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Gucci Buzz Overshadows Surging PPR ’02 Profits

PARIS — The global economy and potential for war might weigh heavily on most minds, but those precarious situations didn’t pepper the most pointed queries at a meeting Wednesday here to present Pinault-Printemps-Redoute’s annual...

PARIS — The global economy and potential for war might weigh heavily on most minds, but those precarious situations didn’t pepper the most pointed queries at a meeting Wednesday here to present Pinault-Printemps-Redoute’s annual results, which showed its net rising 111.1 percent.

Rather, the distribution giant’s chairman, Serge Weinberg, found himself facing down a barrage of questions on the fate of Gucci Group’s captains of management and design: Domenico De Sole and Tom Ford.

The stir was, in part, sparked by interviews that De Sole and Ford gave in these columns Monday, with both men addressing rumors that they might leave Gucci when their contracts come due in 2004.

PPR, controlled by French billionaire François Pinault, owns a 59.3 percent majority stake in Gucci. By March 2004, under terms of a complicated stock agreement, PPR could own it all.

That final shift in regime, some insiders fear, would ultimately challenge Ford and De Sole’s autonomy, which has enabled them to aggressively build Gucci from a single rag-tag Italian fashion house into the world’s third-largest luxury group, with a stable of brands including Yves Saint Laurent, Balenciaga, Sergio Rossi, Alexander McQueen, Stella McCartney and Boucheron.

Speculation also abounds that Weinberg wants to put his mark on the way Gucci is run and is eager to become De Sole’s boss, a scenario that both Ford and De Sole have said would be untenable.

Normally an even-tempered presence, reporters’ and financial analysts’ persistent questions on the issue finally exasperated Weinberg.

“Listen,” he snorted, “there is no interference with Gucci’s management. There’s no reason to go on with those questions.”

But one reporter, quoting from the Ford interview in WWD, asked if Gucci could survive without its current design director or chief executive.

He repeated Ford’s assertion that “it would be naïve for anybody to not understand that Gucci Group would suffer and go through a very rough time for, I don’t know, at least a couple of years” if he or De Sole were to throw in the towel. The reporter also pointed out that Ford had called the corporate structure at Gucci “very fragile.”

“The responsibility of any manager is to give solidity,” Weinberg countered. “I think Tom Ford has underestimated his ability to do that, because he has assembled a strong team at the many brands in Gucci Group.”

Weinberg also papered over rumors that he and Pinault’s relationship with Ford and De Sole was strained.

“The relationship with Tom and Domencio is good,” he said. “I speak with Domencio all the time: several times a week. There is a difference between independence and autonomy. This company [Gucci] is controlled [by PPR]. We don’t interfere with its management. But it’s our role to fix objectives and strategies — without questioning the managerial initiatives of Gucci.”

Eliciting laughter from the crowd, Weinberg quipped, “Have no fears, I don’t intend to design dresses.”

After the meeting broke up, Weinberg told WWD that PPR counted on Ford and De Sole sticking around after 2004. Asked if the conglomerate had begun strategizing to replace either of the men, Weinberg said: “No. Why should we? We don’t need to do that.”

Meanwhile, Weinberg reported PPR’s net income after amortization of goodwill increased 111.1 percent to $1.72 billion from $812.92 million last year. Exceptional items, including the group’s sale last year of its financial services arm and Guilbert office supplies division, inflated that figure.

Operating income declined 7.7 percent to $1.97 billion, versus $2.13 billion last year. As reported, PPR’s net sales declined 1.5 percent to $29.56 billion from $30.02 billion last year. (All figures are converted from the euro at current exchange rates.)

Although Weinberg didn’t provide growth targets for this year, he said PPR’s retail division had logged a 7 percent increase in the first two months. The business-to-business division, on the other hand, saw sales contract about 2 percent.

Analysts classified the results as slightly ahead of expectations. But they called into question the particulars of PPR’s recently stated strategy to realign the group, whose multifaceted interests run from wood and electrical components to retail and luxury, by shedding its B2B activities to concentrate on its higher-margin retail and luxury holdings.

“Mr. Weinberg hasn’t provided a lot of details on the disposal program,” commented Robert Miller, director of European research in the retail sector at Dresdner Kleinwort Wasserstein, in London. “It’s not clear how they will carry out the strategy.

“And the question of Mr. De Sole and Tom Ford possibly leaving is on everyone’s mind,” he continued.

Weinberg, for his part, reiterated the radical strategy he first unveiled this year for PPR to sell off its B2B holdings, which, until recently, was the group’s backbone. He said the end of 2004 should complete the sales.

“It will make the group more understandable,” Weinberg asserted on Monday. “We want to address a single customer.” He justified the strategy by adding that PPR’s B2B activities have been growing slowly over the last five years, while luxury and retail, including the Fnac book and music chain, the Printemps department stores and the Conforama furniture chain, have barged forward.

On a related note, he said selling Guilbert and the Finaref financial services arm last year had helped pay down debt and put PPR in a strong position to carry out a stock put at $101.50 a share for the outstanding shares of Gucci it doesn’t own in 2004. The put agreement was part of a peace pact PPR cut in September 2001 with its archrival, LVMH Moët Hennessy Louis Vuitton, closing one of the most vicious corporate takeover battles in recent memory.

Over the last year, PPR has been building incrementally its stake in Gucci by acquiring shares on the open market. PPR can increase its stake in Gucci to as much as 70 percent before March 2004, according to the put deal.

PPR stock closed down $2.25, or 3.6 percent, to $61.15 Wednesday, on the Paris Bourse.