Byline: Samantha Conti

MILAN — Look at Gucci go.
In a stellar third quarter, Gucci Group NV posted net revenues of $306 million — the highest in the history of the company — and watched net income more than double to $96 million.
Diluted net income per share rose 19.7 percent to 97 cents in the three months ending Oct. 31 compared with 76 cents in the corresponding quarter last year.
On the heels of three major acquisitions — Yves Saint Laurent, Sanofi Beaute and Sergio Rossi — Gucci said sales in every major product category and geographic region showed healthy gains, with the exception of watches.
Sales of leather goods are once again on the upswing, and U.S., European and Asian markets have rallied, thanks largely to a carefully cultivated local customer base. Gucci’s new, wholly owned retail stores were another engine behind the 20.9 percent rise in revenue.
Despite the positive news, Gucci’s shares on Friday closed down 1 1/2 to 94 on the New York Stock Exchange.
“The strategies that Gucci has been putting in place — focusing on local customer bases, developing the leather goods collection and investing in wholly owned retail stores — are beginning to come together,” said Michelle Tsang, an equities analyst for Credit Suisse First Boston in London.
“The 20 percent rise in leather goods was very important. Leather is Gucci’s core business — and the good news is that it’s not slowing down,” Tsang added. In the corresponding period last year, sales of leather goods dipped 20.4 percent due to the crisis in Asian markets, the drop in Japanese tourism and flagging duty-free sales.
Gucci chairman and chief executive officer Domenico De Sole said the company was finally beginning to reap the rewards of major investments in new stores and in once-troubled regions such as Hong Kong and Japan.
“First, we saw the costs; now we are seeing the revenues,” De Sole told WWD. “Gucci will continue to invest aggressively in new stores and focus on the local customer base in Asia.”
In the third quarter, sales from directly operated stores increased 30.6 percent to $198.6 million from $152.1 million. In contrast, last year’s third-quarter results bore the burden of Gucci’s major investments in wholly owned stores: 1998 operating profits during the period dipped 5.1 percent and expenses from the store openings rose to nearly $50 million.
Gucci continued to spend on store openings and communications in the third quarter. Last summer, the company opened its largest Asian flagship in the Shinjuku section of Tokyo. Stores were also unveiled at Rome’s Fiumicino Airport and in Amsterdam. Operating expenses as a percentage of net revenue rose to 44 percent compared with last year’s 42.3 percent, due chiefly to expenses from store openings and marketing campaigns.
Sales from Gucci’s wholesale distribution outlets, including franchises, duty- free outlets and specialty stores, increased 9.4 percent, due chiefly to the renewed demand from Asian customers, the company said.
Sales in Japan rose 13.5 percent to $61.7 million; sales in the rest of Asia rose 18.5 percent to $54.5 million. In the continental U.S., sales rocketed 46.4 percent and sales in Hawaii — which had been hit particularly hard by the Asian crisis — rose 27.8 percent due to a stronger yen and a pickup in Japanese tourism. The overall rise in the U.S. was 32.7 percent to $86.9 million.
Sales in Europe shot up 19.1 percent to $92.8 million due, the company said, to an increase in tourism after the war in Kosovo and favorable yen-euro and dollar-euro exchange rates.
The U.S. market, De Sole said, is looking increasingly rosy. Thanksgiving sales were “extremely strong,” and sales at Gucci’s temporary store on 57th Street have hit $600,000 on its busiest days.
“It’s the feel-good factor — due to the macro economy — that’s making Americans buy for themselves and for one another,” said CSFB’s Tsang. “Americans are increasingly warming toward luxury items in general and appreciating them more.”
One London analyst who spoke on condition of anonymity said the publicity that Gucci’s creative director Tom Ford is stirring up in the U.S. should not be underestimated: “Americans see the attention Ford gets in the press, and consider Gucci a very hot brand,” the analyst said.
Gucci said in a statement that third-quarter net revenues rose 20.9 percent to $306 million from $253.1 million. Net income rose 103 percent to $96 million from $47.3 million. Operating profits increased 18.2 percent to $67.3 million from $56.9 million, and represented 22 percent of revenues. All figures are converted to dollars based on current exchange rates.
Pretax profit was $112.2 million compared with $59.2 million in the corresponding period last year. The rise, in large part, reflects $45.7 million of interest income from the $3 billion cash pile Gucci received earlier this year from its largest shareholder, Pinault-Printemps- Redoute.
Last summer, PPR emerged as Gucci’s white knight during a hostile takeover attempt by LVMH Moet Hennessy Louis Vuitton. Gucci issued new shares to PPR, which, in exchange, gave the company cash to spend on acquisitions and to create a world-class luxury goods conglomerate.
So far, Gucci has purchased Yves Saint Laurent and its former parent, Sanofi Beaute, for $1 billion and the Italian shoe manufacturer Sergio Rossi for $96 million. Operations from YSL and Sanofi will be consolidated beginning Jan. 1. Sergio Rossi’s operations were consolidated last month.
Gross profit in the three-month period rose 23.1 percent to $202 million from $164.1 million. Net income, which rose 103 percent to $96 million from $47.3 million in the three-month period, benefited from interest payments and from a lower tax rate — 13.9 percent compared with 24.6 percent last year.
Sales of leather goods, Gucci’s leading product category, rose 20 percent to $128 million and ready-to-wear, which picks up steam each season, rose 39.1 percent to $49.8 million. Shoe sales rose 14.9 percent to $37.6 million.
Jewelry rose 188.4 percent to $9.6 million and royalty payments — from Gucci’s licensed eyewear and fragrance collections — rose 70.4 percent to $7.8 million.
Sales of watches dipped 0.1 percent to $60.3 million due to the effect of repositioning the business in the U.S., the company said. Gucci closed several doors in the U.S. and is eliminating lower-priced models and focusing on a higher-end products.
For the nine months, Gucci’s net income increased 80.8 percent to $232.6 million from $128.7 million the year before. That increase was fueled by $99.8 million in interest income from PPR’s cash injection earlier this year.
Revenues rose 13 percent to $836.9 million. Operating profit increased 9.7 percent to $180.2 million and earnings per share diluted increased 16.2 percent to $2.51 from $2.16 in the period.
Looking ahead, De Sole said he expected continued solid performance in the U.S. and Asia and was comfortable with analysts’ average estimates of 1999 diluted earnings per share of $3.44.

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