Sold out leather bags suggest Louis Vuitton turnaround pays off

PARIS, Sept 16 Mon Sep 16, 2013 4:00am EDT

PARIS, Sept 16 (Reuters) - Louis Vuitton's pricey new Capucine leather handbags are selling like hot cakes in European fashion capitals, store managers said, signalling the world's biggest luxury brand could be regaining some of its lost sparkle.

The news implies Louis Vuitton's efforts to strengthen its offering of expensive leather bags to reposition itself as more upmarket and exclusive - as did Gucci recently - is starting to yield positive results.

An informal Reuters survey of Louis Vuitton shops in Milan, Paris and London revealed shortages of the 3,500 euro ($4,600) Capucine bags since their launch in June, with long waiting lists.

On New Bond Street in London, there was only one sample bag with a "not for sale" sticker on it and 40 people had already reserved one but assistants said the bags were likely to be available only at the end of September or early in October.

The Capucine handbag in full-grain Taurillon calf leather, a material also used by rival brand Hermes, is several times more expensive than Louis Vuitton's canvas 600 euro-LV-embossed bags with which the brand built its name and profitability.

Bernard Arnault, the boss of parent company LVMH, said in January that Louis Vuitton planned to prune its portfolio of canvas bags, which make up two thirds of its business and generate gross margins of 90 percent.

Analysts expect gross margins from leather bags such as Capucine to be slightly lower.

Shop assistants said they took delivery of only a handful of Capucine bags every other week over the summer, intimating Louis Vuitton may have deliberately caused the shortage to create a buzz around the product - taking a leaf out of Hermes' book.

LVMH and Louis Vuitton declined to comment.

Officially citing production constraints, Hermes is known in the luxury world for its shortages and waiting lists, particularly for its popular 7,000 to 30,000 euro Birkin and Kelly bags, which help strengthen the brand's appeal.

"I take it as a very positive sign that the Capucine bag is sold out," Exane BNP Paribas analyst Luca Solca said.

"Louis Vuitton had to work on its exclusivity perception and creating products for which there is high demand and not enough volume to satisfy everyone, certainly helps."

Shares in LVMH have been underperforming since the beginning of the year, partly on concerns consumers were losing appetite for the French brand, which some regard as too ubiquitous.

Since Jan. 1, LVMH shares have gained only 1.4 percent while shares in Cartier and Lancel owner Richemont rose 28 percent and shares of Gucci parent Kering were up 23 percent, while Burberry stock rose 31 percent.

Louis Vuitton, which generates more than half of LVMH's operating profits, has seen its sales growth slow down this year to around 5-6 percent after recording decades of growth above 10 percent, driven partly by an active campaign of store openings.

Analyst estimate Louis Vuitton generates around 7 billion euros in annual sales, twice as much as rival Gucci, leading to worries that Louis Vuitton is so big and present worlwide that there is little room left for it to expand.