Gucci's Owner Posts Fashionably Late Sales Increase

Posted by: Charles DuBow on July 23

Better late than never, they say. PPR SA (PRTP), the French luxury conglomerate that owns luxury brands such as Gucci and Yves Saint Laurent, as well as European book and CD retailer fnac, unexpectantly beat second quarter forecasts by generating revenue of 4.678 billion euros ($7.36 billion) in the three months to June 30 on a sales rise of 4.5%. This comes as particularly good news for company execs and shareholders because in the first-quarter of the year sales growth fell 2.5% from 11% in the fourth quarter of 2007.

But the concern is that Gucci, which accounted for slightly over 6% of sales in Q2 and is PPR’s most high-profile luxury brand, is still struggling to re-establish itself as a top tier fashion house. As Sara Gay Forden, author of 2001’s House of Gucci(HarperCollins), writes on Bloomberg: “The return of profit momentum doesn’t necessarily mean a revival in the label’s cachet.” These issues stem from the well-publicized departure of former chief designer Tom Ford and group CEO Domenico de Sole in 2004 over disputes concerning creative control. The team of Ford and de Sole returned Gucci to profitability after years of losses and also made it one of the hottest fashion brands in the world.

In addition to the absence of a dominant designer like Ford—Frida Giannini, who joined Gucci as handbag design director in 2002, is currently creative director—there are two areas of concern: first, is the perception that brand is trying to use its high-end identity to flog more middle-price products. Canvas GG Joy purses and bags, introduced in 2007 and which sell for around $540 or so a pop, have earned the scorn of many in the fashion world who regard them as unworthy of the brand.

Second, is Gucci’s small foothold in developing markets such as China and India. While the company has plans to expand in these nations, it is still overly dependent on the U.S. and Europe for the majority of its sales. Chief rivals Moet Hennessy Louis Vuitton (LVMH), Hermes (HRMS) and Richemont (http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=rifz) have already established solid beach-heads in these booming economies and have seen a commensurate rise in sales.

PPR SA’s shares finished the day on the Paris bourse at €66.60, up 5.25% on volume of 1.3 million.