By  on October 30, 2006

MILAN — Domenico Dolce and Stefano Gabbana referenced Napoleon Bonaparte in their fall collection, and their company's annual report provides even more evidence the duo is building a fashion empire — a nearly $1 billion one, to be precise.

Dolce & Gabbana Srl just published its fifth annual report, which shows double-digit growth in both earnings and revenues. Net profit for the 12 months ended March 31 advanced 11 percent to 108.8 million euros, or $132.7 million. Sales rose 18 percent to 809.5 million euros, or $987.6 million, beating an original forecast for 15 percent growth. (Dollar figures have been converted from the euro at average exchange rates for the period to which they refer.)

"We have a growth that is very homogenous. We are growing on all fronts," director of general affairs Cristiana Ruella told WWD, citing plenty of room for expansion for the company, both in terms of products such as accessories and in emerging markets such as China.

To be sure, Dolce & Gabbana's balance sheet will get an even bigger boost during the current fiscal year, when the company will consolidate the sales volume of the D&G diffusion line. The spring 2007 collection was the first to be entirely produced and distributed in-house since Dolce & Gabbana ended its 12-year licensing pact with IT Holding. D&G already does about 250 million euros, or $315 million, a year in sales, and the company is expecting double-digit growth in the label's first year under direct management.

Consolidating D&G's sales will push Dolce & Gabbana over the 1 billion euro mark in terms of sales, a size approaching that of Italy's biggest luxury players, such as Giorgio Armani, Prada Group and Max Mara. Armani had sales of 1.43 billion euros last year.

"It's a good benchmark," Ruella said. "The integration of D&G will allow us to make a large jump."

In the annual report's introduction, designers Stefano Gabbana and Domenico Dolce said they are looking to the future "with more enthusiasm and determination than ever," stressing the importance of optimizing their company's structure.

"We intend to continue along the growth path of the last few years, and at the same time retain our independence. This will allow us to fully develop the still-unrealized potential of our brands and the markets in which we operate," the pair wrote.In a similar vein, Ruella reiterated the company doesn't want to go public and instead prefers the operating agility of not having to answer to investors and stock-market regulations.

"Today, Mr. Dolce and Mr. Gabbana are free to make decisions they deem are the best ones without being limited by anything," she said.

James Hurley, managing director and luxury goods analyst at Telsey Advisory Group in New York, said the company has excelled on several fronts, from streamlining its corporate structure to creating distinct identities for its high-end and diffusion collections.

"I think that they have done a lot of good, smart things, especially in the last few years," he said.

The 75-page report, stocked with glossy images from Dolce & Gabbana's fall-winter Napoleonic advertising campaign shot by Steven Meisel, was published in hardcover this year. As in previous editions, it sheds light on the business breakdown, investments and retail structure.

Specifically, the tome details how the company invested 130.5 million euros, or $159.2 million, on operations, more than twice the previous year's figure. In particular, Dolce & Gabbana spent 48.6 million euros, or $59.3 million, on commercial spaces, including the renovated Metropol theater used for fashion shows and events and the new, stark white D&G headquarters.

Communications investments rose 18 percent to more than 86 million euros, or $104.9 million.

Earnings before interest and taxes for the year rose 14 percent to 163 million euros, or $198.9 million, according to the document.

Ruella said a 60 million euro advance royalties payment from eyewear licensee Luxottica, along with regular cash flow at the company, allowed Dolce & Gabbana to eliminate its debts and move into a positive cash position. The company's net financial position at the end of March 31 was positive by 85.8 million euros, or $104.68 million. Debts totaled 21.4 million euros, or $26.1 million, in the previous year.

The company is allocating major resources to the D&G project. The younger line could one day, "in the very long term," manage to eclipse the Dolce & Gabbana brand in terms of revenue, Ruella said. The company is in the process of determining pricing, order terms and retail development for the line, the executive said. It has hired 460 new employees to develop the D&G brand and plans to boost its head count by an additional 40 people as it develops the business.In June, the group opened a nearly $48 million D&G headquarters here, made of opaline glass and white marble from Namibia. Over the past couple of years, the company has been expanding its Italian production facilities to take on D&G clothing and accessories. Still, Ruella said the plan is to transfer about 70 percent of D&G's manufacturing outside Italy to other Mediterranean countries and Asia to remain competitive.

Returning to the report, Dolce & Gabbana said wholesale revenues, meaning group sales and those made by licensees, rose 10 percent to 1.15 billion euros, or $1.4 billion. The company uses this figure to break down sales by product, brand and geographic market. Women's apparel and accessories made up 60 percent of the total, while men's comprised 40 percent.

Clothing is still the company's biggest product category, making up 46 percent of the wholesale total. Apparel sales rose 7 percent to 530.6 million euros, or $647.33 million, for the year. Revenue from leather goods spiked 32 percent to 123.6 million euros, or $150.8 million, while that from fragrances, eyewear, watches and jewelry rose 6 percent to 432.1 million euros, or $527.16 million.

In geographic terms, Europe comprised 72 percent of wholesale sales, the U.S. made up 12 percent of the total, Japan comprised 4 percent and the rest of Asia made up 7 percent.

Ruella brushed aside some industrywide concerns of softer consumer spending in the U.S. and said she continues to see momentum as Dolce & Gabbana grows its presence there.

"I am not worried, because America has never been as [proportionally] big a revenue generator for us as it has for other brands, so I still see America as an opportunity rather than as a concern," Ruella said.

To wit, Dolce & Gabbana is starting expansion and refurbishment work on its Madison Avenue store, bringing it up to date with the concept in the Milan, Paris and Los Angeles flagships and separating the men's and women's collections into two distinct stores. The finished spaces are due to reopen during the spring or summer of next year.

Ruella is just as bullish about the brand's prospects in Asia, especially China, where Dolce & Gabbana is busy expanding under its wholly owned subsidiary. This year it opened boutiques in Beijing and Shanghai, and a second Hong Kong store is due to open on Canton Road in December."It's a country that has a luxury sensibility," Ruella said.

Elsewhere on the retail front, Dolce & Gabbana is preparing to open two freestanding stores by the end of the year, a franchised store in Lebanon and a directly owned Barcelona flagship.

Currently, Dolce & Gabbana has a network of 206 stores, 85 of which are directly operated and 121 are run by distribution partners. In terms of brands, Dolce & Gabbana counts 151 stores and D&G has 55.

Ruella said it's too early to determine the retail strategy for D&G, but she doesn't rule out the possibility of shuttering some stores and wholesale accounts as the company better determines the brand's customer base.

"This year, in this first period of our directly managing D&G, we are applying a business plan that isn't based on numbers or quantities, but rather on quality," she said.

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