By  on June 29, 2007

MILAN — Jil Sander AG chief financial officer Armin Mueller warned Thursday that the company might miss its breakeven target this year as it continues a legal battle with a minority shareholder and incurs unexpected costs.

Mueller said the company will make up some of the additional expenditures by cutting its advertising budget by about 30 percent in the second half of the year. Sander, which is thriving on the designs of creative director Raf Simons, is erring on the side of caution, the cfo said.

"The management here is very sensitive when it comes to numbers and to costs and money," Mueller told WWD. "We know we have a certain amount of flexibility in the company and that is what we want to use."

For the year ended Jan. 31, Sander managed to more than halve its net losses to 14.1 million euros, or $17.8 million at average exchange rate. Management's original target was to break even in fiscal 2007. Mueller said the company is still endeavoring to reach that target, but can't guarantee it for now. He also noted a weak yen is really hurting the brand's business in Japan.

The cfo said Sander will have to book more than 1 million euros, or $1.3 million at average exchange rate, in unexpected costs this year due to two factors. One problem was that it took longer than anticipated for the fashion house to fully disengage itself from former owner Prada's logistical and distribution systems. The other issue is linked to Sander's stalled attempt to delist a small sliver of shares from the German stock exchange.

As reported last year, Sander's controlling shareholder Change Capital Partners is trying to execute a squeeze-out plan to buy out minority shareholders and take the fashion company private. A group of 15 shareholders took action against the original tender offer price of 347.94 euros, or $438.40, a share. Change Capital later upped its offer by 6.6 percent to 371.03 euros, or $467.50, a share, placating 14 out of the 15 investors.

Because of that one lingering shareholder, Sander must extend its life as a public company until German courts settle the dispute, a process that could take months, if not longer. In the meantime, Sander must publish another annual report and organize a shareholders' meeting for September. Both are costly endeavors the company hadn't anticipated and require management attention, the cfo explained."Solicitors don't work free of charge," Mueller said. "It's a waste of time and a waste of money and a waste of effort. It's not helping the company."

The holdout is investment company SCI AG. Based in the centrally located German town of Usingen, SCI holds about 3,700 shares in Sander, a stake amounting to less than 1 percent of the company. Reached by phone, SCI president Oliver Wiederhold declined to comment on his company's investment in Sander, citing the ongoing legal situation.

Since Sander management takes its financial targets seriously, the company opted to cut its advertising expenses as a protective measure, Mueller said, stressing this is a short-term message for only the current year.

"If we could avoid it, we would do that, but when you have the negatives coming from another end of the business…what choice do you have?" he said.

Instead, Sander is pushing ahead with a series of projects.

On Sunday, the company will launch a men's fragrance and fete its new Paris boutique on Avenue Montaigne. Sander is mum on the name of the fragrance, the first Simons has fully developed for the house. Sander's beauty licensee is Coty.

Mueller said several companies have approached Sander about licensing pacts for various products, but the company wants to be careful not to squander its image for the sake of easy cash. That said, soon the company will return to the eyewear category with a new licensing deal, Mueller specified.

"We're moving in the right direction. We have a lot of interest in the brand," he said.

Sander is also in the process of establishing its own Japanese headquarters, which should be fully operational by the end of the summer. Previously, its operations in the country were integrated with those of Prada. Earlier this month, the company tapped Hiroshi Saito as president and chief executive officer of Jil Sander Japan KK. Saito, an alumnus of Gucci and Sergio Rossi, was most recently commercial director of Prada Japan.

Meanwhile, Mueller said accessories sales are on the rise. As reported, Sander recently set up its own accessories division with a dedicated design staff, ending an era of production under Prada. This week the showroom is selling its vast range of handmade men's shoes and discreet but thoughtfully constructed bags.The fashion house is also moving ahead with its retail expansion plans. Next month, the company will open stores in St. Petersburg and Moscow. It is also scouting a location for a new flagship in London, where it closed its old store in 2005. The unit became an Abercrombie & Fitch unit.

"What we want to see is continuous development. That is what we are going for," he said.

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