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Eager for Polet’s Plan: YSL, Exec Talent Drain Top Analysts’ Concerns

Analysts dissect Gucci Group’s strategic plan in advance of ceo Robert Polet’s delivery on Dec. 14.

PARIS — When will the red ink stop flowing at Yves Saint Laurent? And how will the Gucci brand ensure that its long winning streak endures?

Those are among the key questions luxury and retail analysts expect to be answered come Dec. 14, when industry newcomer Robert Polet, chief executive officer of Gucci Group, presents his long-awaited strategic plan at the British Museum in London.

While analysts don’t expect major strategic changes or dramatic announcements from the world’s third-largest luxury group, they characterized Polet’s first major address as vital to gain the confidence of the market, and to perhaps goose the stock of Gucci parent Pinault-Printemps-Redoute, the French retail giant.

They also are looking for reassurances that Polet can stem a worrisome drain of executive talent — and that the former frozen-foods honcho from Unilever is up to speed on the world of hot handbags and cool frocks.

“I think what the financial markets would like to hear is a refocus on profitability,” said Antoine Belge, luxury analyst at HSBC in Paris. He said that could come from reduced investments in advertising and retail for recently acquired fashion brands, or from the divestment of one or two loss makers, such as Boucheron or Balenciaga.

“My main expectation would be a thorough review by Polet of each of the brands in the group’s portfolio, followed by a clear assessment of their respective potential and distinctive positioning,” Belge said, adding that, “in some cases, it would be probably more sensible to invest even more behind brands, provided they have interesting prospects.”

“I think that the market is eager to get a sense from him that they will focus resources and management talent on Gucci as opposed to the smaller brands,” said Jacques-Franck Dossin, luxury analyst at Goldman Sachs in London. “I also expect to get some sense of where they want to take the smaller brands and a time frame for break-even target.”

HSBC’s Belge characterized Polet’s brief tenure as a “transition period,” still mostly influenced by past decisions made by former ceo Domenico De Sole and creative director Tom Ford, but benefiting from better market conditions.

Gucci Group’s sales for the three months ended July 31 climbed 9.8 percent to 641 million euros, or $772.5 million, as reported.

But analysts agreed uncertainty over Gucci Group’s leadership and future strategy has weighed on the performance of PPR stock, which eased 1.5 percent Monday to close at 77 euros on the Paris Bourse. Also denting the share price has been the departure of key managers and the delayed disposal of its Rexel electronic components firm.

That’s why Polet’s address will be closely watched.

“PPR is one very leveraged play on Mr. Polet,” observed Fraser Ramzan, retail analyst at Lehman Brothers in London. “His performance is really important to [PPR].”

Although luxury goods only account for roughly 25 percent of profits for PPR at present, about half of potential upside for the PPR stock price comes from Gucci Group’s potential, he said. Still, reassurance, not change, is expected to be the chief takeaway of the December meeting.

“I can’t imagine a 180-degree turn on the part of PPR, but I can imagine better cost control,” Ramzan said. “Most of the designer changes have already been announced, and Gucci is a product-led company.”

Analysts said they have been encouraged by strong reaction from retail buyers and press to Gucci’s spring collection. More vital now is the reaction of consumers in Gucci’s network of directly owned stores, Ramzan said. “What we want to see is substantial sales growth, most importantly for Gucci.”

Analysts also are expecting Polet to ensure decisive action at YSL, whose 2003 operating loss widened to $94 million, or 76.4 million euros. Recently, Polet moved YSL president Mark Lee, who had devised a delicate turnaround strategy after a radical and costly overhaul, to the Gucci brand to succeed its former chief, Giacomo Santucci, who was ousted amid accusations of disloyalty.

Lehman’s Ramzan said he expects Polet to espouse a “more realistic” view of YSL’s potential.

“Forget whether or not and when or if it will become a 1 billion euro brand,” he said, a common revenue goal for luxury houses. “We all need to know when it’s going to break even. The reduction in YSL losses is very important.” At present, Lehman has YSL estimated to log a 66 million euro loss this year, breaking even at the end of fiscal 2007.

Dossin of Goldman Sachs said he expects a clear statement about restructuring or cost cutting at YSL. “They’ve taken some provisions for store closures recently,” he noted. Alluding to the rising number of executives who have exited since De Sole and Ford left, Dossin said he also awaits some discussion of management issues.

Departing executives include: Gian Giacomo Ferraris, Gucci’s director of worldwide apparel operations, who became ceo of Jil Sander AG; Brian Blake, former head of Gucci’s watch division and jeweler Boucheron, who joined Burberry as president and chief operating officer, and Robert Singer, Gucci Group’s chief financial officer, who left last May to become president and chief operating officer of Abercrombie & Fitch.

At this point, personnel issues are sensitive, Dossin said. “We are keen to hear about the plan to replace Mark Lee and also how Mark Lee will attack Gucci,” he said. Polet’s address “will be an important message internally, as well,” he added.

“Some investors are skeptical about the ability of an outsider to the luxury industry to succeed, especially since several members of top management have left,” Belge noted. He said he would like to “see a good balance between professionals of the luxury goods industry and general retail managers.”

Polet has not yet made a big impression in financial circles, as his only major address was last September in Paris when PPR presented its first-half results. At the time, the Dutchman gave a rundown on his orientation to the company, saying he was “energized” after meeting thousands of employees and visiting hundreds of stores.

A union source within Gucci’s plant in Scandicci, Italy, said Monday that Polet and Lee recently met with workers there and assured no major changes in terms of group composition or strategy.

More than 300 analysts, investors and journalists are expected to attend Polet’s presentation, which also will be broadcast on PPR’s Web site. PPR ceo Serge Weinberg also is expected to attend, along with many brand heads, to answer questions.

— With contributions from Amanda Kaiser, Milan

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