Gucci: Financial Health & Difficult Path to Success

Introduction

Valuation of business ownership is useful in determining the economic value of a company or business unit. To determine a business’s fair value, valuation is necessary. According to Trugman, valuation is essential for various reasons such as divorce proceedings, taxation, establishing partner ownership, and sale value. In this paper, business valuation helps in determining whether acquisitions made by Gucci were worth or not. The financial statements of Gucci over the period 2001 to 2003 clearly indicate an increase in operating expenses over the period because operating profit kept decreasing.

In 1999, Gucci acquired YSL. The acquisition was worth $1 billion because YSL was among the leading fashion names in the industry. Acquiring YSL could have placed Gucci at a better competitive advantage than before because the company manufactured expensive Italian shoes, which is among the luxurious products traded by Gucci. Furthermore, Gucci’s creative team could have helped in ensuring the success of the new acquisition. Therefore, the YSL acquisition was worth the amount; it was only necessary for Gucci to utilize its resources to ripe fruits from the acquisition.

The ownership of the company changed in 1983 after the death of Gucci, its founder. Maurizio Gucci started owning Gucci because when his father died, he left 50% of his stake to him. Although he got support from his cousin, Paolo, Maurizio still controlled more than 50% of the company, which made him the legal owner of Gucci at that time. During 1999, the competitive analysis showed that Gucci occupied a middle range in the industry with its leather model ranging between $600 and $1,100. Also, the financial results of 15 to 20 lay in the $0.5 billion to $1 billion range; and ten were pegged at between $100 million and $0.5 billion in sales.

Gucci was a privately owned company. From this, it enjoyed various benefits. One of the advantages is undisputed ownership. Gucci and his sons kept control of Gucci Company because it was privately owned. The firm did not have to report to company officers or directions; hence is the reason why it was successful. Additionally, when a business is privately owned, one can sell stock shares to help in funding operations with the company’s control being lost, provided more than 50% of the company’s stock remains with the owner.

Another advantage is limited disclosure. When a business is privately owned, it does not have to file financial or informational documents with various agencies. For instance, Gucci's disclosures were limited to information demand by the states it operates in. The filing of these reports is disadvantaged because it requires filing fees. However, if a company is privately owned, the only information disclosed in the annual report is the address and name of the business, as well as the current registered agent and officers. Gucci, being privately owned, had its financial and operational information remain private.

Being privately owned, Gucci did not offer stock to its employees. However, doing so could have been advantageous to the company. Firstly, it ensures that employees become a firm’s bigger part, which keeps employees motivated. When employees have stock options, it becomes easy to motivate them because they will get more rewards depending on the performance of the business. This helps in keeping them stay motivated. Also, offering stock options decrease employee turnover. If a firm is performing well, offering stock options to employees prevents them from leaving the company.

On the other hand, there are risks associated with offering stock options to employees. One of the is that stocks are not influenced by individual employees, but rather, by the company. As mentioned earlier, stock options make employees work harder, but if the stock option does not apply to all individuals within the firm, hardworking employees will suffer, which may make them see a loss because some of the team members are not working to their standards. Additionally, offering stock options is an additional expense. This would also make stock diluted and expensive because employees would not comply with tax implications.

At the end of 1993, the book value of the company was $340 million ($170 million in September 1993 represented half of its shares). The company arrived at an asking price of $350m in 1994 by reviewing its price structure. Additionally, the issuing of 20 million shares by the company increased its value. Additionally, the value rose due to rigorous advertising (reflected by increased advertising expenses).

Gucci was incorporated in the Netherlands and traded in New York and Amsterdam markets because these markets have many consumers of luxury goods, especially working-class women; hence are the best target markets for the company. The company was incorporated in the Netherlands because of tax benefits, such as tax relief for companies operating in the region.

Artemis is a retail company that makes women’s fashion wear. It retained the ownership of YSL Couture because it was creative and invented modern women’s dresses. Artemis wanted to dominate the women’s fashion world. Gucci also acquired Sergio Rossi at a higher price than its cost is because it produced high-fashion shoes, which were in line with Gucci’s products. The company’s stock price shows that the total number of shares issued influences it. The price rose from 1995 to 1999 because Gucci issued shares.

Conclusion

Gucci’s financial statements show that the company has maintained good financial health since it was started despite the decrease in operating profit. The acquisitions made by the company is among the reasons behind its success because it promoted a wider reach. Also, the ownership of the company, privately owned, ensured proper control, which also helped Gucci prosper. Therefore, the case of Gucci reveals that the journey to success is not easy; one has to go through ups and downs to be successful.