MILAN — Gucci Group is optimistic about luxury goods this year, even with the economic slowdown and war in Iraq.

This story first appeared in the March 28, 2003 issue of WWD. Subscribe Today.

In reporting on Thursday a larger-than-expected 1.7 percent rise in fourth-quarter profits, Gucci chairman and chief executive officer Domenico De Sole said the market’s current depressed conditions could improve in the second half of the year — although he stressed it’s too early to make precise forecasts.

“The question mark is how long the war will last,” De Sole said in an interview, adding that developments in the next few weeks will be critical for an industry already suffering from reduced tourist flows and consumer spending. “Clearly, the war is going to last longer than some people expected.”

Equally important for Gucci, though, is the continuing question as to what will happen when the contracts of De Sole and Tom Ford, the group’s creative director, expire next year. As reported, there was market speculation that tensions between Gucci and its majority shareholder Pinault-Printemps-Redoute could prompt De Sole and Ford to leave the group.

“We do have an excellent relationship with PPR…we are in talks with them and I’m confident that the issue will be addressed satisfactorily over the next couple of months,” De Sole told analysts in a conference call on Thursday.

Gucci’s profit for the three months ended Jan. 31 climbed 1.7 percent to $101.95 million, or 99 cents per share, from $100.24 million, or 98 cents per share, boosted substantially by cost cuts and a lower tax burden.

(Dollar figures are converted from the euro at current exchange rates.)

“I am very optimistic for the fall, provided that the war ends quickly,” De Sole told analysts, citing a “very good” portfolio of orders for the upcoming season. A market bounce could be swift, he said, recalling his days as the head of Gucci’s U.S. division during the first Gulf War of 1991. “Once the war ended, things picked up quite quickly.”

Still, Gucci said in its release that it is cautious about the spring period amid an “uncertain environment” and “persistent volatility across the global markets worsened by the onset of war.”

Revenue for the quarter rose 1.6 percent to $763.91 million from $751.72 million as double-digit growth at Yves Saint Laurent, YSL Beauté and brands like Bottega Veneta compensated for a 7 percent decrease in sales for the core Gucci brand.

Pretax profit dropped 18.43 percent to $100.78 million from $123.54 million.

Analysts were mixed on whether weakness at the Gucci brand level was simply reflecting a tough macroeconomic environment or shows signs that the label is losing a bit of its luster. “The sales performance of Gucci is a little bit worrying,” noted one analyst.

Andrea Paladini, an analyst with Centrosim in Milan, said the drop was expected and Gucci did well to keep its profitability level up. “This depressed climate doesn’t encourage tourists to travel,” he said. “The margins were at a level that’s more than sufficient, so let’s not complain too much.”

The strong fourth quarter only partially counterbalanced a weaker first nine months for Gucci. For full-year 2002, net profits dropped 27.4 percent to $242.38 million from $333.97 million. Revenues slid less than 1 percent to $2.71 billion from $2.75 billion.

Returning to the fourth quarter, the Gucci division saw its sales drop 7 percent to $472.9 million from $508.70 million in 2001.

De Sole said the brand’s numbers suffered because Gucci stocked its stores with too many high-priced items and not enough affordable merchandise — a problem the company addressed late last year shortly after issuing a profit warning.

“It was the right collection for the wrong time,” De Sole said, adding that the problem has been resolved and won’t happen again. He noted that despite the decline in sales, Gucci’s gross margin dropped only slightly to 71.8 percent from 72.1 percent.

“I’m totally, completely comfortable about the strength of the Gucci brand,” he said.

Fourth-quarter sales of leather goods, the biggest product category for Gucci-branded products, fell 5 percent to $236.93 million. Ready-to-wear and watches also saw a drop. Clothing sales lost 15.1 percent to $64.02 million, while timepieces shed 24.7 percent to $49.69 million.

Better performers were shoes, with revenue rising 1.3 percent to $52.69 million and jewelry putting on 12.3 percent to $35.48 million.

“In our view, Gucci division’s good operating performance has been driven by the [fourth-quarter] better than-expected results of the leather goods division…and of the retail division,” Merrill Lynch analyst Paola Durante wrote in a research note. “We believe this is good news for the group, after three difficult quarters. However, we believe we still need to see some consolidation of this trend over the next months.”

On a geographic basis, sales slid in every market in the final three months of the year. Revenues from Europe dropped 3.5 percent to $139.57 million, while those in Japan declined 6.6 percent to $143.21 million.

Sales in the U.S. dropped 9.9 percent to $96.72 million. Revenues in the rest of Asia fell 6.8 percent to $83.04 million and those in remaining markets shed 28.7 percent to $10.15 million.

Buoyed by strong sales of high-margin leather goods, YSL saw its fourth-quarter revenue rise 34.5 percent to $44.56 million from $33.13 million, while it narrowed its fourth-quarter loss before goodwill and trademark amortization to $14.64 million from $24.37 million.

YSL has felt at least a little bit of the anti-French backlash emerging in the U.S. De Sole said he received word that a few American customers returned some merchandise in protest. “It wasn’t major,” he said.

De Sole said he remains “absolutely” confident that the house is still on track to break even in full-year 2005, but later in a conference call with analysts, he noted that “short-term growth may slow” given current volatile market conditions. Earlier this year, Gucci postponed its profit target for the French house by a year.

At YSL Beauté, sales of fragrances such as Opium and Kouros lifted fourth-quarter revenue 11.9 percent to $158.92 million from $142.03 million and grew its operating profit before goodwill and trademark amortization to $15.71 million from $14.43 million.

Gucci’s stable of other brands, which include Bottega Veneta, Sergio Rossi, Alexander McQueen and Stella McCartney, collectively posted revenues of $100.35 million, up 39.9 percent from the $71.71 million in the same period the year before. But the loss before goodwill and trademark amortization of those brands widened to $34.95 million from $17.85 million.

De Sole said the wider losses derive from investments in new stores and other infrastructure for those labels. He wouldn’t comment on when those companies will be profitable, but he told analysts some of them could reach breakeven before YSL in 2005.

“[The brands] are moving along as planned,” he said. “Unfortunately, we are doing this investment in difficult economic times.”

The company doesn’t break out results by brand, but it did note that Bottega Veneta alone saw fourth-quarter growth of 90.5 percent on a constant currency basis.

Gucci said that over the course of 2002, it invested about $309.9 million in advertising and communication for its brands and De Sole estimated that expenditures in that area for 2003 should stay at that level.

As for stores, Gucci said it spent $235.11 million to open and refurbish its retail network, which totaled 349 units at the end of 2002, compared with 295 at the end of 2001. But De Sole said Gucci will slow its rollout of boutiques to about 25 in 2003 because the group’s distribution infrastructure is well positioned.

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