By and  on December 15, 2004

LONDON — No brand disposals, no acquisitions, no major cost cuts and no “massification” drive for Gucci Group, the world’s second-largest luxury goods conglomerate.

Those were the main messages from the company’s new chief executive Robert Polet, who painted an upbeat picture as he presented his long-awaited three-year strategic plan here Tuesday. The plan is to grow group revenues at a compound annual rate of 10 percent, and operating profits even faster.

The industry newcomer announced plans to double the size of Gucci and Bottega Veneta, fix troubled Boucheron and Sergio Rossi and build the company’s emerging designer names — Alexander McQueen, Stella McCartney and Balenciaga — to profitability by 2007.

But despite the fist-pumping optimism he conveyed as he roamed the stage of a lecture theater at the British Museum, Polet disappointed a packed audience of analysts and journalists by failing to give a break-even target for Yves Saint Laurent. He also failed to provide many nut-and-bolts specifics about how he would achieve the bullish sales and profitability targets, saying he did not want to give his competitors too much information.

The market reacted negatively to the lack of specifics, sending shares in Gucci Group parent Pinault-Printemps-Redoute down 1.6 percent Tuesday to close at 76.40 euros, or $101.76, on the Paris Bourse.

“Building on strengths” was the theme of Polet’s nearly two-hour address, and while he sought to distance himself from the previous management — Tom Ford and Domenico De Sole, who made Gucci a case study in brand rejuvenation in the Nineties — he graciously acknowledged the groundwork laid by his predecessors, all the way back to founder Guccio Gucci in 1923.

A renewed focus on the cash cow Gucci brand, which generated 60 percent of 2003 group revenues of 2.587 billion euros, or $3.44 billion at current exchange, and an estimated 141 percent of operating profits, was the centerpiece of Polet’s discourse.

As De Sole and Ford embarked on a drive to create a multibrand conglomerate to rival giant LVMH Moët Hennessy Louis Vuitton, “we did get distracted from the core Gucci brand,” Polet acknowledged.

Indeed, during his first 10 weeks on the job getting acquainted with the fashion business after joining Gucci from Unilever’s ice cream and frozen foods division, Polet confessed he “didn’t spend enough time on Gucci, YSL and Bottega Veneta.”Polet’s goal is to double the revenues of the Gucci brand in seven years — which would take them to more than $4 billion — by opening more stores in the fast-growing Asian region, marching into emerging markets like India and China, building up its wholesale business, leveraging underdeveloped categories like fine jewelry and increasing its communication spend by about 20 percent.

“We are very confident we can do this,” he said as sexed-up images of the new Gucci ad campaigns flashed on a monitor.

While the group’s multibrand strategy was devised by the previous management in part to address the maturity of the Gucci brand, Polet scoffed at the notion that there was a ceiling on its potential.  “It’s an old brand with a lot of heritage, but it’s not an old man,” he said. “It’s a highly dynamic and contemporary brand.”

He expressed confidence in the design trio that succeeded Ford at Gucci —Alessandra Facchinetti for ready-to-wear, Frida Giannini for accessories and John Ray for men’s wear — noting that wholesale orders for spring 2005 were up 20 percent. Their initial efforts received generally lukewarm reviews from the fashion press, as noted.

Meanwhile, he vowed that the “one-size-fits-all” approach to the group’s other brands would end. He characterized a less centralized approach to brand management as a “fundamental” shift from the Ford-De Sole era.

Polet said he expects the global luxury market to grow at a compounded annual rate of 5 percent, reaching 134 billion euros, or $178.5 billion, in 2004, driven in part by a broader customer base for luxury goods and rising Asian wealth.

Polet, who has declined all interview requests since joining Gucci Group in  July, used Tuesday’s presentation to respond to scores of market rumors, the most persistent one being that he might take the mass market route.

“It’s nonsense. We will not tinker at all with the current positioning of the Gucci brand,” he said. Later, he was even more explicit, stating: “We will not make Gucci products in China.”

Serge Weinberg, ceo of PPR, underscored the same point when he introduced Polet. “The essence of luxury is exclusivity and creativity and we are determined that it remain so,” he said.Weinberg, portrayed by Ford as overly meddlesome in PPR’s luxury goods division, took pains to dispel that myth. “Gucci Group will remain a separate entity within PPR, and Robert Polet has full authority to run Gucci Group.”

Polet concurred, taking a humorous tack. “I don’t get instructions every morning from Serge what to do — and you won’t see me carrying Serge’s bag at the airport,” he said, causing a round of chuckles.

Dressed in a pinstriped Gucci suit and shiny YSL shoes, Polet also took issue with a running scorecard in the media of executives who have left the group in the wake of Ford’s and De Sole’s departures in April. These include chief financial officer Robert Singer, Gucci Japan president Toshiaki Tashiro and merchandising chiefs Tom Mendenhall and Joshua Schulman.

Polet said he considered such turnover “completely normal” and was taken aback by what he perceived as undue attention to the exodus. “We employ 11,254 people and we have filled every position,” he said. “I’m only looking to fill one position, and that’s a new ceo at YSL.”

That position became vacant in October when YSL chief Mark Lee was named president and managing director of the Gucci brand, succeeding Giacomo Santucci, who was ousted amid accusations of disloyalty. Polet declined to give a time line to the naming of Lee’s successor, but hinted an announcement was imminent.

Questions about the turnaround prospects at YSL and Gucci’s growth drivers dominated the question-and-answer period, but Polet was stoic.

“I am not going to publicly commit to a break-even date for YSL,” he said. “We’ve done it two times before and I won’t make that mistake again. When we get close, I will alert you to the fact.”

Peppered with questions, Polet allowed that breakeven of the fashion house would likely occur when revenues reach about 300 million to 350 million euros, or $399.6 million to $466.2 million at current exchange, roughly double the 2003 total of 154 million euros, or $205.1 million. He also said losses, which ballooned to 76.4 million euros, or $101.8 million, last year, would continue to decline over the next three years.Still, “it has been fantastic what has been achieved [at YSL],” Polet said. “It had been necessary to reposition at the highest level to be revamped.” However, he allowed that an unwelcome side effect has been a brand positioning that can be “intimidating.” That has resulted in “low store traffic” and “not enough product density,” he allowed.

Reiterating a turnaround plan formulated by Lee before he was moved to Gucci, Polet said YSL would capitalize on iconic brand designs like the tuxedo and safari jackets, add more daywear to the merchandise mix and broaden the pricing.

“We need to define as quickly as possible the ‘sweet spot’ at YSL,” Polet said, repeating that tennis analogy several times in discussing the French brand.

However, analysts questioned how sales growth at YSL would be achieved without opening more retail stores.

In their quest to divine how Gucci and YSL sales would advance, analysts probed issues of pricing, product mix and selling surface.

An energetic, smiling executive whose face reddens with excitement, Polet became more animated still when talk turned to Bottega Veneta, which the group now categorizes alongside Gucci as a “fundamental driver of profitable, organic growth.”

Famous for its discreet, woven leather handbags, Bottega’s sales are slated to reach 100 million euros, or $133.2 million, this year, and should double by the end of Polet’s three-year plan, thanks to 20 new directly owned stores. Profitability is expected within the next two years, Polet said. “We could have broken even next year, but we will continue to invest.”

Later, he pinpointed group capital expenditures at 130 million to 140 million per year, or $173.2 million to $186.5 million.

Polet found it more difficult to accentuate the positive at Boucheron, where watch revenues are “half of what they used to be,” and at Sergio Rossi, where overinvestment and less-than-stellar collections diminished a once-profitable brand. It is now gunning for breakeven in 2007 via tight cost controls and creating shoes for multiple dressing occasions.

In the only mention of layoffs Tuesday, Polet noted that Boucheron reduced its head-office staff by 25 percent in an effort to reduce costs.Polet hailed the talent of the group’s emerging designers — McQueen, McCartney and Balenciaga’s Nicolas Ghesquière — but made it clear that continued losses at those companies would not be tolerated. “You have to ask, ‘Where is the light at the end of the tunnel?’” he quipped.

He said growth would hinge on wholesale expansion and “selective licensing,” highlighting McCartney’s deal with Adidas to design performance apparel as a perfect example.

Indeed, he brushed off suggestions that Gucci Group might ultimately dispose of some of these emerging brands should they fail to meet new business targets. “Alexander McQueen, Stella McCartney and Balenciaga are successful ventures,” Polet stressed. “We will build these brands and turn them into profitable, growing businesses.”

As they exited the meeting, luxury analysts lauded Polet’s polish, charisma and evident people skills, but expressed disappointment over the lack of financial guidance and business detail.

“Accomplishing all of the goals laid out today is going to be a difficult exercise. It will require a lot of management attention to reach all the targets,” said Antoine Belge, luxury analyst at HSBC in Paris. “Perhaps Gucci Group is setting out to do too much, biting off more than it can chew. The objectives are sound — it’s just going to be a lot of work.”

Fraser Ramzan, luxury analyst at Lehman Brothers, noted that PPR’s stock performance hinges on Gucci Group’s performance, and the delay in YSL’s turnaround and unfavorable currency hedging could weigh on its fortunes.

“I don’t think the market is going to be very impressed with today’s presentation,” said one Paris analyst, who asked that his name be withheld. “[Polet] was short on clear targets. His speech created a lot of question marks.”

Another Paris-based analyst lamented the dearth of facts about YSL and questioned Polet’s bullish stance on the watch business. “He’s talking about an average growth rate of 9 percent for the sector while I am projecting 5-6 percent,” the analyst said. “Maybe he’s already counting on the fact that the recent recovery will continue.”

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