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Fashion’s Big Question: De Sole Hopes Contract Will Be Settled by Nov. 1

Gucci contract news could come in a few weeks, as the firm posted a 47 percent drop in 2nd-quarter profits along with a 1.1 percent uptick in sales.

Domenico De Sole and François Pinault
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Photo By WWD Staff

Two looks from Gucci’s fall 2003 collection
MILAN — Are Dom and Tom staying?

The answer may come by the end of the month. Gucci Group president and chief executive Domenico De Sole said Wednesday that a decision about the renewal of his and creative director Tom Ford’s contracts could come in a matter of weeks. That statement came as Gucci posted a 47 percent plunge in second-quarter profits, along with a 1.1 percent uptick in sales.

“For the sake of our employees and our colleagues, we should try to make an announcement as soon as possible, hopefully by the end of the month,” De Sole told WWD in a phone interview, denying a spate of recent press reports that Gucci and principal owner Pinault-Printemps-Redoute had established a deadline for a decision. Both contracts expire next year.

Later in the day, De Sole appeared to strengthen his stance on the matter. Speaking on a conference call, he told analysts that an announcement would “probably” come by the end of the month.

Reiterating previous comments, a PPR spokesman said in response, “As soon as there is something to announce, we’ll announce it. We haven’t set any precise timetable. We don’t feel it is appropriate to negotiate through the press.”

Speculation over whether Ford and De Sole will stay or go amid reported tensions with PPR has grown particularly intense in recent weeks. One recent theory, considered far-fetched by many in the industry, had the pair heading to Versace. De Sole said he did not want to comment on rumors while a Versace spokesman reiterated that “there are no plans for Mr. De Sole or Mr. Ford to join Versace.”

As expected, Gucci’s numbers highlighted the challenges of doing business in an environment characterized by SARS and the aftermath of the Iraq war. At the same time, De Sole expressed optimism that trading conditions are improving and Gucci should post a strong comeback in the third and fourth quarters of the year.

Gucci’s net profit for the quarter ended July 31 plunged 47 percent to $26.6 million from $50.2 million in the year-ago period, as both costs and markdown expenses increased. De Sole said it was necessary to slash prices to move old goods out of the stores and make way for the fall collection.
Sales, in line with analyst expectations, were relatively stable, rising 1.1 percent to $684.5 million from $676.8 million. On the call, De Sole specified sales for the quarter were up 2.2 percent on a constant currency basis. Gucci said retail sales for the group have “surged” since Aug. 1.

Dollar figures have been converted from the euro at current exchange. In local currency, second-quarter net profit came in at 22.7 million euros while sales were 583.7 million euros.

“There was an improvement in the month of July as the collection hit the store,” De Sole said, noting strong demand for fall merchandise. “The problems that were here have disappeared, meaning the war and SARS.”

Gucci’s bullish outlook for the second half of the year echoes comments made Tuesday by two other European luxury powerhouse firms, LVMH Moët Hennessy Louis Vuitton and Burberry, as they released financial results. PPR releases its third-quarter sales today.

Paola Durante, an analyst with Merrill Lynch, said the market is focused on the company’s outlook for the rest of the year. “What the investors are really paying attention to is the extreme confidence that management has expressed for the third quarter,” she said.

Jacques-Franck Dossin, an analyst with Goldman Sachs, also expressed a positive view for the future.

“We knew that the spring-summer collection wasn’t successful, but now it seems that they’ve designed the right product and the right collection at the right price point that is easily identifiable with the brand,” he said. “I am confident about [Gucci’s] autumn-winter and spring-summer ’04 collections.”

Still, De Sole said critical challenges remain. The tourism flow, particularly to France and Italy, “is not as strong as a year ago.” A high euro-to-dollar exchange rate hurts firms like Gucci with developed overseas businesses, although he said the strength of the yen against the dollar partially compensates for that in markets such as Hawaii.

Gucci also has plenty of costly work ahead of itself in turning around the brands it’s amassed in recent years. In particular, De Sole said the company is scaling back on expansion plans for Boucheron, a jewelry brand with extremely high prices and little name recognition outside Europe.
Gucci will shutter the Boucheron shops in both Honolulu and Milan, both opened about one year. Boucheron will reopen in Milan, but this time inside the building Gucci bought on Via Montenapoleone. The company had no further details on the timing or logistics of the move.

When asked if Gucci would consider selling Boucheron or any of its other brands, De Sole said it doesn’t have any “specific plans” for sales, but at the same time he didn’t rule out the possibility.

“You can never say never. This is business and everything is for sale,” he said.

A sale of Boucheron at some point wouldn’t shock Sagra Maceira de Rosen, an analyst with J.P. Morgan.

“I wouldn’t be surprised if at some point [Gucci management] says, ‘Let’s stick to accessories and leather goods,’” she said.

Mirroring a phenomenon experienced in the first quarter of the year, a tax benefit lifted Gucci into the black. Gucci posted a second-quarter pretax loss of $5.8 million, or 4.9 million euros, compared with a year-earlier profit of $51.5 million, or 43.9 million euros.

Although better than those of the first three months of the fiscal year, the second-quarter figures did little to bolster Gucci’s first half. As reported, Gucci barely posted a profit in the first quarter, a result considerably worse than analyst expectations.

For the six months ended July 31, Gucci’s net profit fell 69.6 percent to $27.9 million, or 23.8 million euros, while sales dropped 2.9 percent to $1.35 billion, or 1.15 billion euros.

Restructuring costs related to store closures, inventory write-downs and employee layoffs also cut into Gucci’s profitability for the second quarter. Those expenditures came to $17 million, and the largest chunk of this outlay, $12.1 million, was for Gucci’s “other operations,” an umbrella category for recent acquisitions that excludes YSL and YSL Beauté but includes brands such as Stella McCartney, Alexander McQueen, Balenciaga and Boucheron.

Those expenses led to an operating loss of $21 million for the quarter compared with a year-earlier profit of $36.9 million.

Sales at the flagship Gucci brand declined 1.4 percent to $424.9 million in the quarter. Shoes and jewelry were the only product categories seeing an increase in revenue, rising by 14.1 percent and 14.5 percent, respectively.
Geographically, Japan, with a 5.6 percent sales increase, was the only major market registering an uptick.

Meanwhile, profitability at the division suffered as Gucci marked down merchandise to account for slow sales of its spring-summer collection. The company noted it has a “conservative inventory valuation policy.”

Operating profit at the division slid 20.2 percent to $102.7 million, or 24.2 percent of sales, from $128.7 million, or 29.9 percent of sales, the year before.

On the upside, Gucci did note conditions are improving, citing “strong double-digit growth” for constant-currency retail sales in Europe, Japan, Hong Kong and the U.S. since Aug. 1.

As for YSL, revenue for the quarter grew 5.5 percent to $41.6 million, but Gucci said it rose 14.6 percent on a constant-currency basis.

The costs of opening stores and, once again, increased markdowns caused YSL to widen its second-quarter operating loss before goodwill and trademark amortization and restructuring costs to $22.1 million from $15.6 million.

In the meantime, De Sole brushed aside talk that PPR is unhappy to have Ford designing both the Gucci and YSL collections and that the issue has become a sticking point in contract renegotiations.

De Sole said he had picked up on this rumor, but he had not heard such a sentiment from PPR chairman Serge Weinberg.

“I believe Tom Ford is the greatest designer of his generation. He’s done a superb job at both Gucci and YSL, period,” De Sole said.

“We believe in freedom of expression,” he later quipped to analysts on the conference call.

Gucci also provided a rosier outlook for YSL, saying retail sales growth at the French brand is accelerating. It said constant-currency retail sales grew 22.8 percent in the second quarter and were up 31 percent since the end of July.

YSL Beauté saw its revenue rise 1.3 percent to $136 million from $134.2 million, but Gucci said it would have been up 9.5 percent in constant-currency terms.

Expenses linked to new product launches such as Alexander McQueen’s Kingdom fragrance and Ermenegildo Zegna’s Essenza di Zegna caused YSL to widen its operating loss before goodwill and trademark amortization to $21.4 million from $14.2 million.
Gucci provided less detail regarding its “other operations” category of emerging brands, including McQueen, McCartney, Boucheron, Balenciaga, Sergio Rossi and Bottega Veneta.

Collectively, these brands saw second-quarter sales rise 16.1 percent to $97.9 million. The loss before goodwill and trademark amortization and restructuring costs narrowed slightly to $16.65 million from $16.77 million.

Gucci specified that Bottega Veneta saw 33.7 percent revenue growth in the quarter, accelerating to a 42 percent jump since the beginning of August. The company also noted Alexander McQueen and Stella McCartney revenues rose by more than 100 percent for the period.

The sales base for each of these brands, however, has changed rapidly as Gucci proceeds with store openings. Just so far this year, McQueen opened stores in London and Milan, while McCartney opened a retail location in London and Los Angeles. Over the last year or so, Bottega Veneta has opened five major stores in London, Tokyo, Milan, Paris and Honolulu.

On the call, De Sole noted both Boucheron and Sergio Rossi are adjusting their product offerings to be more commercially viable. In addition to slowing the retail rollout at Boucheron, Gucci aims to introduce more affordable items at the jeweler to boost volume.

De Sole said sales at Sergio Rossi are improving after “product issues” were addressed. Last month, Gucci tapped a new ceo at the division, Prada alumnus Claudio Paulich.