Byline: Samantha Conti / With contributions from Thomas J. Ryan

Milan — Gucci is looking good, but Wall Street wants to see Yves Saint Laurent looking better.
Gucci Group NV Wednesday posted sharply higher sales and earnings for the fourth quarter, but stock analysts appear to be waiting for greater evidence of the company’s ability to integrate its recent Yves Saint Laurent acquisitions before giving their fullfledged endorsement.
In the fourth quarter ended Jan. 31, vigorous sales of Gucci leather goods and ready-to-wear, and major upticks in the U.S. and Asia, helped the company post a 47.2 percent increase in net income, to $97.7 million, on a 32.3 percent sales gain, to $399.3 million.
Revenues for the Gucci division rose 16 percent to $350.1 million, the highest quarterly results in the history of the company. Unlike those for the division, group revenues include the partial consolidation of Yves Saint Laurent, Sanofi Beaute and Sergio Rossi.
“Gucci had a tremendous fourth quarter and an excellent year in 1999,” said Domenico De Sole, chairman and chief executive officer of Gucci Group. “The fourth quarter is always an important one due to the holiday season, but some regions — including the U.S. and Asia — performed better than expected.”
For the quarter, earnings per fully diluted share dipped to 97 cents, compared with $1.12 in the corresponding period last year and analysts’ consensus estimates of 96 cents. The drop principally was due to the issuance last spring of 39 million new shares for the French retail group Pinault-Printemps-Redoute, now Gucci’s largest shareholder, with a 42 percent stake in the company.
Gucci Group’s earnings per share for the 1999 fiscal year rose 6.1 percent to $3.48. Analysts say the rise in EPS would have been 7.6 percent — to $3.53 — had Gucci Group not made the new acquisitions. Net income for the year rose 69.4 percent, to $330.3 million, as sales advanced 18.6 percent, to $1.24 billion.
De Sole acknowledged that the drop in fourth-quarter EPS was due to the recent acquisitions and said the company was projecting a 10 percent decline in EPS for 2000 and 2001.
In the company’s statement, De Sole said that management was “comfortable” with analysts’ earlier estimates of $3.45 a share for 2000, “excluding any costs or benefits from restructuring, and assuming a 40 year amortization period for the YSL trademark and goodwill.”
“We have already stated that the impact of the three new businesses would be negative at first. But we are planning a quick, aggressive turnaround, which means the new companies will begin to be accretive in 2002,” De Sole told WWD. “For YSL, we expect to incur operating losses in the near term as we rebuild the brand equity and transform the company from a primarily licensing operation into an integrated and directly operated one,” he added.
Wall Street appeared to view the results neither as a confirmation of success nor an indication of trouble. While Gucci shares closed down 5 7/8 at 89 1/8 on the New York Stock Exchange Wednesday, many analysts interviewed admitted that they had trouble determining the weight that the partial consolidation of the new companies would have on Gucci’s bottom line.
Claire Kent, equities analyst with Morgan Stanley Dean Witter in London, said, “The results were in line with our expectations, and I think YSL is on track.” She plans to raise her 2000 EPS projection for Gucci Group to $3.47 and her 2001 projection to $4.00, based on her sales projections of roughly $2 billion in 2000 and $2.2 billion in 2001. In addition, Kent is projecting sales of roughly $1.3 billion in 2000 and $1.5 billion in 2001 for the Gucci division.
Donaldson, Lufkin & Jenrette downgraded Gucci stock to “market perform” from “buy” on Wednesday, but Janet Kloppenburg at Robertson Stephens reiterated her “buy” rating. “The truth is that the core Gucci brand business is extremely strong and profitable,” she said. “The wild card is how long it takes the Yves Saint Laurent business to become a meaningful contributor to earnings as opposed to a detriment to earnings.”
Gucci, it would seem, would prefer to err on the side of caution.
In the statement announcing the results, Gucci said that YSL and Sanofi — which the company has unofficially dubbed YSL Beaute — had both been consolidated for one month, while Sergio Rossi was consolidated as of Nov. 20, 1999. Gucci Group is still finalizing the name change to YSL Beaute. A Gucci spokesman explained that the company’s lawyers are still ironing out the legal details and researching the linguistic implications of the name worldwide.
The spokesman told WWD that royalty income accounted for 64 percent, or about $56 million, of YSL’s consolidated sales of $88 million for the year. He added that additional revenue from directly owned stores should more than offset any declines in royalty income as Gucci continues to act on its intention to acquire licensees or allow licenses to expire.
In the fourth quarter, the Gucci division’s operating profits reached $89.6 million with a margin of 25.6 percent, while net income rose to $102.6 from $66.3 million. Sales in the U.S. shot up 17.2 percent to $98.2 million, which De Sole said was due to an increased focus on the local customer base.
“When the Asian crisis hit, we knew we couldn’t dwell on it. We had to look forward and focus on local customers, rather than depend on Asian tourists,” said De Sole. “Since then, we’ve done a lot of very aggressive work with our local client base in the U.S., and our all-out efforts are paying off.”
De Sole said Gucci put together a series of in-store incentives in the U.S., such as offering bonuses to staff members who helped build a local customer base. He said, too, that in the U.S., Gucci worked hard to promote its ready-to-wear division, which usually draws local customers rather than tourists.
De Sole called the 10.9 percent fourth-quarter sales rise in Japan — to $84.1 million — an “excellent surprise” and said the upswing in sales continued through the beginning of 2000. As reported, Gucci opened its largest Asian flagship, in the Shinjuku section of Tokyo, last August. The company also has a flagship in Tokyo’s Aoyama district and a 6,000-square-foot space in Fukuoka-Kawabata, in addition to shops-in-shops in the city.
Sales in other parts of Asia rose 28.2 percent to $63.7 million in the quarter. Sales in Europe rose 12.8 percent to $94.5 million, while sales in the rest of the world grew 10.9 percent to $9.7 million.
Renovations on Gucci’s New York store on Fifth Avenue are scheduled for completion this fall.
For the first time in recent history, quarterly sales of Gucci rtw overtook those of footwear. Rtw sales grew 35.3 percent to $49.6 million, while footwear grew 16.5 percent to $46.3. As usual, the leather goods division was Gucci’s biggest volume generator, with sales growing 11.5 percent to $147.7 million. Watch sales grew 9.2 percent to $67.8 million, while jewelry, one of Gucci’s newest divisions, rocketed 146.3 percent to $15.4 million.
The only product division that dipped was ties and scarves: Sales dropped 10.8 percent to $7.5 million. Other divisions rose 21.8 percent to $8.6 million, while royalties dropped 20.3 percent to $7.3 million, in line with Gucci’s strategy to limit licenses and take all production in-house.
Gucci’s wholly owned store strategy continues to reap rewards: In the fourth quarter, sales in directly operated stores grew 19.4 percent to $243.3 million. De Sole said that number was continuing to rise in the first quarter of 2000. “Gucci division retail sales were up 34.5 percent in February 2000 compared with the year before,” he said in Wednesday’s statement.
Meanwhile, distribution through franchises, duty free and department and specialty stores rose 13 percent to $42.9 million.
Gucci Group’s fourth-quarter operating profit, before goodwill and trademark amortization, rose more than 12 percent to $87.9 million. The group’s net income increase to $97.7 million was due both to the increase in operating profit and the low tax rate on the $3 billion cash pile Gucci received from PPR last year. PPR’s stock position has now risen to 42 percent and, while $1 billion in acquisitions and other activities have cut into the cash, interest on them and other Gucci assets have left the “balance” at $2.5 billion, the spokesman said.
The rise in the firm’s net income for 1999 reflects both the cash injection from PPR and a rise in operating profit to $273.2 from $246.5, with a margin of 22.1 percent.
Yearend results for the Gucci division show that net revenue grew to $1.2 billion from $1.04 billion while operating profit grew to $269.7 million with a margin of 22.7 percent. Net income rose to $335.2 million from $195 million.
One month of revenues from Sanofi Beaute and YSL contributed $31.7 million and $7.6 million, respectively, to Gucci group. Sergio Rossi contributed $9.9 million in revenues since its consolidation.

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