Making Over YSL Is No Stroll Down the Catwalk

But Gucci is making steady progress in sprucing up the brand

When movie star Nicole Kidman turned up for the opening night of the Cannes Film Festival last May clad in a black silk strapless dress with ruffles--the work of designer Tom Ford for Yves Saint Laurent--she sparked a global run on the $6,500 frock. That was good news for Gucci Group (GUC ) Chief Executive Domenico De Sole, who paid $1 billion in December, 1999, for the tarnished YSL ready-to-wear and perfume businesses. Two years of the Gucci treatment--a special blend of De Sole's hard-nosed management and Ford's impeccable design instincts--have restored much of the brand's lost luster. "The fall and spring collections have had nothing short of a spectacular response from clients," says Ronald L. Frasch, chairman and CEO of exclusive New York retailer Bergdorf Goodman.

The YSL makeover is a vital step in transforming Gucci from a single-brand luxury house into a multibrand powerhouse. It hasn't been a stroll down the catwalk, though. To cement his control over YSL, De Sole had to slash away at a thicket of licensing agreements that provided up to 75% of the fashion house's revenues yet devalued its image by imprinting the YSL logo on everything from cheap sunglasses to baseball caps. "It was really painful," recalls the CEO. "We started from zero." Meanwhile Ford, already under pressure to create a winning new image for YSL, had to contend with ill-concealed disapproval from the brand's founder, fashion legend Yves Saint Laurent. Now, the 65-year old designer's decision to retire and close his money-losing haute-couture atelier will make it easier for De Sole and Ford to put their own stamp on YSL's mainstream operations.

Analysts expect 2001 revenues at the relaunched fashion business to total $90 million for the fiscal year ending Jan. 31, down slightly from 2000 but ahead of target given the plunge in licensing income. Still, heavy investments in new boutiques and five budget-busting Paris fashion shows have led to an estimated $75 million loss in 2001. Full-year profits are not expected to materialize until 2004--a year later than first forecast, prompting grumblings from some analysts that Gucci paid too much for YSL. "They underestimated where the brand had fallen to," says Dana E. Cohen of Banc of America Securities in New York. But the perfumes and cosmetics unit, YSL Beaute, is already in the black: For 2001, it is expected to register an operating profit of $43 million on sales of $475 million.

De Sole and Ford, who boosted Gucci revenue tenfold, to $2.4 billion from 1994, hope to spur dramatic growth at YSL. Ford must keep producing fashion hits for YSL, which he has positioned as a more glamorous alternative to Gucci's hard-edged sexiness. Example: a black cotton bare-shoulder peasant blouse priced at $1,143. It hit stores in July and sold out in weeks, inspiring affordable knock-offs by mass-market manufacturers such as Spain's Zara.

De Sole's next test is to generate big sales in high-margin accessories such as handbags, eyeware, watches, perfume, and cosmetics. "They have to find a way to apply the same trickle-down effect at YSL [as at Gucci]," says Armando Branchini, president of Milan fashion consultancy InterCorporate. Leather goods account for less than 10% of sales at YSL, compared with 45% at the Gucci division. Already YSL's Mombasa, an African-inspired handbag with a horn handle and a $632 price tag, is a spring fashion rage. "We sold 80% of our order in the first week," says Bergdorf's Frasch.

No question, the management challenge--and the risks--for De Sole and Ford are much bigger than those they had running a single-brand company. The two must invest heavily to grow seven smaller companies purchased over the past 24 months, including the fashion houses of Alexander McQueen and Stella McCartney and leather-goods maker Bottega Veneta. De Sole, a 58-year-old former tax lawyer who joined Gucci's U.S. operations in 1984, says the shopping spree may not be over. "In difficult times, you get interesting breaks," says De Sole, who points out that while some of his heavily indebted competitors are suffering, Gucci is sitting on a $1.5 billion war chest.

Meanwhile, De Sole is already wringing cost savings from combined backroom operations. YSL's Mombasa bag, for example, was produced by Gucci's Tuscan network of skilled leather craftsmen. Smart designs, great execution: The YSL brand is starting to recapture its star allure.

By Gail Edmondson in Florence

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