LVMH & Warnaco

Topics: LVMH, Luxury good, Finance Pages: 5 (768 words) Published: January 15, 2014

LVMH & Warnaco
1. Calculate ROIC for both companies for fiscal 2011. For calculations requiring a tax rate, assume 33.3% for LVMH (the French corporate rate), and 35% for Warnaco (the U.S. corporate rate). Based on this analysis alone, how do the companies compare in terms of their performance?

LVMH
Warnaco

 
EUR mil
USD mil

2011 Operating Income
5,154.00
181.50

Tax rate
33.3%
35.0%
[1]
Tax
1,716.28
63.53

NOPAT
3,437.72
117.98

Ending Investment Capital

Total Equity
23,512.00
897.20

+ Long Term Borrowing
4,132.00
208.48
[2] [3]
+ Short Term Borrowing
3,134.00
47.51
[3]
Ending Investment Capital
30,778.00
1,153.19

Beginning Investment Capital

Total Equity
18,204.00
972.61

+ Long Term Borrowing
3,432.00
0
[3]
+ Short Term Borrowing
1,834.00
32.17
[3]
Beginning Investment Capital
23,470.00
1,004.78

2011 Average Investment Capital
27,124.00
1,078.98

ROIC
12.67%
10.93%

Our analysis shows that the ROIC for LVMH and Warnaco are fairly similar – ROIC for LVMH was 12.67% compared to the 10.93% for Warnaco. While we see that LVMH’s operating income is substantially larger than the operating income of Warnaco, the difference in ROIC of 172 basis points shows that the underlying performance of the two companies are much more comparable when taking into account their relative sizes. When calculating ROIC, we have made a few assumptions, which are noted below: [1] For calculating Tax, we have started with Operating Income and deducted the respective Income Tax provided in the case for each company. One could argue that a more accurate result could be derived by taking operating profit, subtracting the actual tax on the income statement and then adding back the effective tax on the financial items below the operating income line. [2] For Warnaco, we have not included "Redeemable Non-controlling interest" in Long Term Borrowings, as we have assumed that no interest payments are required in relation to this liability. [3] For both LVMH and Warnaco, we assumed no interest paying liabilities under "Other current or non-current liabilities". 2. Review the description of each company above and think about the strategic positioning of their products. How are the two companies similar and how are they different? Similarities:

LVMH and Warnaco operate in the high end consumer goods industry. Both companies own valuable brands and sell their products to consumers. Differences:
LVMH focuses on luxury goods and operate in five diversified segments. It owns a more diversified portfolio of valuable brands, such as Louis Vuitton, Moët Hennesy, Dom Pérignon champagne, Christian Dior perfume, and TAG Heuer. Warnaco is more focused group, concentrating on design and manufacturing of products, such as Calvin Klein and Speedo. The products of LVMH can be considered higher priced luxury goods, while Warnaco has positioned itself in the market for products of high quality, but at a lower price point than LVMH. As manufacturer of comparably lower priced goods, Warnaco is likely to focus more on having high sales volume, with a lower gross margin as they target a broader consumer base than LVMH. As a luxury brand owner LVMH’s strategy likely requires higher investments in areas such as flagship stores, branding and marketing. In contrast Warnaco’s position within its lower priced segment will likely have lower gross margin and require more focus on efficiency in production and supply chain.

3. Breakdown ROIC into its components, NOPM and IC turnover.

LVMH
Warnaco
2011
EUR mil
USD mil
Sales
23,659.00
2,513.39
NOPAT
3,437.72
117.98
NOPM (NOPAT/Sales)
14.53%
4.69%
IC Turnover (Sales/Average IC)
87.23%
232.94%
ROIC
12.67%
10.93%

Splitting the ROIC into NOPM and IC Turnover reveals that the companies generate their ROIC from two different sources. LVMH has a...
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