How Gucci’s financial statements from 1992 to 1999 reflect changes in management to efficiently expand the business rapidly and cost-effectively

1. 1
Financial
management
–
final
project
individual
essay
Done
by:
Sarah
Lee
Shan
Yun
This
essay
will
outline
how
Gucci’s
financial
statements
from
1992
to
1999
reflect
changes
in
management
to
efficiently
expand
the
business
rapidly
and
cost-­‐effectively.
Gucci’s
appointment
of
Domenico
De
Sole
as
managing
director
of
Gucci,
and
his
subsequent
decisions
helped
to
turn
the
struggling
business
around.
It
also
outlines
how
buyouts
and
acquisitions
by
Investcorp
and
PPR
gave
Gucci
the
opportunity
to
expand
and
establish
itself
as
a
luxury
heavyweight.
According
to
the
Gucci
case
study,
Domenico
De
Sole,
who
was
appointed
president
and
managing
director
of
Gucci
in
1983,
reduced
the
number
of
points
of
sale
of
the
brand
from
600
to
only
194
between
1980
and
1993
(case
study,
p.3).
Between
1990
and
1994,
De
Sole
reduced
American
stores
by
almost
half,
dropping
16
of
the
brand’s
42
stores
(ibid).
In
addition
to
the
store
closures,
he
also
renegotiated
rents,
reduced
square
footage
and
cut
staff.
All
these
moves
helped
to
reduce
Gucci’s
overall
expenses
in
the
early
1990s.
Selling,
general
and
administrative
costs
were
low
in
1992
at
a
total
of
$143
million,
but
revenue
and
gross
profits
were
also
low
at
$199
million
and
$114
million
respectively,
leading
to
a
net
loss
for
the
year.
It
was
not
until
the
1994
reorganization
through
the
Investcorp
buyout
(case
study,
p.
8)
that
Gucci
started
to
cover
its
costs
and
breakeven
(case
study,
p.16).

2. 2
Licensing
was
used
as
a
quick
method
to
grow
the
company
and
cash
in
on
revenue
without
any
additional
marginal
costs.
This
allowed
Gucci
to
avoid
investing
capital
heavily
in
production
systems,
which
gave
them
a
much
high
return
on
capital
invested
throughout
the
1990s
up
till
1998,
with
the
highest
percentage
at
63%
in
1996
(case
study,
p.16).
However,
the
company
was
still
earning
most
of
its
revenue,
62.8%
to
74.8%,
via
their
directly
operated
stores.
This
meant
that
De
Sole
had
to
invest
a
lot
of
time
and
money
into
upgrading
their
store
locations,
to
boost
sales
per
square
foot,
which
increased
from
$2,300
to
$3,248
between
1995
and
1997
(ibid).
De
Sole’s
idea
to
unite
the
company
to
merge
production
and
sales
divisions
created
synergies
in
distribution
and
shared
information.
Guccio
Gucci,
Gucci
France,
Gucci
Ltd.
(UK),
Gucci
S.A.
(Switzerland),
Gucci
America,
Gucci
Japan,
and
Gucci
Co.
Ltd.
(Hong
Kong)
were
combined
to
form
one
company
in
1995
(case
study,
p.9).
Total
Sales,
general
and
administrative
costs
increased
slightly
from
$136
million
to
$208
million
from
1994
to
1995,
but
the
resulting
increase
in
net
revenues
proved
that
the
synergies
were
advantageous
to
Gucci
(case
study,
p.16).
Furthermore,
Investcorp’s
decision
to
sell
its
stock
in
the
company
in
Amsterdam
and
New
York
resulted
in
a
cash
injection
of
about
$87
million
to
its
balance
sheet
(ibid)
Using
this
spending
power,
Gucci’s
new
management
invested
heavily
in
increasing
advertising
expenditure
from
$5.9
million
in
1993
to
$250
million
in
1999
(case
study,
p.10).
De
Sole
and
Pat
Malone
also
decided
to
re-­‐price
their
collection
pieces
by
lowering
prices
on
average
by
30%
to
position
the
brand
effectively
below
brands
like
Hermes
and
Chanel,
but
“on
a
par
with
Prada
and

3. 3
Vuitton”
(case
study,
p.9).
De
Sole
made
sure
to
keep
manufacturing
local,
and
not
to
outsource
to
lower-­‐cost
countries
in
order
to
keep
a
close
eye
on
the
quality
of
the
goods
made
(case
study,
p.10).
Combined
with
the
appointment
of
Tom
Ford
as
the
new
creative
director,
who
completely
revamped
the
brand
from
head
to
toe,
revenues
sky-­‐rocketed,
more
than
doubling
between
Ford’s
appointment
in
1995
from
$500
million
to
$1,236
million
in
1999
(case
study,
p.16).
This
increase
in
revenue
came
mainly
from
the
sales
of
leather
goods,
which
represented
41.3%
to
59.2%
of
net
revenue
from
1994
to
1999
(case
study,
p.19).
By
reorganizing
its
production
systems
and
providing
financing
for
materials,
investments
in
plant
and
technical
expertise
to
its
partner
suppliers,
Gucci
could
increase
its
production
volume
in
leather
goods
increased
from
640,000
to
2.4
million
units
between
1994
and
1998.
With
this
new
increase
in
revenue,
the
company
focused
on
improving
its
directly
operated
stores.
Pat
Malone
Tom
Ford
and
architect
Bill
Sofield
were
appointed
to
renovate
the
stores
(case
study,
p.12),
which
represented
the
resulting
increase
in
sales,
general
and
administrative
costs
from
$208
million
in
1995
to
$558
million
in
1999
(case
study,
p.16).
Revenue,
on
the
other
hand
continued
to
increase,
and
operating
margins
remained
steady
at
23%
to
27%
between
1996
and
1997
(ibid)
despite
the
increase
in
expenses.
After
the
battle
with
LVMH
and
PPR
over
the
ownership
of
Gucci,
the
multi-­‐
brand
company
Gucci
Group
was
created
through
PPR’s
successful
acquisition,
housing
the
Gucci
division,
Sergio
Rossi,
YSL
Couture
and
YSL
Beauté
(case
study,
p.13).
$3
billion
was
injected
into
the
company’s
current
assets
in
1999
(case
study,

4. 4
p.16).
The
company
had
come
a
long
way
from
its
struggles
in
1992
and
in
a
span
of
just
7
years
has
increased
net
income
from
a
loss
of
$32
million
to
a
profit
of
$330
million
(ibid).
Although
the
company
has
significant
amounts
of
cash,
Tom
Ford
practiced
caution
with
over-­‐expanding,
advising
the
group
to
“make
really
smart
acquisitions
and
(not)
just
snap
up
brands
for
the
sake
of
snapping
up
brands”
(case
study,
p.15).
Overall,
Domenico
De
Sole’s
decisions
to
cut
down
expenses,
invest
in
improving
directly
operated
stores,
merge
different
product
and
sales
divisions,
invest
in
advertising
and
negotiate
with
local
manufacturers
all
helped
to
push
the
brand
forward
by
streamlining
operations.
Tom
Ford’s
appointment
as
the
brand’s
creative
director
also
helped
product
sales
to
increase
rapidly
through
the
brand’s
new
image.
However,
the
company’s
ability
to
expand
could
not
be
possible
without
the
significant
cash
injections
from
Investcorp
and
PPR
in
1994
and
1999
respectively.