| Excessive Depression |
7 July 2003
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Gucci's Profits are Not Disastrous
Gucci, the Italian luxury goods group, took it on the chin this quarter, with its operations losing €24.4 million. Analysts have dubbed it a "total disaster." While the combination of war, SARS, and euro appreciation hurt the group, financial and taxation gains kept net income positive. Although it was down from €35.5 million to €1.2 million, Gucci stayed in the black. How can this be a total disaster? Seems more like management pulled a rabbit out of the hat.
Brands in general, and luxury brands in particular, make a thinking person suspicious because by their very nature they trade off their name. Everyone "knows" that Gucci handbags are excellent items -- damn few could explain why. "Because it's Gucci" really tells one nothing, yet that is precisely what the vendor gives as a reason -- it carries the Gucci name so it must be good.
This lack of content in the analysis of the product line is useful in convincing the social climbers to dispose of their income thoughtlessly. However, the same lack of content in the analysis of the company's value to shareholders should not convince investors that it is time to bail out. Yet many seem to be doing so.
Gucci may or may not be a well-run company, its products may or may not be over-priced, the firm may or may not be over-valued. That is for the financial analysts to say. Instead, what they are saying is that a company that turned a profit despite war, SARs and adverse currency fluctuations is a "total disaster." If so, then what possible term would have described a loss? In the area of expectations, Wall Street has some adjusting to do, but one would think they could tell the difference between red ink and black ink.