(FORTUNE Magazine) – Asia's economic troubles have caused the world's biggest market for luxury goods to all but fall off the map. American and European makers of expensive liqueurs, haute couture, and other pricey items are feeling the pinch, but no purveyor is more exposed to the Asian downdraft than France's Louis Vuitton Moet Hennessy. The maker of Louis Vuitton handbags, Moet & Chandon champagne, Hennessy cognac, Givenchy fashions, and Christian Dior perfumes gets 40% of its sales from Asia. At one point late last fall, the stock hit a low, shaving off more than a third of the company's market capitalization.

Investors were reacting to the fact that LVMH Chairman Bernard Arnault, who is widely admired as an all-too-rare example of a French manager with American-style entrepreneurial spirit, had recently invested big in the region. In late 1996, Arnault paid $2.5 billion for 61% of the Duty Free Shops retail chain; but almost all of DFS's 180 outlets are in Asia or cater to Japanese tourists. Ouch. Says a defensive Arnault: "You can say it would have been better to buy it today than one year ago. It was for sale last year, not today."

The fact remains that DFS sales were down 16% last year, and profits dropped 66%. "Arnault has made some great acquisitions, but DFS was a misjudgment," says Edouard de Boisgelin, a luxury-goods analyst at Merrill Lynch in London.

Arnault, who's also LVMH's largest shareholder, nonetheless dismisses his current troubles as a trou d'air, or downdraft. Says an elegantly attired Arnault, 48, in his Paris office above the headquarters of fashion giant Christian Dior: "We are in Asia for the long term, not for the short. In fact, in the medium term I am certain of double-digit growth." He points out that LVMH worldwide sales last year were up 9.7%, to $7.9 billion. But profits are another matter. Merrill Lynch calculates that profits last year rose only 1%, to $712 million.

To reach his double-digit growth targets, Arnault plans to steer Louis Vuitton into a new role as a retailer of luxury goods in more markets outside Asia, especially in the U.S., where, up until now, sales have accounted for only about 12% of the company's total. Besides his Duty Free Shops chain, which is the world's largest luxury-goods retailer, Arnault also scooped up the French perfume retailer Sephora, which has 54 outlets in Europe. (An attempt to buy Barneys New York, the upscale U.S. clothing store now in bankruptcy court, collapsed last year.)

Arnault has given DFS President Myron E. Ullman III the task of rolling out Sephora shops in the U.S. With Sephora, which is to perfume and makeup what Office Depot is to stationery, the idea is to attract customers with a huge array of products. Many of them, like Givenchy's best-selling Organza perfume, will be produced by LVMH's own perfume and beauty products division. That would eliminate the middlemen who take a slice of retailers' profits. The first shop is scheduled to be opened next year in San Francisco.

Analysts point out that this strategy is a risky one, however. For one thing, middlemen or no, the retailing business has much slimmer profit margins than, say, making Louis Vuitton leather bags or luggage, where profits can run as high as 47%. Still, if anyone can pull it off, it may be Arnault, who's long been known for his bold moves. In 1995 he provoked the ire of the fashion world by ousting the grand old man of haute couture, Hubert de Givenchy, and replacing him with British designer John Galliano, at the time only 25 years old. Today Galliano is one of the stars of the fashion world. Arnault also assembled a management team with worldwide marketing experience: his executives come from global consumer companies such as Chesebrough-Pond's and Unilever.

And yet, as his employees will admit, none of Arnault's successes come without a price. According to Concetta Lanciaux, LVMH's vice president for human resources, who came from Intel, Arnault is even tougher to work for than legendary taskmaster Andy Grove. "Talk about 'only the paranoid survive,' " she says. "Nothing is ever good enough for Bernard."

Will LVMH's perfectionist be able to inspire growth? He doesn't seem spooked by Asia: DFS is going ahead with a retailing joint venture in Korea. Taking a longer view, Cedric Magnelia, an analyst at Credit Suisse First Boston in London, says the company is "fundamentally very sound, with strong brand equity for all its products." The most reassuring thing Arnault has going for him: he has taken daring bets before and walked away a winner.

--Charles Wallace