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Gucci Blow: YSL Profitability Delayed

Gucci Group postponed its profitability goal for Yves Saint Laurent by a year amid concern that Domenico De Sole and Tom Ford could step down soon.

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MILAN — In what’s shaping up to be a challenging 2003 for Gucci Group, the company postponed its profitability target for Yves Saint Laurent by one year amid swirling reports that chief executive Domenico De Sole and designer Tom Ford could step down in the near future.

Gucci said current market conditions mean YSL is on track to turn profitable in late 2004 and in full-year 2005, one year later than most recently forecast, a spokesman said, reiterating comments De Sole made Tuesday to analysts at a closed-door meeting in London. This comes on the heels of a group profit warning last December.

Meanwhile, speculation is growing in the market that De Sole and Ford could choose to leave the group when their contracts expire in March and June of next year, respectively. One insider said Wednesday that there is about a 60 percent chance that De Sole will leave next year.

There have been rumors for years that Ford could break away and start his own line. The most recent incarnation of the theory has had De Sole involved in the new line in their post-Gucci careers.

De Sole and Ford declined to be interviewed for this article, but a spokesman reiterated De Sole’s previous remarks, as quoted in Wednesday’s Wall Street Journal in an interview with PPR chairman Francois Pinault, that it is “objectively possible” that he could exit Gucci Group, but “unlikely,” given his and Ford’s emotional attachment to the company.

“I’m very committed to Gucci for the long term,” Ford said in 1996 when first confronted by rumors of a Tom Ford collection. “Having my own collection is definitely a possibility sometime in the future. However, I have no concrete plans at this time.”

Ford’s name has become synonymous with both the Gucci and YSL labels, so much so that it appears as part of the brand name in credits on photo spreads and ads. At the same time, there’s talk that he’s being groomed to one day replace De Sole as Gucci’s ceo.

“It would be worse if Tom Ford were to leave,” said Chiara Tirloni, an analyst with UBS Warburg in Milan. “With De Sole, we know that at age 60 he could retire in 2004. It would be harder to explain if Tom Ford left. It would send a bad message.”

She also said she doubted that Ford could take on as costly and risky a proposition as creating his own brand in current market conditions, where even established names like YSL are losing money.

Another source said that YSL would likely take a bigger hit, because Ford’s reputation has lured some in-the-know Gucci customers to YSL, whereas the broader Gucci customer base is not as intimately aware of Ford’s presence.

“Behind Tom there are a lot of talented people,” said one source familiar with Gucci Group. “It’s not a one-man-show and it shouldn’t be.”

Ford’s future appears to be closely entwined with that of De Sole, whose own intentions are also unclear. De Sole, who with Ford revamped a troubled company, polished its image and took it public in 1996, has said often how much he relishes his independent management power despite the fact that Pinault-Printemps-Redoute holds a controlling stake in the company.

But it’s not clear that things will stay that way as PPR tightens its grip on Gucci. As reported, PPR is obliged to offer $101.50 a share for Gucci in 2004, giving it 100 percent of the company and ultimately the last word over De Sole and Ford. PPR has said it may re-list Gucci on the stock market — just the sort of move needed to give De Sole more space to operate — but no timing has been given regarding if and when an initial public offering will occur.

“There is some tension, definitely,” the source said. “I think Pinault is not the type of guy to let someone step on his foot. He wants to at least have control.”

Since October of last year, PPR has bought Gucci shares on the market at cheaper prices to reduce the bill that comes due in 2004. It has raised its Gucci stake to 58.2 percent from 53.2 percent and said it will increase its stake to more than 61 percent. PPR can increase its stake to as much as 70 percent by buying-up shares on the market.

Regardless, the uncertain future of De Sole and Ford doesn’t appear to be François Pinault awake at night. In a rare interview, he told The Wall Street Journal that he wants De Sole and Ford to stay, but that Gucci “shouldn’t shake in its boots at the thought that they may someday leave.” Gucci is strong enough “that a change of management shouldn’t put the company in peril,” he said.

The article also highlighted clashes between De Sole and Serge Weinberg, chief executive officer of PPR. But Weinberg said in an interview with WWD that the idea of strained relations between PPR and Gucci is “absurd.”

“Of course we have different interests sometimes, but that’s normal. I’m in charge of PPR’s interests, whereas Domenico is in charge of Gucci’s interests,” he said. “I’ve always been fully supportive. [De Sole and I] have a very good personal relationship. I’m talking almost every day to Domenico and he can confirm that to you.”

Nevertheless, the year has started out on a series of difficult notes for Gucci. In December, the luxury goods group launched a profit warning citing weak November sales heading into the Christmas season. That move prompted some in the industry to question whether the main Gucci brand, the engine driving the company, is losing momentum as management concentrates much of its effort on YSL. At that time, De Sole already hinted that YSL might miss its target to turn a profit at the end of 2003 and in full-year 2004.

Sagra Maceira de Rosen, an analyst with J.P. Morgan Securities, spoke admirably of Gucci’s turnaround efforts at YSL and said she wasn’t that surprised that Gucci had to pull back expectations on YSL.

“This is a turnaround situation and in a turnaround situation it’s never quite certain when things are going to happen,” de Rosen said.

The YSL profit warning dented the stock of Gucci and its parent Pinault-Printemps-Redoute. PPR stock fell 5.6 percent to close at $67.01 on the Paris Bourse while Gucci shares dropped 0.5 percent to $93.55 on the New York Stock Exchange.

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