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Cost Cuts Seen For Gucci

Careful cost-cutting is likely to be among the first fashion statements made by Gucci Group's new chief executive officer, according to analysts.

PARIS — Cutting costs — albeit carefully — is likely to be among the first fashion statements made by Gucci Group’s new chief executive officer.

That’s the expectation of the financial community as it awaits the imminent announcement of Domenico De Sole’s successor by Pinault-Printemps-Redoute, which controls the Italian luxury conglomerate. PPR has said it will announce De Sole’s replacement before the end of April.

“Any cost-cutting would likely be viewed as favorable,” said Antoine Colonna, luxury analyst at Merrill Lynch here. “But I would expect [the new ceo] to use a scalpel and not an ax.”

It’s an opinion shared by a Merrill Lynch colleague, London-based Aymeric Poulain, who wrote in a recent report on PPR that Gucci’s next ceo “is expected to be a cost-cutter in line with the group’s strategic focus on margins, cash flow and debt repayment.”

On Tuesday, a PPR spokesman declined to comment on the likelihood of any forthcoming cuts at Gucci Group. However, ceo Serge Weinberg has repeatedly denied any plans to trim its luxury portfolio and reiterated that PPR would not significantly change Gucci Group’s strategy once it assumes full management control.

But, if there are cuts, luxury analysts expect them to come primarily at Yves Saint Laurent and Boucheron, with the closure of unprofitable stores and some staff reduction considered possibilities. But some would also like to see PPR go further, and prune its portfolio of loss-making brands.

Any measures to narrow losses at YSL and its other fashion businesses are likely to improve investor perceptions and goose PPR’s stock, although Poulain questioned whether such a tactic “will command the same rating as a strong top-line grower.”

In fact, one London-based analyst, who requested anonymity, suggested it would be “a mistake” and “dangerous” for Gucci Group’s new ceo to cut costs, as it could stunt the growth of its brands and dampen prospects for future growth.

“On the whole, the group is quite lean,” the analyst said. “All the integrations that could be done have already been done. I don’t see any room for additional cuts.”

The analyst noted that advertising costs, for example, are often viewed as a quick fix to stem losses, but that firms including Bulgari and Hermès have recently announced plans to up their advertising spend this year.

Losses at YSL — fueled partly by a communication spend at 18 percent of sales — widened to $91.7 million, or 76.4 million euros, for the full year. Losses at Gucci’s other brands, which span Boucheron, Bottega Veneta, Sergio Rossi, Bedat & Co. and the emerging fashion houses Alexander McQueen, Balenciaga and Stella McCartney, totaled $75.1 million, or 62.6 million euros, for the year. Dollar figures have been converted from euros at current exchange.

Despite extravagant fashion shows and other tales of excess — including Tom Ford’s penchant for making thousands of samples to put only a few dozen on the runway — the Tom and Dom era is not viewed as one of waste among financial types.

Colonna, for one, said he detects little fat — and that ongoing investments in the core Gucci brand are assured. He also said Bottega Veneta, while generating heavy losses last year as it expanded its store network, appears to be “on track” and does not require scaling back.

However, management is likely to slow retail rollouts for YSL and Boucheron, and to shutter money-losing locations, analysts agreed. One potential target for closure or reformatting, according to some, could be the YSL flagship on 57th Street in New York.

Gucci took a $12 million, or 10 million euro, restructuring charge in the fourth quarter for store closings, mostly related to Boucheron. Losses at the jewelry, watch and fragrance firm are believed to have ballooned to at least $30 million, or 25 million euros, last year.

“I think the market would like them first to sell Boucheron,” said Nathalie Schneider, analyst at HSBC in Paris. “Nobody in the financial community sees PPR or Gucci Group being able to run such a business profitably. It will be very hard to break even.”

Its brand portfolio could also be trimmed of underperforming emerging names — Alexander McQueen, Stella McCartney and Balenciaga — while Bottega Veneta is “far ahead of expectations” and the leather goods firm Sergio Rossi “deserves another try,” Schneider said.

She noted that she “wouldn’t be surprised” to see some reduction in head count at YSL or other loss-making brands. “For YSL, they have no choice but to try to optimize the cost structure,” she said. “For example, if they will not open more stores going forward, that would help.”

In her estimation, it is plausible that PPR could set new targets for loss-making divisions to reach profitability, or have them face disposal.

Andrea Paladini, an analyst with Centrosim in Milan, said he doesn’t think Gucci can really cut that much on smaller brands, as they are still in a growth phase and need investment. “Quarter after quarter they are going to have to evaluate each brand’s progress and continue to decide which brands are worth it,” he said.

“As for the Gucci division, there is some space for rationalizing the cost structure and it may be possible to analyze all the store locations and revisit the store-opening plan going forward,” he said, although he added that he didn’t feel the situation had reached a critical level. “There isn’t restructuring to do.”

On the smaller brands, like Boucheron, for example, Gucci may opt to limit the number of flagships these brands have to key cities for image-related reasons, and boost distribution through multibrand stores or other third parties.

Meanwhile, analysts agree on one point: They expect the new ceo to lavish attention on the cash-cow Gucci brand, which is prized for impressive profit margins in the 30 percent range.

Schneider said she expects the new ceo to concentrate on rallying and assuring the troops at Gucci, its key franchise. Others agreed motivating the staff would be a key function, along with assuring that the Gucci brand will continue to have a unified image under the three designers appointed to succeed Ford.

— With contributions from Amanda Kaiser