GUCCI GROUP PROFITS DIVE 51% IN QUARTER, 2002 OUTLOOK CLOUDY

Byline: Samantha Conti

LONDON — Gucci Group lifted the veil off of its 2002 prospects and they aren’t pretty.
Following a third quarter in which profits fell by more than half and sales dropped nearly 8 percent, the company said on Tuesday that it sees even more tough times ahead — especially for its core Gucci division. The group, the first in the luxury field to release 2002 projections, said it expects the Gucci division’s sales to remain “at least” flat against 2001, a flashing red light for the luxury goods industry since Gucci represents 60 percent of group sales.
Overall, Gucci Group expects fully diluted net income per share next year to land between $2.34 and $2.70, lower than this year’s expected range of $2.60 to $3.00. Group sales are expected to reach $2.43 billion — only slightly higher than this year’s projected $2.3 billion.
The 2002 projections, issued Tuesday in a statement with third-quarter results that also included declines in the Gucci division’s sales and profits, have been converted from euro at current exchange rates. As of next year, the company will begin reporting its figures in euros rather than dollars.
In a telephone interview with WWD, Gucci Group chairman and chief executive officer Domenico De Sole described the 2002 projections as “very conservative,” but he acknowledged there is “a lot of uncertainty in today’s economic climate,” and that “trading conditions for the luxury goods industry will remain difficult in the coming months.”
To make matters worse for Gucci, recent declines in U.S. and European short-term interest rates could continue to take a bite out of the company’s net interest income, a company statement added, eroding its bottom line and earnings-per-share estimate for next year. Net interest income for 2001 will account for 24 percent of Gucci group’s pretax profit. Today, Gucci has nearly $2 billion in cash left over from the injection it received from Pinault-Printemps-Redoute in 1999 as part of a white-knight deal.
Gucci is part of the very exclusive group of publicly held luxury goods companies — including Compagnie Financiere Richemont and LVMH Moet Hennessy Louis Vuitton — to visibly suffer from the sharp decline in consumer spending. Over the past year, the three publicly listed companies have issued multiple profit warnings. Meanwhile, Prada, which had planned an initial public offering for this fall, was forced to put it on ice indefinitely because of bleak market conditions.
Despite the cloudy outlook, De Sole said 2002 would be a “critical” one for investments — and especially for Gucci’s newly acquired brands. He said the company’s capital investments were $200 million in 2001, and that the figure would increase next year, although he declined to say by how much.
“We have a very strong cash flow, and intend to move forward with our growth plans,” he said. “We’re going to make a lot of investments in the coming year — in Gucci, Yves Saint Laurent, Boucheron, Bottega Veneta and our other new brands.”
He added that the firm would not scrimp on advertising in the coming year: “You need to support the new store openings, and do for the brand what needs to be done.”
Sagra Maceira de Rosen, a vice president at J.P. Morgan and head of its luxury goods team, said Gucci’s guidance on 2002 was “substantially more conservative” than she was expecting. She said she will be projecting growth — not flat sales — for the Gucci division in 2002. “This is a strong brand that will benefit from new store openings in the coming year. I don’t believe that sales will be flat,” she said. Maceira de Rosen also called Gucci’s decision to continue investing despite the slowdown in sales “critical” to Gucci’s growth. She said: “Management is moving fast to turn the new brands around, and when you move fast, you need to spend money. They will see the benefits of their investments soon enough.”
However, damage control topped the agenda for the third quarter ended Oct. 31. Despite third-quarter sales declines in all major product categories and all regions except for Japan, Gucci has confirmed that 2001 yearend projections are on target thanks to aggressive cost cutting. Gucci confirmed its projections for yearend fully diluted net income and said that revenue would be “at the lower end” of the previously announced range of between $2.3 billion and $2.4 billion. Gucci’s 2001 fiscal year ends on Jan. 31, 2002.
“We acted immediately to make sure we would meet our yearend projections, which in the end is what the market cares about. Every cost was attacked with lightning speed,” De Sole said, adding that cost cutting has touched nearly every area of the company. As reported, Gucci laid off 130 workers in its U.S. offices last month. While De Sole said that there are no more layoffs planned, there is currently a hiring freeze and travel costs have been slashed.
The group said sharp decreases in consumer spending, resulting from a drop-off in American tourism after Sept. 11, and economic uncertainty were to blame for third-quarter declines. Net income sank 51 percent, to $56.3 million, or 55 cents a diluted share, from $114.1 million, or $1.12. Group sales dropped 7.9 percent, to $566.2 million from $615 million, and operating profit, before goodwill and trademark amortization, was down nearly 40 percent, to $80.9 million from $133 million. The results were roughly in line with analysts’ estimates.
De Sole said American tourists, who a year ago were hungry for luxury goods and loaded with dollars, have “disappeared” in Europe, while U.S. tourist meccas such as Las Vegas and Hawaii have become “disasters.”
At the Gucci division, which accounted for 60 percent of group revenue in the quarter, sales fell 9.5 percent, to $340.3 million from $376.1 million. Retail sales were flat on a constant-currency basis. Operating profit before goodwill amortization dropped to $93.6 million from $96.9 million, although operating margins improved to 27.5 percent of sales from 25.8 percent last year.
“The improvement in operating margins is testimony to management’s skill at moving the company forward despite the slowdown in sales,” said Maceira de Rosen.
De Sole added that, once again, tough times were generating opportunities for Gucci. “Real estate prices everywhere are coming down, and we plan to take full advantage of that trend as we work to expand our retail networks for our new brands,” he said, adding that the company also planned to take advantage of the decrease in the price of acquisitions, which industry experts say is now more than 20 percent. “We have a lot of cash and we’re ready to buy — but we want the right companies at the right price.” In 1997, during the Asian crisis, Gucci took advantage of depressed real estate prices to purchase retail property and buy back its franchises in the region.
In addition to the Gucci and YSL brands, Gucci controls the Sergio Rossi, Boucheron, Roger & Gallet, Bottega Veneta, Bedat & Co., Alexander McQueen, Stella McCartney and Balenciaga brands. Next year’s investments will focus mainly on store openings for Boucheron, Bottega Veneta, McCartney and McQueen.
The Gucci division wasn’t the only part of the group to see sales decline: YSL Beaute’s sales dropped 14.3 percent, to $138.8 million from $161.9 million; while those at YSL dipped 7.8 percent, to $22.5 million from $24.4 million. Other operations, including Gucci’s new businesses, rose 25.2 percent, to $67.2 million from $53.6 million. The company said the drop at YSL Beaute was due to lower sales in the U.S. and in the duty-free channel. The Gucci statement added that Nu, the new fragrance launched on Oct. 11, was performing exceptionally well, generating sales in line with the Sept. 11 budget.
The company described revenues at YSL as “encouraging,” despite the decline that was due partly to the discontinuation of the Variation line in February. Retail and wholesale revenues were 20.2 percent above last year’s levels, while Rive Gauche retail sales alone increased 117 percent compared with the year before. In November, overall Rive Gauche sales jumped 216 percent, on the back of a 221 percent increase in directly operated store sales. “YSL has turned a corner, and we believe that next year, it will be unbelievably successful,” said De Sole, adding that operating loss before goodwill and trademark amortization will not exceed $75 million.
At the Gucci division, sales in all major product categories declined. Leather goods, the company’s largest category, dropped 2.6 percent, to $159.5 million; ready-to-wear slid 13.8 percent, to $57.7 million, and shoes fell 18.5 percent, to $34.9 million. While watches saw a decline of 17.8 percent, to $50.7 million, jewelry saw a rise of 9 percent, to $14.6 million. Japan, where sales rose 20.6 percent, to $91.4 million, was the only region to register an increase. In the U.S. sales plummeted 23.7 percent, to $73.6 million, followed by the rest of Asia, where sales fell 20.1 percent, to $53 million; in the rest of the world, sales slid 18.4 percent to $9.3 million, and Europe, they dropped 10.5 percent, to $112 million.
For the nine months, net income fell 19.3 percent, to $195.1 million, or $1.92 a diluted share, from $241.7 million, or $2.38 a share. Sales rose 1.1 percent, to $1.66 billion from $1.64 billion.

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