DE SOLE ‘DELIGHTED’ — EVEN THOUGH GUCCI NET DROPS 17.3%

Byline: Luisa Zargani

MILAN — Gucci Group chief executive officer Domenico De Sole feels vindicated.
Profits fell at a double-digit pace in the fourth quarter and year, but De Sole viewed the results not only as better than expected but also as proof of the company’s discipline and the wisdom of its acquisition record.
Gucci on Thursday reported net profit last year fell 17.3 percent, to $278.4 million or $2.74 a diluted share, as sales gained 1.2 percent to $2.28 billion. Fourth-quarter earnings dropped 12.3 percent to $83.3 million, or 82 cents, as sales rose 1.4 percent to $624.6 million. Dollar figures are converted from the euro at current exchange rates.
However, faced with a rare instance of earnings declines, De Sole noted cost controls, vertical integration and the resilience of its Gucci and Yves Saint Laurent divisions.
“I am delighted with Gucci Group’s performance last year,” an upbeat De Sole told WWD. “We have proven our ability to manage the group through difficult times.”
The comments and circumstances were reminiscent of those facing LVMH Moet Hennessy ceo Bernard Arnault less than two weeks ago when, as reported, the Paris-based luxury house reported a 98.6 percent drop in profits.
De Sole pointed out that full-year operating profits before goodwill amortization at the Gucci division were up 14.4 percent to $461.7 million, a weighty 30.5 percent margin compared with 27 percent the previous year. In the fourth quarter, operating margin climbed 350 basis points to an unprecedented 33.6 percent, from 30.1 percent, as operating profits reached $142 million.
At Yves Saint Laurent, retail sales expanded 183.6 percent in the fourth quarter and and mushroomed 218 percent in the six weeks ended March 16.
“The Gucci division profitability grew 30 percent,” De Sole said. “We turned around the Yves Saint Laurent brand, which is quickly moving forward, and we showed that we bought our labels with clarity, discipline, strength and strategy. We never went on a crazy shopping spree, as some would have it.”
Over the past two years, the group has expanded its brand stable to include Yves Saint Laurent and Yves Saint Laurent Beaute, Bottega Veneta, Boucheron, Sergio Rossi, Bedat, Stella McCartney, Alexander McQueen and Balenciaga, and was at times criticized by luxury goods analysts for this purchasing strategy.
“We are proud of our purchases,” said De Sole. “These are great brands.” He was also proud that that full-year earnings per share was 13 cents above analysts’ projections.
“There are no exceptional surprises, but the group has fared slightly better than expected, in particular with the Gucci and YSL divisions,” said Milan-based Paola Durante, luxury goods analyst at Merrill Lynch. “We expected yearend sales of $1.505 billion at the Gucci division, which actually posted sales of $1.515 billion; we expected operating profits margins of 29.7 percent at the same division, while it actually registered margins of 30.5 percent.”
Antoine Belge, a Paris-based luxury goods analyst at ABN Amro, echoed Durante’s comments: “These results are slightly better than expected, especially the profitability of the Gucci brand. Yves Saint Laurent is in line with our expectations. The management’s strategy is good, but it will take some time to see if it is a success, at least 12 to 18 months before we see concrete results.”
De Sole was cautious about the 2002 outlook and said Gucci division revenues would be “at least” equal to 2001, reaching $1.5 billion, with group revenues about $2.38 billion. “There is still a war going on, and we expect to see improvements in the U.S. market in the second half of 2002,” said De Sole. “In this current economic and social environment, we want to communicate realistic expectations,” he said.
However, De Sole was “totally confident” that Yves Saint Laurent sales will grow at a double-digit pace even as operating losses are reduced. “We’ll break even in the second half of 2003 or the first half of 2004,” said De Sole.
In 2001, Yves Saint Laurent reported an operating loss of $67.9 million, lower than the pre-Sept. 11 forecast of $75 million. “We see a modest decline in losses for 2002, but we will maximize profits in the long term,” said De Sole.
In the fourth quarter, sales at Yves Saint Laurent were $27.5 million, a 55.4 percent increase from the previous year. “This is a tremendous momentum for Yves Saint Laurent,” said De Sole. He said the group is taking the number of directly operated stores from 43 to more than 50, and plans to invest 29.4 percent of revenues, or $8.1 million, in communications, compared with 15.9 percent the previous year.
“I believe this brand can become as strong as Gucci,” said De Sole.
In the fourth quarter, accessories, which have higher margins than ready-to-wear, represented a record 26.4 percent of total Rive Gauche sales, compared with 17.6 percent the previous year.
De Sole said the Gucci division is still “a pillar” of the group and the driving force behind it, with sales of $422.7 million in the fourth quarter, 4.3 percent below the prior-year quarter. The company attributed the decline to the difficult economic conditions following the terrorist attacks in the U.S. and the sharp decline in tourism worldwide. In the fourth quarter, sales in the U.S., including Hawaii, declined 22.7 percent on a comparable-period basis. Mainland U.S. retail sales declined 14.7 percent. This drop was balanced by a 20.7 percent increase in sales in Japan, 11.3 percent growth in Hong Kong and a significant 38.1 percent increase in South Korea.
The division registered a 24 percent increase in wholesale revenues in the fourth quarter to $67.8 million, due to strong sales to specialty stores in Europe and the U.S.
All Gucci division product categories registered a drop in sales in the fourth quarter, with the significant exception of the jewelry division, which grew 21.4 percent and registered sales of $22.1 million. While leather goods continue to be the top-selling product category with sales of $207.2 million, this division registered a 2.4 percent decline in sales due primarily to sales declines in the U.S. and in travel retail.
The same factors led to a 3 percent drop in ready-to-wear sales, which finished the quarter at $62.7 million. Watch sales declined 5.6 percent to $59 million as department and specialty stores scaled back orders after Sept. 11. Sales rebounded in January, increasing 14.3 percent over January 2001.
The group’s beauty division, YSL Beaute, proved to be the second driving force after Gucci, with sales in the fourth quarter of $117.9 million, a 0.9 percent increase compared with the same period last year. Yves Saint Laurent brand fragrance and cosmetics sales increased 4.5 percent in the quarter, women’s fragrance sales increased 3.5 percent and makeup sales advanced 10.3 percent.
Revenues for other brands, including many of those recently acquired, were $59.6 million in the fourth quarter and $226.8 million for the year. The operating loss before goodwill and trademark amortization was $14.8 million for the quarter and $37.3 million for the year.
De Sole said the company still has a $1.5 billion cash pile to invest. “We are interested in acquisitions only if they make sense, they are strategic for us and they come at a reasonable price,” said De Sole.

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