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Marzotto: A Focus on Fashion

On July 1, storied Italian textile firm Marzotto SpA spun off its fashion holdings into a new concern, Valentino Fashion Group, with shares trading on the Milan Bourse.

On July 1, storied Italian textile firm Marzotto SpA spun off its fashion holdings into a new concern, Valentino Fashion Group, with shares trading on the Milan Bourse. The move was an effort to wring equity value out of its high-profile apparel labels — including Valentino, a majority stake in Hugo Boss AG and the licensed Marlboro Classics and M Missoni labels — by separating them from the company’s legacy textile operations.

“I think this is a revolution in our company, and for our family,” said Matteo Marzotto, chief operating officer at Valentino SpA, a division of the group, in a presentation outlining the strategies for turning the fashion group into a global luxury player. “The title of the summit [‘The Challenge of Change’] is perfect for us.”

Marzotto’s textile roots are deep, as the company was founded in 1836, prior to the unification of Italy. “It was the time of the Austro-Hungarian Empire, and the company was starting and stopping. Every two weeks there were the French or the Austrians [invading], and the company really struggled — as we did later with Valentino,” said Marzotto, to laughter.

The company segued into the men’s wear business in 1950. “It was right after World War II, and we used machinery that came from the Marshall Plan, so that should tell you something about our relationship with the U.S.”

In 1986, Marzotto signed its first designer licenses, and in 1992 acquired a controlling stake in Hugo Boss — today it owns 50.9 percent of the German label. Three years ago, Marzotto bought 100 percent of Valentino.

“Hugo Boss was our first step into the international market and beyond provincial Italian, so I would say that was the most important time in our history, as was the 2002 deal for Valentino, which was our first step into a fashion luxury brand,” said Marzotto.

The decision to create an independent Valentino Fashion Group — which accounted for 85 percent of 2004 sales within the former Marzotto company — was made in order to create shareholder value. “The market was asking us to be more clear,” explained Marzotto. “Textiles were struggling because of new market issues and the cost of labor, and our share values were being discounted. There were no synergies between the different businesses.”

Today, Valentino Fashion Group and Marzotto shares together are worth about 24 euros, or $28 at current exchange, whereas in the 12 months leading up to the spin-off, the average price of Marzotto shares was 13.80 euros, or $16, according to Marzotto. “Now we’re more flexible and management can stay focused on a single business,” he added.

Within Valentino Fashion Group, Hugo Boss accounts for 75 percent of total company turnover, Valentino contributes 11 percent and the remaining 14 percent comes from Marlboro Classics (“Very successful worldwide, except the U.S. — I don’t know why,” pointed out Marzotto), M Missoni, Pincipe and UomoLebole.

With the diversity of VFG’s brands and their various sublabels (Baldessarini, Boss Hugo Boss, Hugo Hugo Boss, Valentino Black Label, Valentino R.E.D. and Valentino Roma, among others), the company covers a breadth of men’s and women’s categories, at a range of price points. Hugo Boss is stronger in men’s wear, while Valentino is 85 percent women’s wear.

Going forward, VFG will focus on growing its women’s businesses, accessories, leisurewear and youthwear, while exploring intragroup synergies in areas such as logistics, sourcing, IT and distribution. Geographically, the company aims to boost growth in the U.S., China, Japan and emerging markets. “We need to be less European and more international,” explained Marzotto.

The impetus for that global expansion parallels the growth of the luxury market around the world. Currently, Asia represents 25 percent of the total market for luxury goods, but just 8 percent of VFG sales. Similarly, North America is 35 percent of the total market, but 18 percent of VFG sales, while Europe is 35 percent of the total market and 72 percent of VFG sales.

Overall, VFG’s net sales increased 5.5 percent to $1.94 billion in fiscal 2004, with 8,000 points of sale in 110 countries. At the end of last year, the company’s brands were sold in 1,298 dedicated retail stores, with 127 of those directly owned by VFG. As of last June, that last number had grown to 164, with 27 in North America, 45 in Europe and 92 in Asia.

For the first half of 2005, net sales increased 11.3 percent over the year-ago period to $1.02 billion, as net income improved 14.8 percent to $50.5 million. Additionally, net debt was slashed by 11.2 percent to $577.2 million.

“When we acquired Valentino in 2002, a lot of important people in Italy and Europe were very skeptical about what we did,” recounted Marzotto. “The issue of debts was a real issue. I remember when, after the closing, we were going around the table and fighting. I said, ‘Listen, we spent six months looking at the company, now we are here and we have to run.'”

Marzotto SpA originally acquired Valentino for $210 million, including net debt of $179.2 million. “We did this because we realized the brand has excellent brand awareness. There was a little dust on top, but the brand has big potential.”

Today, the Valentino brand has 800 POS in 58 countries, including 24 directly owned stores and 64 franchised stores. This year, there has been significant growth of the franchised network, added Marzotto.

For 2005, Valentino’s sales will be 46 percent wholesale, 44 percent from retail stores and 10 percent from royalties. “That is where I would like to remain. It means being balanced,” said Marzotto. “Valentino is not a story about just opening new shops. First, we don’t have the money — somebody has to pay the bill. Second, we have extraordinary retail partners around the world and I feel very confident going this way.”

In the first half of this year, Valentino’s sales increased 19.9 percent to $120.5 million, as net income improved to $700,000, compared with a loss of $3.1 million in the year-ago period. The retail value of Valentino products sold in the U.S. is $625 million.

Going forward, Valentino’s growth drivers will include a focus on women’s wear, shoes, handbags and accessories. “Men’s wear is not a top priority, but it’s very much part of the flow,” said Marzotto.

The company also is looking at potential new licenses in areas such as jewelry, home furnishings, lingerie and swimwear. Earlier this year, the company took over distribution of its Japanese business after 32 years with Mitsui.

A key focus for the brand has been North America, where Valentino has struggled with sales and profitability. “It was losing a lot of money,” noted Marzotto. “But my friend, Graziano de Boni [chief executive officer of Valentino’s U.S. operations], did something really incredible, rebuilding the wholesale business here, starting with Bergdorf Goodman.”

The overhaul of the U.S. operations included fixing the existing directly operated stores business before opening new ones or renovating old ones, focusing on consumers with the support of direct marketing, expanding pre-collections and tweaking price points and streamlining processes and organization with a keen eye on working capital and cost controls.

The efforts have paid off. This year, Valentino is one of the top-10 branded businesses at Bergdorf Goodman, selling more product there this past September than in the entire year of 2002. The brand also has attracted a younger clientele in its late 20s and 30s.

Overall, Valentino USA’s performance went from $23 million in sales and a net loss of $10 million in 2002 to an estimated $58 million in sales this year and breakeven. In the same period, distribution climbed from 17 department store doors to 125.

Asked about the viability of continuing Valentino’s money-losing haute couture operations, Marzotto stressed the image-enhancing effect of those efforts. “Mr. Valentino is artistically committed to designing couture,” he added. “It’s such a fascinating part of my job. The dresses are still cut and sewn in Rome, on the second floor right next to my office, by 37 beautiful ladies. [Couture] represents the Valentino lifestyle, and is worn by celebrities and princesses. One of our best customers is the Queen of Thailand. It’s not exactly a business — we sell on average 100 to 120 pieces a year — but I believe in it.”

As for collaborating with the brand’s founders — Valentino Garavani and Giancarlo Giammetti, who are still under contract with the company — Marzotto noted the men remain passionately involved in the business. “The two guys are not easy at all, you can imagine. Sometimes we fight — I always fight with Giancarlo and never with Valentino. Of course, Valentino has his own habits, he really wants things in a certain way,” explained Marzotto. “But it’s not a major problem. They are so intelligent, classy and committed to the brand. It’s not a matter of being consultants — we always work together.”