 4.70 Table Source: Reuters, 2012b The financial picture is clear. As part of the LVMH group of 60 brands, Donna Karan is in a very healthy financial state, able to leverage the robust financials of the parent firm, as well as the various advantages that the gargantuan size of the parent firm confers on Donna Karan, such as access to large markets, economies of scale, financial scale, operations and distribution scale, and ability to tap into the creative force of the different companies operating under the LVMH umbrella, among others. Certainly Donna Karan is on better financial footing than its competition (Reuters, 2012; Google, 2012; Google, 2012b). B. Impact of Recent Economic Trends on the Business To determine the impact of recent economic trends on the operations of Donna Karan and LVMH, we look at share price movements and mark significant periods when the economy as a whole was going up or down. It is noteworthy that at the height of the financial crisis that hit the global financial system 2007 and 2008, the LVMH's stock price was flying off the charts, hitting its historical peaks over the past ten years of the life of the stock leading to 2012. There was a precipitous fall in the share price between 2008 and 2009, which could have been the result of a number of different factors, one of them hypothesized to be a lag in the effect of the economic crisis on the financials of the firm. Examining the share price movement further, one sees that consonant with the improving financial ratios over the past five years, the stock has inched up slowly through that period, hitting shy of 25 percent of its historical highs as of the most recent trading day (Google, 2012; Reuters, 2012; Obstfeld and Rogoff, 2009; Taylor, 2008): Plot Source: Google, 2012 From the above we see that the share price, and therefore the company's financial fate, has been largely buoyant post-crisis, and the quick rebound is notable for even being sharper and faster than the rebound in the overall economy. Internal financial strengths must account for this more than the general state of the economy (Obstfeld and Rogoff, 2009; Google, 2012; Taylor, 2008; Reuters, 2012). C. Strategies Donna Karan Employed/Could Have Employed, To Adapt to Changing Markets As the literature suggests, the LVMH umbrella affords Donna Karan with vast possibilities and advantages owing to the vast number of brands under management by LVMH, its massive market capitalization, and its economies of scale achieved for various aspects of the supply chain and value chain for Donna Karan and its peer brands within the company. There is a trend, moreover, towards consolidation of many fashion houses and brands from many to a few, with the few that survive competing with each other in terms of market reach, market clout, revenues, and the scale economies that are the result of consolidating the operations, logistics, and the supply chains of various smaller fashion houses and design companies. This may be the greater impetus for the way LVMH and Donna Karan, by extension, has sought to grow itself through acquisitions, to beat the market, and to introduce efficiencies that will help shore up profits in the face of competition heating up and the industry dynamics becoming a race towards economies of scale and massive concentrated sales and profits. The health of its share price and the robust financial picture arising out of the ratios analysis undertaken earlier suggest that this strategy of trying to grow and trying to leverages the advantages of that growth are sound strategies that have led LVMH/Donna Karan to do well in the face of competition and the changing dynamics of the market (Google, 2012; Google, 2012b; Reuters, 2012; Reuters, 2012b). D. Tactics Donna Karan Employed/Could Have Employed, for the Achievement of Business Goals The general business goals of LVMH, it is clear from its financials and its profitability and growth ratios, are along the lines of undergoing a massive acquisitions and growth tear in order to grow large enough for the advantages of scale economies in all aspects of the business to kick in and become a source of competitive advantage for Donna Karan and the parent firm. Donna Karan, being a house and a brand under the LVMH umbrella, naturally aligns its overall business goals with that of the parent firm. From the ratios it is clear that LVMH was able to pursue a path of profitable growth, in comparison to the loss-generating growth that peers in the industry have achieved. (Google, 2012; Google, 2012b; Reuters, 2012; Reuters, 2012b). To be sure, given the large creative freedom that the Donna Karan group enjoys within the LVMH stable of brands and companies, Donna Karan must have some leeway and freedom to prioritize growth and profitability goals, alongside more aesthetic goals. Tactics that Donna Karan could have employed should be those that leverage and play on the natural strengths of the group. Marketing that is creative, and that makes use of emerging technologies and media to reach a wider audience and to be able to effectively market to the target market, are also things that ought to be part of the tactics equation. It is not a stretch to include those tactics that are related to leveraging emerging technologies, such as the Internet and the new web, for instance, to offer value and to stay relevant (Google, 2012; Google, 2012b; Reuters, 2012; Reuters, 2012b; Hansen, 2011, pp. 25-42). E. Donna Karan HR's Role for Aiding in the Achievement of Business Goals Scale economies for LVMH extend to many aspects of its operations, finances, distribution, marketing, and many other aspects, and the same holds true for human resources. As already discussed, the largeness of the organization as a whole means that HR could aid in the achievement of the overall and individual business unit goals, by leveraging scale in all of its aspects. This could mean, for instance, leveraging the strengths of one group within the LVMH, to help Donna Karan reach its marketing and business goals, given the constraints and the intensifying competition. The tactic of learning and culling learning from other brands and departments within the large LVMH family can be beneficial for HR too. HR can span the length and breadth of the whole organization to make sure that, for instance, personnel needs are matched with the right people working across the organization, and that knowledge and talent generated by one group is diffused to the rest of the organization, to benefit the work of the rest. Working in this creative and synergistic way, HR can play a big role in the achievement of the larger business goals of Donna Karan and LVMH (Google, 2012; Google, 2012b; Reuters, 2012; Reuters, 2012b; Hansen, 2011, pp. 25-42). F. Investment Decision The preceding analysis and review of its strategic options shows a company that is part of a larger fashion juggernaut, growing at a fast and profitable clip, and whose share price is undervalued relative to its earnings and track record of escalating profits and sales, relative to the rest of the industry. The profitability and growth ratios suggest a company that is on sure footing and ready to leverage its achieved scale economies for maximum growth and profit moving forward. It is a wise decision to buy into the shares of Donna Karan through LVMH (Google, 2012; Google, 2012b; Reuters, 2012; Reuters, 2012b; Hansen, 2011, pp. 25-42). References Google (2012). Donna Karan International Inc. Google Finance. Retrieved from http://www.google.com/finance?cid=7785510 Google (2012b). LVMH Moet Hennessy Louis Vuitton SA (ADR). Google Finance. Retrieved from http://www.google.com/finance?q=PINK:LVMUY&sq=lvmh&sp=2&ei=xlZVUKiHFcP3kAX57AE Hansen, R. (2011). How Fashion Brands Learned to Click- A Longitudinal Study of the Adoption of Online Interactive and Social Media by Luxury Fashion Brands. Selected Papers of the Information Systems Research Seminar in Scandinavia. Retrieved from http://www.tapironline.no/last-ned/921 Hoovers (2012). Top Donna Karan International Inc .Competitors. Hoovers.com. Retrieved from http://www.hoovers.com/company/Donna_Karan_International_Inc/cthhhi-1-1nji3i-1njhu5.html Obstfeld, M. and Rogoff, K. (2009). Global Imbalances and the Financial Crisis: Products of Common Causes. UC Berkeley and Harvard University. Retrieved from http://www.parisschoolofeconomics.eu/IMG/pdf/BdF-PSE-IMF_paper_OBSTFELD-ROGOFF.pdf Reuters (2012). LVMH Moet Hennessy Louis Vuitton SA (LVMUY.PK). Reuters.com. Retrieved from http://www.reuters.com/finance/stocks/financialHighlights?rpc=66&symbol=LVMUY.PK Reuters (2012b). TSI Holdings Co Ltd. (3608.T). Reuters.com. Retrieved from http://www.reuters.com/finance/stocks/financialHighlights?rpc=66&symbol=3608.T Taylor, J. (2008). The Financial Crisis and the Policy Responses: Analysis of What Went Wrong. Bank of Canada. Retrieved from http://www.nviegi.net/teaching/taylor1.pdf Read More