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MILAN — The second quarter brought an even steeper drop in Gucci Group NV’s profits than the first.

This story first appeared in the September 27, 2002 issue of WWD.  Subscribe Today.

Gucci Thursday reported a 55.1 percent decline in second-quarter net profit and warned that a weaker economy or war in Iraq might cause it to miss its full-year earnings target.

Despite narrowed losses at Yves Saint Laurent, net profit for the three months ended July 31 dropped to $41.8 million, or 40 cents per diluted share, from $93.1 million, or 92 cents, in the prior-year period. Operating profit dropped a commensurate 56.6 percent, to $30.8 million from $70.8 million.

Revenue dropped 6.9 percent to $563.4 million from $605.4 million, dragged down mostly by a larger-than-expected slide in Gucci brand sales. Dollar figures have been converted from the euro at current exchange.

“It’s been a difficult trading environment, particularly in the United States and in Europe,” chief executive Domenico De Sole said in an interview. “We’ve seen a slowdown of tourists after Sept. 11 and it continued into the summer.”

De Sole said sales were hit especially hard at stores in tourist destinations such as Hawaii, where sales were off 27.6 percent, and Las Vegas.

As reported, first-quarter net income contracted 42.2 percent to $33.7 million on a 1.5 percent sales drop, to $578 million.

Even in a difficult environment, some of Gucci’s biggest competitors appear to be faring better. Looking at the first half of the year, Gucci’s operating profit shed 57 percent compared with a slide of 49.1 percent at Prada and a 10 percent jump at Armani. But De Sole shrugged off comparisons with private companies which, he said, may practice “selective disclosure.”

Gucci said it is currently on track to meet its full-year 2002 earning-per-share target of at least $2.54, but it warned it might not make that target if trading conditions deteriorate further. In 2001, when Gucci still posted its results in dollars, the firm logged EPS of $2.74.

“The big question mark is whether there will be a war,” said De Sole, recalling his days as the ceo of Gucci’s U.S. division during the 1991 Gulf War. “In a war situation, our industry goes through a lot of suffering.”

Gucci trimmed its full-year sales and operating margin forecasts. It now sees revenue coming in at $2.54 billion compared to the previous forecast of $2.64 billion, while its operating margin before goodwill amortization should come in at 13 percent rather than 14 percent.

Chiara Tirloni, an analyst with UBS Warburg, said she was doubtful that Gucci will make its earnings-per-share target even if market conditions remain as they are. “I don’t understand the basis on which this estimate was made,” she said.

De Sole said trading conditions showed some signs of improvement in September, particularly in Europe and the United States, but he declined to provide detailed sales figures.

Investors appeared reassured by this positive sign as shares of Gucci rose $2.14 — or 2.5 percent — Thursday to close at $86.34 in New York Stock Exchange trading.

Gucci division revenue slumped a larger-than-expected 14.2 percent, or 7.5 percent on a constant currency basis, to $358.7 million from $417.95 million the year before.

Retail sales dropped 14.9 percent, or 8.2 percent on constant exchange rates, to $239.9 million from $282 million the year before. Fewer American and Japanese tourists came to Europe for shopping trips, pushing retail sales in that region down by 12.6 percent. Sales in mainland U.S. dropped 17.6 percent, 10 percent better than the decline in Hawaii.

The Gucci brand performed better in Asia. Sales in Japan were flat while those on the rest of the continent grew 2.1 percent.

At the wholesale level, Gucci brand sales declined 10 percent to $65.3 million as sales to travel and duty-free retailers softened.

The division’s operating profit before goodwill amortization fell 22.7 percent to $107.2 million from $138.5 million the year before.

Driven by strong sales of both apparel and accessories, Yves Saint Laurent revenue advanced 34.7 percent to $32.9 million. Still riding high on the success of the horn-handle Mombasa bag, sales of leather goods rose 207.3 percent to $5.9 million on a constant currency basis.

Gucci did not give a more detailed breakdown of YSL revenue, but it said sales of women’s ready-to-wear increased by 50.5 percent, while men’s sales grew by 35.2 percent.

“They are doing a good job with their collections,” said one Milan analyst. But he stressed that the double- and triple-digit percentage sales growth at YSL has to be kept in context. “They are starting from a very small base and they have opened a lot of stores.”

Gucci said YSL will have 47 directly operated stores worldwide and about 30 shops-in-shops in the United States and Europe by the end of this year.

YSL’s operating loss before goodwill and trademark amortization narrowed to $13 million from $15.1 million the year before, a result that beat some analyst forecasts.

De Sole said YSL is still on track to break even in late 2003 and turn a profit in full-year 2004.

Elsewhere, YSL Beauté saw an unexpected 3.8 percent drop in second-quarter sales to $103.6 million from $107.6 million. Gucci said sales dropped 0.2 percent on a constant currency basis.

A nearly 4 percent drop in sales is “extremely disappointing,” said one analyst, noting better results at competitor Bulgari, which saw a 26.5 percent jump in second-quarter perfume sales.

YSL Beauté posted a wider than expected loss before goodwill and trademark amortization of $8.4 million compared to a loss of $3 million the year before. Gucci said the unit lost more money as it increased provisions against excess inventory.

De Sole declined to specify further about inventory levels or the sales performance of certain products, saying only that the provisions are part of Gucci’s “prudent” strategy.

Gucci’s collection of smaller brands, including Sergio Rossi, Bottega Veneta and Stella McCartney, together generated revenues of $78.8 million, compared with $56.1 million the year before.

Gucci said start-up costs and investments in these brands widened their collective operating loss before goodwill and trademark amortization to $17.4 million from $11.3 million.

Although Gucci did not break down revenue by brand, the company said both Sergio Rossi and Bottega Veneta saw “double-digit” sales growth.

Thursday, Bottega Veneta rolled out the red carpet for its new flagship on Via Montenapoleone.

Gucci also said sales were strong at its “emerging brands.”

“Stella McCartney, Alexander McQueen and Balenciaga each experienced strong sell-in of their fall-winter collections, with retailers having already reported excellent sell out,” Gucci said in a statement.