By Ken Ige, Star-Bulletin
Shoppers browse at the Duty Free Shop at Honolulu Airport
recently. French luxury goods supplier LVMH had exceptionally
bad timing in buying Duty Free, analysts say.

---

Duty Free
hurting LVMH

Poor sales in the Pacific Basin
are affecting the new
parent company

By Jacqueline Simmons

Bloomberg News

PARIS -- The timing of LVMH Moet Hennessy-Louis Vuitton SA's $2.47 billion purchase of DFS Group Ltd. couldn't have been worse, analysts and investors said.

After months of legal haggling with a major shareholder, the maker of Louis Vuitton leathers and Givenchy perfume in January bought a 61.25 percent stake this year in the world's largest duty-free chain whose 165 stores are mostly in Asia and Hawaii.

Unfortunately for LVMH, in the first half the yen fell as much as 10 percent against the dollar. In the second quarter the economy shrank 2.9 percent from the first quarter as Japanese consumer spending dropped 5 percent. DFS sells exclusively in dollars and Japanese shoppers, at home and abroad, account for 65 percent of its sales.

"We're cautious on LVMH because of DFS and Asia," said Veronique Gomez, a fund manger at Jean-Pierre Pinatton, which has $714 million in assets under management, including LVMH shares.

Other investors concur: LVMH has been the worst performer in the French benchmark CAC 40 Index this year, down about 12 percent as the CAC has risen about 33 percent. The shares have fallen 19 percent since July 23, the day LVMH announced first-half earnings.

"Everything depends on the macroeconomics of the region," concurred DFS chairman and chief executive Myron E. Ullman III. "The problems aren't DFS. The problems are macroeconomic, involving currency, especially the yen, and travel by Japanese. This is not a robust year."

DFS announced Tuesday that it was reorganizing its Asian business and hiring a new manager to more directly run its Hong Kong operation, where the company makes 24 percent of its sales. But the move didn't cool concern -- LVMH shares dropped 1.9 percent to 1,261 that day.

The DFS problem returned to the spotlight last week when LVMH conceded earnings took a hit from the unit. An LVMH spokeswoman said that in addition to the decline in the yen, DFS has suffered from a rise in hotel prices in Hong Kong since the reversion to Chinese rule, which has slowed Japanese tourism there. Hong Kong is its most important market.

At least four brokers shortly after downgraded LVMH, mostly on DFS's disappointing results.

At least five brokerages, including Pinatton Analyse Financiere, have cut their estimates for DFS operating profit. ABN-Amro Hoare Govett analyst Denis Huruguen forecasts full-year 1997 operating profit will fall 50 percent to about 850 million French francs ($144 million) from 1.73 billion francs last year.

"DFS will remain a thorn in their side for a while," said Edouard de Boisgelin, a luxury-goods analyst at Merrill Lynch Global Securities. "Only time will tell if they made the right decision."

In May DFS lost a bid to sell liquor, tobacco, cosmetics and perfume at the new Hong Kong airport where concessions are expected to be the most lucrative in the world. DFS is expected to lose key concessions at the Taiwan airport, also considered to be one of the world's most profitable.

Analysts said losing the Hong Kong airport was a blow because that city is its biggest revenue generator, followed by Hawaii, which accounts for 23 percent of sales, Guam and Saipan, 17 percent of sales, Singapore 14 percent and other Asia-Pacific countries, 12 percent. North America makes up 10 percent of revenue, with most stores on the West Coast.

In the long run, the future of DFS depends on what the Japanese economy does and right now things don't look good.

"The purchase seems reasonable for the medium-term, not short-term," said Thierry Bergeron, the Cap Finance fund manager who owns shares of LVMH. "We have to stay positive."