MILAN — Everyone thought it was going to hurt, but not quite this much.
Sending a shudder throughout the luxury sector, Gucci Group stunned the market Wednesday, barely posting a net profit for the first quarter and showing a steeper-than-expected drop in sales, especially at its core Gucci brand. Still, the Italian company is hopeful that things can only get better in the second half of the year.
Only a tax benefit enabled Gucci to slide into the black with a net profit of $1.4 million, or 1 cent a share, for the quarter ended April 30, a startling 96.6 percent drop from the $41.1 million, or 40 cents, reported a year earlier. Gucci posted an operating loss of $28.2 million compared with an operating profit of $23.6 million in last year’s quarter.
“It was the perfect storm,” Gucci president and chief executive Domenico De Sole said in a phone interview. “Everything that could go wrong went wrong.”
Consolidated sales declined 6.7 percent to $655.9 million from $702.7 million in the first quarter of 2002, but the company said revenues would have been flat at constant currency rates. Sales were especially weak for the core Gucci brand, sliding 13.7 percent.
Dollar figures have been converted from the euro at current exchange. In local currencies, Gucci reported net income of 1.2 million euros on sales of 567.1 million euros.
De Sole said that high margins, which worked to the company’s advantage in quarters past, achieved just the opposite effect on Gucci’s numbers this time around, generating “negative leverage.” Depressed tourist flow resulting from the war in Iraq, combined with the negative impact of SARS and a strong euro, bit heavily into Gucci’s top line. Those effects filtered down to the profitability level.
The bottom line also suffered as losses widened at Yves Saint Laurent and Gucci’s “other operations” division, a group of acquisitions including Bottega Veneta, Sergio Rossi, Stella McCartney, Alexander McQueen and Balenciaga.
Still, De Sole was optimistic that things will improve for the rest of the year, citing “improving revenue trends” in May and June. Specifically, he noted strong orders for Gucci’s cruise collection and double-digit sales growth at YSL in the months of May and June.While De Sole said he sees encouraging signs from the U.S. and Asia, he said there is still no evidence of a rebound in tourism to Europe.
“We saw some improvement in the months of May and June,” De Sole said. “We have to see if this good momentum is sustainable.”
He declined to provide a financial target for the full year but told analysts on a conference call that a challenging climate won’t derail the group’s multibrand strategy.
“We expect Gucci Group to be very profitable in 2003,” he said.
Analysts were very surprised by the first-quarter figures. While they were gearing up for a weak set of results, they pegged the net profit decline at something closer to 28 percent.
“Maybe the impact on the EBIT level was bigger than we expected, but on the sales, we were probably too optimistic,” said Chiara Tirloni, an analyst with UBS Warburg in Milan. She said it wasn’t possible for Gucci to sufficiently cut costs to offset the steep drop in Gucci brand sales in the quarter.
The market appeared to shrug off the poor first-quarter showing. Gucci’s shares closed up 0.7 percent at $98.42 on the Amsterdam Stock Exchange. But then again, its shares are supported by majority shareholder Pinault-Printemps-Redoute’s offer to buy out all remaining shares of Gucci come 2004. After Gucci’s exceptional dividend in May, PPR’s tender price will likely come close to $85.89 a share, at current exchange.
In New York Stock Exchange trading later on Wednesday, shares closed up 60 cents, or 0.6 percent, at $98.70.
PPR’s shares ended 0.7 percent ahead in Paris at $74.02, after falling to as low of $71.41 earlier in the day.
Nathalie Schneider, a Paris-based analyst with HSBC, said Gucci’s results do not bode well for the second-quarter prospects of other companies. Gucci’s fiscal year, like those of most U.S. retailers, ends Jan. 31, so its first quarter comprises February, March and April. The April results of most of Gucci’s competitors, with fiscal years coinciding with the calendar year, will come as part of their second-quarter numbers. Bulgari and Tod’s are both due to report second-quarter results later this month.“Some of Gucci’s problems are specific to the brand, but…second-quarter figures for most players will look extremely weak,” Schneider said. “We still think LVMH’s second-quarter sales, even though showing a slowdown versus first quarter, will look better in relative terms than the rest of the luxury sector.”
Jacques-Franck Dossin, an analyst with Goldman Sachs, echoed these thoughts. “The first-quarter results are definitely disappointing. It shows a loss of momentum of both the Gucci and YSL brands in the quarter.”
In particular, the Gucci brand saw first-quarter revenues drop dramatically, eroding 13.7 percent to $369.8 million from $428.4 million the year before. Operating profit before goodwill and trademark amortization was off 30.9 percent, to $74.8 million. Despite cost cutting, the brand’s margin before goodwill amortization dropped to 20.2 percent of sales from 25.3 percent.
Lehman Brothers analyst Andrew Gowen articulated a common concern in the market that the Gucci brand is losing shoppers to competitors like Louis Vuitton and Hermès.
“We believe that the distraction of managing the YSL turnaround, especially in such difficult market conditions, has contributed to this underperformance,” he said.
De Sole dismissed talk that the Gucci name has lost its luster, saying he is “totally and completely” confident in the strength of the Gucci brand and challenged those who disagree.
“We’ll discuss [the issue] at the end of the year and we’ll see who’s right and who’s wrong,” he said.
Leather goods, by far the Gucci brand’s biggest product category, saw its sales shed 16.3 percent to $175.9 million.
Goldman’s Dossin said the weakness in the leather goods division “shows that the strategy to have cheaper products and more logo items has not yet worked out, yet it seems like this strategy is starting to work in the second quarter.”
Gucci’s footwear revenue slumped 12.6 percent to $46.8 million. Ready-to-wear sales backtracked 6.6 percent to $54.9 million. The only bright spot was jewelry, which saw an 18.4 percent jump to $25.2 million.
Gucci brand sales lost ground in every single geographic market. A sharp drop in tourism, particularly in Italy and France, caused revenue from Europe to fall 15.8 percent to $122.7 million. U.S. sales declined 16.3 percent to $76 million.Japan also fared poorly during the first quarter, with revenue dropping 5.7 percent to $106.7 million. But Gucci said the retail environment in the country is showing signs of improvement and yen-denominated retail sales were up 7 percent in April and 10 percent in May and June.
As for YSL, De Sole said he still believes the house is on track to turn a profit come 2005. YSL widened its first-quarter loss before goodwill and trademark amortization to $24.9 million from a loss of $22.8 million the year before.
Sales for the quarter dropped 0.7 percent to $38.1 million, hit especially hard by the slowdown in Europe, but Gucci said they would have risen 4.3 percent in constant currency terms.
“Management expects the strong fall-winter collection, as well as the expansion of the retail network, to support sales growth in the second half of 2003,” Gucci said in a release. The company also noted that retail sales growth resumed in May and June, rising 16 percent in constant currency terms.
De Sole said in a conference call that YSL’s spring-summer collection, despite its artistic merits, was “difficult commercially,” but that prospects should be better for fall. He cited a positive response from recent trunk shows of the collection.
In June, YSL inaugurated a store on 57th Street in New York and an accessories-only boutique on Rome’s Via Condotti. Other flagships in Beverly Hills, Hong Kong and London are slated to open in early fall.
YSL Beauté saw its sales for the quarter slide 1.2 percent to $163 million, but Gucci said they would have risen 2.4 percent in constant currency terms.
The beauty unit posted an operating loss before goodwill and amortization of $8.1 million compared with a profit of $3.5 million the year earlier. Gucci attributed the loss to start-up and communications expenses for the launch of two fragrances: Alexander McQueen’s Kingdom and Ermenegildo Zegna’s Essenza di Zegna.
YSL Beauté also is preparing to launch this fall the first Stella McCartney fragrance, Stella.
Gucci released relatively few details regarding its “other operations.” Collectively, this group of brands saw sales rise 21.3 percent to $94.1 million. It widened its first-quarter operating loss before goodwill and amortization to $23.4 million from $18.1 million the year before.Gucci said Bottega Veneta’s first-quarter revenue increased 63 percent in constant-currency terms although the company did not release exact sales figures. Elsewhere, Gucci said it will open a Bottega Veneta flagship on Fifth Avenue in a location originally earmarked for a Boucheron store.
Boucheron needs to develop business in its network of recently opened stores in London, Tokyo, Milan, Paris and Honolulu before opening a major store in New York, Gucci said. De Sole also explained that Boucheron will fuel future growth by broadening its offerings, particularly in “more accessible price points.”
As for the other brands in the group’s portfolio, Gucci sales at both Alexander McQueen and Stella McCartney “more than doubled” for the quarter. Both brands cut the ribbon on stores in London last April. McQueen opened a boutique in Milan last month and McCartney will open a store in Los Angeles in early fall.
During the conference call, Gucci also shed light on Sergio Rossi’s financial performance. De Sole said that the shoe company had experienced a “difficult period during the first quarter of this year,” with retail sales dropping 4.2 percent in constant currency terms. But he said the future is looking brighter and sales in May and June are up 12.9 percent at constant exchange rates.
“After a very difficult quarter, sales seem to have improved,” he said.
Meanwhile, there is still plenty of mystery surrounding the futures of both De Sole and creative director Tom Ford. As reported, there has been intense speculation that tensions between them and PPR could drive them from the company. Both have contracts that expire next year and they have said they will stay at Gucci only if PPR guarantees them managerial independence.
“We are negotiating, things are moving along,” De Sole said. “As soon as we have news, we’ll let you know.”