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Domenico De Sole of Gucci Group: Luxe life

One of the tax attorney's clients in the early 1980s was the famed Gucci design family. Impressed with his work, Rodolfo Gucci lured De Sole into the family's business

Born in Rome in 1944, this son of an army general traveled all over Italy in his youth, while dreaming of spending time someday in the U.S. After completing a law degree at the University of Rome in 1970, he got his chance: De Sole received a scholarship to Harvard Law School. After stints at a couple of blue-chip U.S. law firms, he became a partner in the high-powered Washington, D.C., law firm Patton, Boggs & Blow. One of the tax attorney's clients in the early 1980s was the famed Gucci design family, whom he aided on a restructuring of corporate holdings. Impressed with his work, Rodolfo Gucci, a son of founder Guccio Gucci, lured De Sole into the family's business as chief executive officer of Gucci America in 1984. A decade later De Sole found himself in Florence as the parent company's chief operating officer. He became CEO the following year.

It hasn't always been smooth sailing for Gucci Group or De Sole. Investcorp, the Bahrain-based private equity firm, completed its purchase of the Gucci family's stake in 1993, at a time when the fashion company was teetering on the edge of bankruptcy. When Investcorp couldn't unload its position, it handed De Sole the unenviable task of reviving the company. De Sole named a young Texan, Tom Ford, as lead designer for the Italian fashion icon. Ford has proved an inspired choice, reenergizing Gucci's product lines and reputation, greatly aiding its revival.

In 1995 De Sole led Gucci's successful listing on the New York and Amsterdam stock exchanges, which allowed Investcorp to cash out. Four years later he outwitted Bernard Arnault when the French financier's fashion conglomerate, LVMH Moët Hennessy Louis Vuitton, made a hostile bid for Gucci. De Sole got the help of another Frenchman, François Pinault, whose investment firm, Artemis, owned a controlling stake in French retail giant Pinault-Prin-temps-Redoute. Gucci sold PPR a 42 percent interest for $3 billion, diluting the stake Arnault had accumulated and forcing him to retreat.

As part of the complicated deal, Gucci Group agreed to buy Sanofi Beauté -- which owned famed fashion brand Yves Saint Laurent -- from PPR for $1 billion. And in the past three years, De Sole has acquired shoe company Sergio Rossi as well as several smaller boutique design shops, including Alexander McQueen, Balenciaga, Boucheron and Stella McCartney.

De Sole, 58, and Ford, 41, have rejuvenated YSL, a revered brand that had fallen on hard times. In this year's second quarter (ended July), YSL revenues were up 35 percent. It is still operating at a loss, but De Sole says it will be profitable by the end of next year.

There are clouds on De Sole's horizon, however. Last September Arnault sold half of his 20 percent stake in Gucci to PPR for $800 million. (He sold his remaining Gucci holdings to Crédit Lyonnais late in the year.) At the same time, PPR agreed to pay $101.50 a share, or $4.8 billion, for the 48 percent of Gucci it doesn't own if the company's stock is trading below that level in March 2004. This put option has buoyed Gucci shares in a bleak economic environment. In mid-November Gucci shares were trading at about $90.

Some analysts and investors are worried that PPR won't be in any position to buy the stock. The company has $6 billion of debt; in April Standard & Poor's downgraded its debt rating to a notch above junk. PPR's stock price has tumbled about 50 percent this year. Still, executives insist that PPR will be able to shoulder the put option if it must. For his part, De Sole says Gucci's stock will be trading above that target price come 2004. That's easier said than done. In September the company reported that second-quarter profits dropped 55 percent, to $42 million, on a 7 percent decline in sales.

De Sole recently discussed Gucci's outlook with Institutional Investor Staff Writer Justin Dini at the company's surprisingly spartan Manhattan offices.

Institutional Investor: Is now a bad time to be selling luxury goods?

De Sole: I really believe that this is a very good industry. Long term I think it is a very, very good investment. Obviously, there are going to be cycles. In certain times we are going to do better than others. As far as Gucci Group is concerned, I believe that we are really in a good situation. We have a very strong brand in Gucci, with 30 percent gross profit margins. We are in the process of turning around several brands that we've acquired and are investing in. All of them are very strong luxury brands. The Yves Saint Laurent line is moving along quite strongly. We have no debt. Actually, we have a lot of cash. But it is, I recognize, quite a difficult time; one of the big uncertainties, at this moment, is the possibility of war.

So clearly there's a lot of uncertainty.

Yes, but I feel the level of wealth will continue to grow on a worldwide basis. There are certain strong signs a new economy is emerging. China has become quite important. I'm very optimistic long term. We just have to go through a difficult time. We have to manage for profit, control costs and be very careful.

Has cost control been companywide?

To be successful in controlling costs, it has to be across the board. I didn't feel there was an area where there was a lot of fat. We didn't want to cut advertising. In fact, this year, we will have spent a tremendous amount of advertising dollars for the relaunch of Yves Saint Laurent. I think you can respond tactically to things that happen on a day-to-day basis, but you have to see to your strategy, otherwise it will be really catastrophic for the long-term success of the brand.

What approach have you taken in picking the brands you acquire?

Before acquiring a brand, we have a very distinct understanding of what we want to do with it. And we always try to buy a brand that has some magic, some trademark and a great name.

What do you intend to do with the E1.5 billion in cash you have?

It's not just an issue of cash. Obviously, there may be some great opportunities, but we are now concentrating on turning around the companies we've acquired. One of the reasons we have such a strong profit is because we have a fairly lean company. This year we spent almost $300 million in capital expenditures. Everything has to be done to the same standard of quality and luxury that we use for Saint Laurent and Gucci. It's a complex effort just to keep that going.

Why have you embarked on this multibrand strategy?

I believe that if you have a luxury company, and you want to continue to make a lot of money, you have to have some standards, a strong sense of exclusivity. You can't really go down-market, because then you kill your profit. So to keep it very exclusive, control distribution. About 70 percent of sales are done in our own stores, so you essentially have control over the brand. Once you go public, you have to grow. I believe that the Gucci brand has a huge amount of potential. But clearly, there's going to be a point with a luxury brand when there's a limit to how much you can grow without going down-market. So to make it work, you need to have other brands and create new ones. It's a little bit like a pharmaceutical company. You have to have products in your pipeline. Long term, I think you have no choice: You have to become a multibrand company.

Do you believe that PPR will be in a position to exercise the put option?

I don't have any doubt in my mind. But let me make this very clear: We don't want the put; they don't want the put. Our independence is important to us. Obviously, everybody wants the stock to be much higher. But if that doesn't happen, I've talked to PPR, and they've assured me they'll be totally able to put. So, they've made a statement that they plan to honor the put and refloat the company.

How do you raise the stock price?

The only way we do it is with performance. It's my sense that the put is going to be determined by where we're going to be a year from now. We invested a lot of money in this new company, and the turnaround is moving along properly. I think at the end of the day, it's up to the investor to determine if we can do better.

Tom Ford is critical to the creative energy of the company, but there are concerns that he is spread too thin.

No, I don't think so. Tom has a very strong team that we put together and we nurture, so there's a tremendous amount of design talent in the company. Tom is fantastic, but I think sometimes people believe that Tom designs everything.

We're in the holiday season. Are you optimistic?

I'm hoping we have a good holiday season. The summer has been very difficult. We've been depressed by a flurry of bad news, but I'm hopeful.

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