PARIS Neverfull - the name of Louis Vuitton's best-selling handbag - sums up well its parent LVMH: even if it snapped up all of the world's last remaining independent luxury brands, it would still have room for more.
The French group's insatiable appetite for acquisitions has been tolerated by investors while its cash cow Louis Vuitton, which contributes half of group profit, grew revenues at a rate of more than 10 percent in the past two decades.
But this year Vuitton's sales growth halved as it failed to anticipate consumers' move away from logo-branded luxury goods, Chinese demand cooled and it put the brake on expansion. Uncertainty about the brand's future growth heightened further last week when a source close to LVMH said Vuitton's star designer Marc Jacobs was leaving.
With Vuitton in intensive care, investors are taking a harsher look at LVMH's other brands and growing concerned it will take years for them to provide alternative growth.
LVMH, the No.1 luxury goods group with more than 60 brands from Dior to Hennessy cognac, has never built a major brand from scratch and is one of the industry's worst stock market performers.
LVMH stock has nudged up just 5 percent since the start of the year, compared to a 20 percent share rise across the rest of the luxury goods sector. Meanwhile, the analyst consensus for LVMH's expected earnings per share (EPS) growth for 2013 is 6 percent, compared to 15 percent for the sector.
"LVMH has underperformed mainly because of big question marks hanging over the development strategy of Louis Vuitton," said Chicuong Dang, fund manager at French asset management firm KBL Richelieu.
Jacobs' departure, to take his eponymous own label public, is part of a series of leadership changes at Vuitton, the most significant in two decades, as it tries to reposition itself as a more exclusive, less ubiquitous brand.
In a sector where expectations of sales rather than earnings growth have tended to drive share performance, LVMH's main problem is that with Vuitton already making 7.3 billion euros in annual sales, it is too big to buy substantial growth.
Rival Kering, owner of Gucci, has been able to get a bigger boost than LVMH from its other brands such as Bottega Veneta which makes revenues of around 1 billion euros and Yves Saint Laurent with sales of nearly 500 million euros because Gucci makes half of what Vuitton makes, or 3.6 billion euros.
Comparatively, LVMH's Celine and Fendi are estimated to make around 500 million euros while fast-growing Marc Jacobs makes nearly $1 billion in annual sales including license revenues - and some of those sales would be lost in the event of an IPO.
LVMH is unlikely to find the answer to faster growth among its smaller fashion brands such as Berluti, Kenzo, Givenchy, Donna Karan and Loewe. Though it is plowing millions of euros into their expansion, it could take a long time for some of them to have an impact on the group's sales growth profile - if ever.
Unlike Kering, LVMH never publishes sales or profit numbers for any of its brands and analysts question the profitability and growth prospects of several of its smaller ones. LVMH has recently started investing in budding fashion labels with the hope that one day they will become global brands.
The group recently gobbled up some of the world's most exclusive luxury names - Roman jeweler Bulgari in 2011 and Italian cashmere maker Loro Piana in July. But analysts say it will have to be patient before it gets a good return on such investments, which should be higher than the 10 percent weighted average cost of capital (WACC) in the luxury sector.
HSBC estimates it could take at least 10 years for LVMH to get proper returns on capital employed from Roman jeweler Bulgari, for which it paid 4.2 billion euros in 2011- 22 times earnings before interest, tax, depreciation and amortization (EBITDA) or core earnings, way above the industry average.
Other analysts wonder if LVMH could not have better used the 2 billion euros it spent on 80 percent of Italian cashmere maker Loro Piana - valuing it 19 times core earnings - as the brand will only boost LVMH's EPS by 1 percentage point from 2014.
LVMH declined a request to be interviewed for this report. It has a policy of never commenting on share price performance.
COSMETICS KEY TO GROWTH
Given that LVMH's existing drinks, watch and jewelry businesses are also leaders in their field, there remains only one area in which LVMH could still buy growth: cosmetics.
LVMH has small beauty brands Benefit, Nude and Make Up for Ever and has developed skincare lines for Dior and Guerlain.
But the theory goes that if it bought a top skincare brand, it could leverage its network of Sephora and duty-free shops and tap into China's booming skincare market - the prize for every big cosmetics group - and into rising tourist flows in Asia.
China's premium skincare market is set to nearly double between now and 2017 to reach 6 billion euros, according to data from Euromonitor International.
Hence investors' eagerness to see LVMH piggy-back Chinese cosmetics growth via the purchase of a major cosmetics brand.
"LVMH could create a (cosmetics) brand of its own but it would gain time if it bought an already existing brand," said one LVMH associate who declined to be named.
Targets in Europe include French family-owned Clarins, Sisley, Nuxe and Spain's Natura Bissé.
LVMH's Chief Financial Officer Jean-Jacques Guiony told analysts at the group's half-year results: "Brands like Sisley and Clarins are not on the market, otherwise they could be interesting targets."
But some observers say a deal could still be on the cards.
"Of course, none of these major cosmetics brands are for sale but in luxury, nothing is ever for sale. Loro Piana also was not for sale and suddenly Arnault bought it," said one financial adviser specialized in luxury and retail companies.
While Clarins, which makes annual sales of more than 1.2 billion euros, has stated it is not for sale, its decision this year to merge its perfume business, including Azzaro and Thierry Mugler scents, with its core skincare operations has lit speculation it could be sprucing itself up for a buyer.
"Everybody expects Clarins will be put on the market," said Francois Arpels, a managing director at investment bank Bryan, Garnier & Co in Paris. He added the merger between Clarins's two units will improve margins "which would be good if there was a change in ownership."
Arpels noted that Clarins still had a relatively small presence in China and the Courtin-Clarins family, who took the business private in 2008, "have always let people know that eventually, they would be looking for a way to sell out."
The Courtin-Clarins family declined to comment. ($1 = 0.7358 euros)
(Editing by Sophie Walker)