Byline: Samantha Conti

MILAN — Gucci’s costly new stores with their cut limestone facades, rosewood walls and mohair chaise longues are starting to pay off.
In its upbeat second-quarter report released Wednesday, Gucci pointed out that sales in its directly owned stores in the three months ended July 31 rose 15.7 percent to $166.2 million, helping to boost the quarter’s operating profit 5.7 percent.
Even more impressive in lifting the quarter’s net earnings, however, was the interest income of $37.1 million derived principally from the capital increase of $2.9 billion received from French conglomerate Pinault-Printemps-Redoute in March. Gaining PPR’s alliance was Gucci’s key strategy in fending off the hostile takeover attempt of LVMH Moet Hennessy Louis Vuitton.
Including that interest income, Gucci reported its second-quarter net income soared to $76.4 million, or 77 cents a diluted share, from $39 million, or 65 cents, originally reported a year ago. Adjusted for an accounting change, the year-ago net has been restated to $40.8 million, or 68 cents.
Results beat analyst estimates of 74 cents a share, and on the New York Stock Exchange Wednesday, Gucci’s shares climbed 2 7/16 to close at 87 9/16, edging ahead of its previous 52-week high of 87 3/8.
Reflecting new shares issued to PPR, the weighted average number of diluted shares throughout the first half came to 87.4 million, against 60.2 million a year earlier.
Net revenues, including royalties, for the three months rose 10.1 percent to $260.9 million from $236.9 million a year earlier. The firm noted that in July it achieved its highest-ever monthly net revenues, reaching over $117 million.
Gross profit increased 10.3 percent to $172.9 million and represented 66.3 percent of net revenues, against $156.7 million, or 66.1 percent of net revenues, a year earlier.
In discussing the quarter, Domenico De Sole, Gucci president and chief executive officer, both in a statement and telephone interview pointed to the success of the company’s slick new stores, designed by Gucci’s creative director Tom Ford and architect Bill Sofield.
“Revenues, and in particular retail sales, are writing the story of Gucci’s success,” De Sole said. “We’ve built big, direct retail bases in Asia and the continental U.S. and they are beginning to pay off.” More than 60 percent of Gucci’s global sales now come from its directly owned and operated stores.
De Sole added that retail sales in July — when the fall-winter collection was unveiled in stores — were up 23.2 percent. In August and the first part of September, they were up more than 30 percent, he added.
Retail sales in the continental U.S. were up more than 50 percent in August, a rise that De Sole attributes to Gucci’s “strong and aggressive” pursuit of the local customer base.
“We have renovated a lot of stores and will continue to do so,” said De Sole, adding that he expected Gucci’s San Francisco, New York and Bal Harbour, Fla., stores, which are currently undergoing renovation, to be finished by the middle of next year.
“We expect to have all of America’s Gucci stores up to speed by July 2000.”
Gucci spent about $80 million last year rolling out the new store format in 15 cities in Europe and the U.S. This year it plans to spend a total of $90 million on new stores and store renovations.
Michelle Tsang, an equities analyst specializing in luxury goods at Credit Suisse First Boston in London said: “Growth in the retail business has contributed significantly to Gucci’s overall growth. You can see that direct distribution is really starting to take off. Gucci’s strong retail business also indicates good, solid performance in the coming months.”
Sales from franchises, duty-free outlets and department and specialty stores, dropped 3.4 percent in the quarter to $43.6 million. The company said the drop was due primarily to reduced sales to franchisees and duty-free customers in Asia. Shipments to Asia during the second quarter of this year were based on orders received at the height of the Asian economic crisis, in July 1998, Gucci pointed out.
However, De Sole was bullish on Asia in general. Sales in Asia — excluding Japan — rose 11.4 percent to $48.6 million. In Japan, they rose 18.2 percent to $52.7 million. “There is still a ways to go, but the signs we are seeing are very good. There are improvements across the region and especially in Hong Kong,” De Sole said. As reported, during the economic crisis in the region, Gucci bought back a total of 20 stores from its franchise partners in Taiwan, Korea and Guam in a bid to control distribution better in those areas.
“We invested a lot in the region, and now we see it coming back to us,” De Sole said.
Last month, Gucci opened its largest Asian flagship in the Shinjuku section of Tokyo, and earlier this year the company opened a 7,000-square-foot flagship store in Tokyo’s Aoyama district, and a 6,000-square-foot space in Fukuoka-Kawabata. De Sole has also said he’s interested in opening a freestanding store in the Ginza district of the city.
Second-quarter sales in other regions were as follows: the U.S. rose 9.6 percent to $74.8 million; Europe increased 8.3 percent to $76.2 million, and regions outside the U.S., Europe, and Asia dropped 15 percent to $8.5 million.
Among merchandise categories, sales of leather goods, Gucci’s largest product division, dropped 4 percent to $100.5 million, which the company said was due primarily to “high comparative markdown sales in Asia in 1998, as well as lower wholesale sales in the second quarter of 1999, reflecting orders received during the prior year’s economic downturn.” However, the firm added that handbag sales, which were up 28 percent in mainland U.S. in the second quarter, have increased 18 percent worldwide in August.
Shoe sales in the three months rose 15.3 percent to $40.9 million; ready-to-wear increased 40.4 percent to $37.9 million, and watches grew 4.8 percent to $51.7 million.
Jewelry, launched in 1998 and only sold through Gucci stores, rose 230.5 percent to $8.8 million. De Sole said that this year the firm would begin wholesale distribution of the jewelry collection through Gucci Timepieces, the Swiss watch company Gucci purchased in 1997. “The distribution will be very limited, very high-end,” De Sole said.
Ties and scarves, the staple of duty-free shops, dropped 10 percent to $4.8 million. Other product categories increased 53.6 percent to $9.4 million, and royalties rose 9.4 percent to $6.9 million,
In the first six months of the year, Gucci’s net income, including the hefty interest income, rose to $136.6 million, or $1.53 a share, compared with last year’s figure of $82.1 million, or $1.37 a share, as originally reported. Adjusted for the accounting change, last year’s net income is restated to $81.3 million, or $1.35 a share.
Operating profit in the half increased 5.2 percent to $112.9 million from $107.3 million.
Revenues, including royalties, rose to $530.9 million from $487.6 million.
Gucci noted that management was “comfortable” with analysts’ current estimates of net income per diluted share for fiscal 1999 of $3.40. Last year, Gucci’s diluted net income per share was $3.28.
“We are pleased about Gucci’s growth prospects as we enter the fall,” De Sole said. “Gucci’s current success provides an excellent platform on which to build the leading multibrand luxury goods company. We are confident that our strategies to develop our core business, as well as to seek profitable investment opportunities, will enable us to maximize shareholder value.”
He declined to comment, however, on the due diligence being done on Sanofi Beaute. Sanofi, which is currently owned by Francois Pinault’s holding company Artemis and whose jewel is the Yves Saint Laurent fashion and beauty business, is the first company on Gucci Group’s list of potential acquisitions.
De Sole also declined to comment on rumors that it is eyeing Fendi as a potential buy. Ever since PPR filled Gucci’s coffers with $3 billion for acquisitions in the luxury goods sector, rumors have mushroomed — and Gucci has declined to comment on all of them.