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Gucci Brand Hits Turbulence as PPR Sales Rise in First Quarter

Gucci has hit a bump. After experiencing soaring growth over the last few years, the brand saw sales slip in the first quarter...

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PARIS — Gucci has hit a bump.

This story first appeared in the April 25, 2008 issue of WWD.  Subscribe Today.

After experiencing soaring growth over the last few years, the brand saw sales slip in the first quarter ending March 31 as a result of tough conditions in the U.S. and Europe and the impact of currency exchange. Gucci’s sales rose 2.4 percent at constant exchange rates but fell 3.3 percent in the quarter to 513 million euros, or $769.5 million at average exchange.

The decline came even as the brand’s siblings in the Gucci Group saw significant sales increases in the quarter, which helped propel overall luxury sales at parent PPR up 9.6 percent at constant exchange — or 4 percent after currency exchange — to 816 million euros, or $1.22 billion. The increase was spurred by rapid growth in Asia, excluding Japan, and China, where sales bounded ahead 116 percent.

Overall, PPR said Thursday that first quarter sales rose 20 percent to $4.91 billion euros, or $7.37 billion, thanks to the addition of Puma and robust sales at Yves Saint Laurent and Bottega Veneta. Sales grew 4 percent after taking account of currency exchange, reflecting the impact the high value of the euro against the dollar and yen is having on European luxury firms.

The improvement wasn’t enough to offset the news about the core Gucci label, however, and PPR’s stock dropped 2.4 percent to close at 82.37 euros, or $130.97 at current exchange, in trading on the Paris Bourse.

“We are not satisfied [with Gucci’s quarter] and we have been addressing it at all levels,” Jean-François Palus, PPR’s chief financial officer, said bluntly on a conference call with analysts and reporters.

Gucci’s weakness contrasted with strong showings by Europe’s other big luxury players. Compagnie Financière Richemont, whose fiscal year ends March 31, said Wednesday its fourth-quarter sales accelerated, leading to a 9.8 percent annual gain in revenues. LVMH Moët Hennessy Louis Vuitton last week said first-quarter sales grew 12 percent at constant exchange and despite the adverse currency climate it had seen no slowdown in America.

Palus said Gucci had begun to take “strong measures” to nip the downward sales trend in the bud. He said one of the potential causes for the fall was Gucci overemphasizing the “top-end of the pyramid” with its leather goods while taking its eye off midrange products.

“[The midrange] is the segment dragging on Gucci’s numbers,” said Palus. “We are looking to correct this.”

The cfo said the brand would make more of a statement with its double-G logo fabric, with more emphasis on the motif on the fashion runway as well as in advertisements.

Gucci also suffered from a slowdown in tourist traffic in Europe and soft business in Hawaii, Palus said.

Further complicating the quarter, Palus said Gucci experienced supply-chain issues that affected its wholesale business with the already tough department store segment. “We are working to fix these issues,” Palus said.

Offsetting Gucci’s weak performance, PPR said Bottega Veneta’s sales advanced 31.5 percent to 106.2 million euros, or $159.3 million, on a comparable basis, fueled by all regions, including Japan, where the brand’s sales grew 31 percent.

The money-losing Yves Saint Laurent brand registered growth of 20 percent to 63.1 million euros, or $94.7 million, spurred by sales of the Besace, Ymail and Muse handbags. The brand also benefited from royalties, mostly from fragrances linked to the divestment of the YSL Beauté business to L’Oréal.

Excluding royalties, YSL’s first-quarter sales grew about 7 percent, with revenues growing 11 percent in Europe, 9 percent in Asia outside of Japan and 4 percent in North America.

Balenciaga posted “high” double-digit growth, as did Boucheron, Palus said.

Overall sales at PPR’s so-called “other” luxury brands, which include Sergio Rossi, Alexander McQueen and Stella McCartney, grew 20.8 percent to 133.9 million euros, or $200.8 million.

Puma, the German sports brand PPR bought last year, saw sales rise 6.6 percent to 673.3 million euros, or $1.01 billion, hamstrung by a “significant slowdown” in March sales, especially in footwear in the United States. “We need to regain momentum in this category,” said Palus.

Sales of Puma’s core footwear category declined 0.4 percent, while apparel sales grew 18.5 percent and accessories sales gained 16.5 percent. Palus said the brand suffered from tough business in American malls but that its own brand stores were growing at double digits.

Results at PPR’s other concerns, which span from furniture retailing to an African trading company, were mixed and generally marked by the tough trading environment in Europe and the U.S.

Sales at the Fnac music and book chain grew 2.7 percent to 1.02 billion euros, or $1.53 billion, while sales at the Redcats catalogue division fell 4.4 percent to 916 million euros, or $1.37 billion. Sales at the Conforama furniture chain dipped 1 percent to 790 million euros, or $1.18 billion, while revenues at the CFAO African trading business gained 17.5 percent to 691 million euros, or $1.04 billion.

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