Tough Quarter for Gucci — And Iraq Spells More Uncertainty

MILAN — A slowdown at the core Gucci division and higher losses at Yves Saint Laurent were the main reasons for a 14.4 percent drop in Gucci Group’s net profits in the third quarter ended Oct. 31.<br><br>And with a possible war in Iraq...

MILAN — A slowdown at the core Gucci division and higher losses at Yves Saint Laurent were the main reasons for a 14.4 percent drop in Gucci Group’s net profits in the third quarter ended Oct. 31.

This story first appeared in the December 20, 2002 issue of WWD.  Subscribe Today.

And with a possible war in Iraq inching closer, Domenico De Sole, Gucci president and chief executive, said predicting the future is even harder, although the group is sticking with its long-term strategy.

Gucci reported Thursday that third-quarter net income dropped 14.4 percent to $54.2 million, or 53 cents a share, from $63.4 million, or 63 cents, in the prior-year period. On a per-share basis, earnings beat analysts’ consensus estimates by 4 cents. Group sales headed in the opposite direction, rising 3.2 percent to $660.9 million from $640.5 million last year.

The figures were in line with Gucci’s forecast last week of a 23 percent reduction in full-year earnings per share (EPS), to about $2.02 from $2.63 last year. Dollar figures are converted from the euro at current exchange.

“Despite the difficult and volatile environment, the group performed admirably in the third quarter,” said Domenico De Sole, president and chief executive officer. De Sole pointed out that the group’s third-quarter results were announced the same day the U.S. rejected the Iraqi arms declaration, renewing fears of a war. De Sole said the constant uncertainty was “hurting even more.”

“I am very mindful of the economic and political situation, and I believe you tactically have to adjust your business in hard times, but strategically you should stay the course,” De Sole said. “Ours is a good, long-term strategy and we will continue to pursue it. I am totally confident in the brands and the work we’ve done, and I am very optimistic. Fashion is not going through a crisis, and the fall collections in general were great.”

While group sales advanced 10 percent in October, and slowed down in November, De Sole was reluctant to provide a forecast for December. “I feel it is inappropriate, the remaining days of this month have historically always been very difficult and volatile,” he said.

Quarterly revenues at the Gucci division dropped 5.1 percent to $364.5 million, compared with $384.1 million in the same period of 2001.

The Gucci division’s operating profit before goodwill amortization fell 11.8 percent to $93 million, 25.5 percent of sales, from $105.4 million in last year’s quarter, for a 27.5 percent margin.

Even with a drop of 200 basis points from last year’s level, the Gucci division’s operating margin was a point of pride to De Sole: “A 25.5 percent operating margin is one of the highest in the luxury industry,” De Sole said.

“We expected a 27 percent EBITDA (earnings before interest, tax, depreciation and amortization) at Gucci, while the company reported 25.5 percent,” said Paola Durante, a luxury goods analyst at Merrill Lynch. “On the other hand, Gucci reported a higher EBITDA at the Yves Saint Laurent Beauté division: $30.7 million, compared with what we expected, which was $20.5 million.”

However, he noted, Gucci’s leather goods division did not perform as expected, registering a 9.9 percent drop in sales in the quarter compared with the year before. The analyst, however, was pleased with the performance at the footwear division, which grew 8.5 percent.

De Sole said November was particularly difficult in the U.S., where Gucci division sales fell a hefty 27.8 percent in August, but rose 5.6 percent in October.

“The American market is suffering — just think of the fact that it is seeing the highest unemployment rate in nine years,” he said.

De Sole said that, despite the crisis, “Japan remains a strong market for Gucci and November sales there were up 6 percent.” While retail sales in Japan dropped 3.8 percent in constant currency during the quarter, the figures were up against a 29.2 percent increase in retail sales during the year-ago quarter, excluding currency fluctuation.

In constant exchange rates, retail sales in Europe declined 8.6 percent. A 39.8 percent drop in sales to travel/duty-free retailers was further proof of how tourism is still suffering, while sales to department and specialty stores grew 17.3 percent.

In total, retail sales for the Gucci division dropped 5.4 percent, or 3.8 percent on constant exchange rates, to $251.4 million during the quarter.

Gucci is currently expanding its retail network — completing its largest store, a 22,000-square-foot unit in Milan; adding flagships in New York and Paris in September and opening a store in Waikiki. De Sole reported, “Hawaii is doing very well now, and sales are picking up there.”

Earlier this month, Gucci opened its first freestanding jewelry store in Rome. The jewelry division in the quarter grew 29.4 percent to $24.9 million.

An analyst who requested anonymity said Gucci’s leather division “is a problem now. The feeling I get is that Gucci’s last collection [for spring-summer 2003] was not really appreciated or well received by the market.” The analyst conceded that creative director Tom Ford “did wonders for Gucci over the years, so this may happen at one point. It’s not surprising.”

Responding to this observation, De Sole said on a conference call with analysts on Thursday that he and Ford realized there was a gap in the Gucci leather goods offering in August. “We corrected this immediately and aggressively and implemented the line with new items,” De Sole said. “By November, we saw the results of this move.”

Gucci is also banking on a selection of higher-priced models and limited edition, made-to-order merchandise. “We want to reemphasize the prestige and luxury of the Gucci brand,” De Sole said.

One analyst contacted by WWD also wondered whether Ford is now too focused on his other “challenge,” the Yves Saint Laurent brand. De Sole firmly denied this in the interview. “I see him and I know how he works,” he said. “This is absolutely not true. Tom is fully dedicated to Gucci.”

Conversely to Gucci, sales at Yves Saint Laurent’s leather goods division shot up 263.6 percent, largely accounting for the 52.3 percent increase in the brand’s revenues for the quarter, which hit $38.8 million. The brand’s leather goods division accounted for 22.9 percent of sales in the third quarter, up from 10.1 percent in 2001. After the success of the horn-handle Mombasa bag, the company introduced the Marquise and Colonial bags.

Gucci did not provide details about the ready-to-wear division, but De Sole said it posted “vigorous double-digit growth.” The group is investing in the YSL retail network, planning to open eight more directly operated stores by the end of next year, reaching 55 doors, in cities such as New York, London, Hong Kong and on Rodeo Drive in Beverly Hills. Next year, the company plans to open 20 additional shop-in-shops to the existing 30 in Europe and the U.S. Retail and wholesale sales were up 79.7 percent in October, while in November the increase was 54.1 percent.

“We are fully on track with the repositioning of the brand and expect profitability in 2004,” De Sole said. “However, we must be cautious and take into account the possibility of a war, in which case, this could be deferred.”

One Milan-based analyst observed, “The YSL numbers are good, but conditions at YSL have changed since the acquisition, so the company needs to give us some long-term guidance as to the future of the brand now.”

YSL’s operating loss climbed to $18.5 million from the prior-year quarter’s level of $15.1 million due, the company said, to investments in retailing and communication. The company said in a statement that it expects revenues at this division to reach between $143.5 million and $153.7 million for the full year 2002, and operating losses before goodwill amortization to fall below the $78.1 million posted in 2001.

YSL Beauté saw sales advance 7.8 percent, to $169.9 million, or 10.6 percent in constant currencies. De Sole said the new men’s fragrance M7, launched in October, “exceeded our expectations,” and that the more established fragrances — Opium, Paris and Kourous — advanced 19.7, 8.4 and 14.4 percent, respectively. Overall, fragrance and cosmetics sales increased 2.5 percent, or 4.9 percent on constant currency basis.

Other brands grew 27.6 percent, to $97.2 million. This category includes Bottega Veneta, Sergio Rossi, Boucheron, Bedat & Co., Stella McCartney, Alexander McQueen and Balenciaga. Investment in these brands widened the operating loss before goodwill amortization to $15.9 million from a loss of $12.6 million in last year’s quarter.

Although Gucci does not break down revenues by brand, the company said Bottega Veneta sales were up 103 percent, and Sergio Rossi retail sales increased at a double-digit pace.

“New state-of-the-art production facilities for Rossi will be ready in April next year,” De Sole said.

Spring-summer 2003 orders for Balenciaga were up 67 percent, for Stella McCartney 90 percent and for Alexander McQueen 118 percent compared with the spring-summer 2002 collection.