Tuesday, March 11, 2008

One to watch as US slowdown hits

Francesco Trapani, the chief executive of Bulgari, has some news for those analysts and investors feeling pessimistic about his company's prospects.

"If you look at the global numbers we are not suffering," he says. "The consolidated sales are good and the company continues to grow significantly." Rome-based Bulgari is one of the few well-known names in jewellery, alongside Tiffany and Cartier, and Mr Trapani thinks it is not going to be hit badly by the coming downturn.

Many in the market disagree, and will be watching today's announcement of 2007 results with interest. Standard & Poor's has a sell recommendation on the shares. Goldman Sachs recently downgraded the company from a buy recommendation to neutral. The shares have fallen almost 30 per cent in six months, as other luxury-goods manufacturers such as Luxottica, Tod's, Richemont and Coach have been hit to varying degrees by a slack Christmas period and a wider slowdown in sales.

Almost everyone in the industry is expecting the credit crisis to hurt sales in the US in particular, but views luxury goods as a cyclical industry that will bounce back in time.

Actually, Mr Trapani does not agree with that assessment either. He told the Financial Times that the building of brand names, which takes a long time, makes luxury goods companies fairly impervious to downturns. "I don't see [the business] as very cyclical. . . I see it as pretty resilient."

He says even great shocks such as the terrorist attacks of 2001 had short-lived effects on the company. "After September 11, this company was down 3-4 per cent for three or four quarters."

That is not to say the composition and geography of Bulgari's sales are not changing. "We are seeing a pretty soft business in the US and in some important European countries . . . [But] almost all of Asia is going extremely well and counterbalancing [that softness]."

The components of Bulgari's profit are also changing. The company used to make a great deal more of its money from expensive watches. In the Bulgari store at Rome's Fiumicino airport some of the most expensive do not have prices marked, while others run up to a mere €18,400 ($28,200).

Such watches are Bulgari's highest margin products but their sales acc-ounted for just 27 per cent of revenues last year compared with 45 per cent 10 years ago. "It's true that when we lose sales in watches it's particularly painful," says Mr Trapani, adding that there have been component supply problems, which the company hopes have passed.

It is making up the difference in profitability with "prudent" price increases, reflecting the growing ability to use the Bulgari name. It is also broadening its offering and has just started selling skincare products.

Mr Trapani is relatively relaxed about the share price. "The stock price moves from expectations and speculation," he says.

The company's family background and continued 52 per cent hold on the shares allows him a long-term view. Mr Trapani is from the third generation after Sotirio Bulgarifounded the company in 1884. The secret to longevity and avoidance of family feuds has been to buy out almost all family members. Only Mr Trapani and his two uncles - Paolo and Nicola - are still involved. The uncles are chairman and vice-chairman and part of a board in which they are outnumbered by independent directors.

When Mr Trapani became chief executive in 1984 he was 27 - "too young", he says - and Bulgari had just five stores. Growing to a group with 250 outlets involved a public listing in 1995 and the imposition of modern governance standards. "I was convinced the only way to succeed was to have a system of total meritocracy . . . We should try to avoid [like other family companies] a cousin in accounting and a sister in marketing," Mr Trapani says.

But he admits the company sometimes acts in ways that may not please investors looking for strong growth every quarter. "The motivation that we have is not quarterly results. It is much more long term. We want to be the largest, the most prestigious brand in 10 years. Every now and then we may have numbers that are a bit less bullish than the financial community might expect because we are determined to make investments."

Copyright The Financial Times Limited 2008

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