Fashion & Finance

“An explosive cocktail”

Lesson 11

Castellanza, 17th November, 2010

Corporate Finance

Corporate Finance

Fashion & Finance: “An explosive cocktail”

Summary

1 Two worlds that meet together2 Why so explosive?3 Emanuel Ungaro’s history4 The Ferragamo strategy5 Some figures6 The decision to sell7 Other examples – success stories

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Corporate Finance

1 Two worlds that meet together

Fashion & Finance

Two different worlds that

started to talk each other

due to the changes in

business arena

larger size of the companies;

new geographic markets;

necessity of management

and organization – not only

style;

interest of “external”

investors;

finance as a tool to grow.

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Corporate Finance

2 Why so explosive?

Why very often fashion &

finance are an

explosive cocktail?

fashion is a world of

“primadonna”, “stars”;

finance is a world of “primadonna”

as well;

in many cases people tend to

“invade” the competencies

of the other;

success stories are those in

which the competencies and the

roles of the single individuals are

respected and valued.

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Corporate Finance

3 Emanuel Ungaro’s history

Transformed it into “Emanuel Ungaro SA” and opened the current house at 2, avenue Montaigne, Paris.

Opened “Emanuel Ungaro SARL”, avenue Mac-Mahon in Paris.19651965

19671967

19681968 Opening of the first ready-to-wear boutique, Ungaro Parallele, on the ground floor of the Fashion House. First contact with licenses.

Emanuel Ungaro at the age of 22 started his career working alongside the designer Cristobal Balenciaga in Paris.

19581958

70s70s Ungaro Parallele was opened in American Department Stores (Neiman Marcus, I. Magnin, Saks, Bloomingdale’s, Bonwit Teller) and in Japan (Takashimaya). Start of agreements with the licensor GFT. Creation of the Ungaro pour Hommes line. Opening of the Emanuel Ungaro Homme store at 2, avenue Montaigne. Opening of the first Emanuel Ungaro store in New York.

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Corporate Finance

3 Emanuel Ungaro’s history – cont.

80s80s Creation of the Ungaro Diffusion line in Europe. Creation of the fragrance for women, “Diva”. Opening of the Emanuel Ungaro showroom in Milan. Creation of the Emanuel/Emanuel Ungaro Bridge line.

19961996 Salvatore Ferragamo Group acquired Emanuel Ungaro SA.

From 1997 to

2003

From 1997 to

2003Creation of Fever collection. Creation of the Emanuel Ungaro Shoes and Handbag line, made by Salvatore Ferragamo. Creation of an Emanuel Ungaro Eyewear line, in partnership with Luxottica. Creation of the Ungaro Sun (Swimwear) line. Opening of the Emanuel Ungaro boutiques in London Rome, Moscow, Beijing, Shenzen, Singapore, Taipei and a new accessories boutique in Paris.

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Corporate Finance

Emanuel Ungaro is one of the most famous Fashion House in the

world. The Company designs and commercialises clothes and

accessories and is specialised in Haute Couture and Ready To Wear.

During the last forty years, the Emanuel Ungaro House expanded to

include boutiques and license agreements worldwide. Emanuel Ungaro is

registered at the Chambre Syndicale de la Haute Couture.

In 1996 Salvatore Ferragamo Group, which is one of the most

important and internationally famous Italian luxury company, acquired

the whole share capital of the Company. Salvatore Ferragamo is

also the licensee for the Emanuel Ungaro footwear and handbags

collection.

4 The Ferragamo strategy

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Corporate Finance

The arrival of Ferragamo as new shareholder led to a strategic shift in 1997,

with a focus on internalising the activities of the Company to better control

the operations and the brand image of Emanuel Ungaro.

The main components of the Ferragamo strategy were the following:

Product: reshuffle of product portfolio, keeping the top lines but eliminating the

bridge and the diffusion lines and developing of accessories line (bags & shoes).

Production: have a better control of sourcing and reduce the licensing activities

(e.g Japanese lines).

Distribution: reduce the retail franchising activities and launch an aggressive

retail strategy with the opening of several direct operated shops in key locations

and the refurbishment of the existing boutiques.

4 The Ferragamo strategy – cont.

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Corporate Finance

4 The Ferragamo strategy – cont.

This effort implied closing significant sources of profit (licenses and franchises) and investing in high fixed costs.

This strategy, that was not supported by an appropriate product range, together with the increased competition in the luxury industry since the late 1990s and the economic slowdown since 2001, has put Emanuel Ungaro in an difficult financial situation. In detail the main consequences of this strategy are:

Increase of the Company revenues due to the expansion of retail network, that substituted the loss of Company and brand revenues caused by the decrease of the licensing activity.

Significant decrease of profitability due to the increase of rental and personnel costs not entirely offset by retail gross margin.

The disappearance of the bridge line in the United States and the gradual exit from the Japan marketplace

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Corporate Finance

5 Some figures

The economic results of Emanuel Ungaro for the years ending December 31, 2001-2004 are summarised below

Income Statement 2001 2002 2003Euro '000

Sales 24.521,0 100,0% 26.258,0 100,0% 27.038,0 100,0% 30.122,0 100,0%Cost of goods sold (9.406,0) 38,0% (10.123,0) 39,0% 10.617,0 39,0% (12.323,0) 40,9%

Gross margin 15.115,0 62,0% 16.135,0 61,0% 16.421,0 61,0% 17.799,0 59,1%

Building & Equipe rental/maintenace (5.481,0) 22,0% (6.036,0) 23,0% (4.885,0) 18,0% (6.817,0) 22,6%Professional fee & consultancy (3.835,0) 16,0% (4.128,0) 16,0% 5.062,0 19,0% (4.454,0) 14,8%Labor costs (9.532,0) 39,0% (10.817,0) 41,0% (9.770,0) 36,0% (10.051,0) 33,4%Marketing & selling costs (6.144,0) 25,0% (4.014,0) 15,0% 5.554,0 21,0% (4.985,0) 16,5%General & Administrative costs (3.307,0) 13,0% (2.585,0) 10,0% (2.286,0) 8,0% (2.730,0) 9,1%Operating costs (28.299,0) 115,0% (27.580,0) 105,0% (6.325,0) 102,0% (29.037,0) 96,4%

Ebitda (13.184,0) 54,0% (11.445,0) 44,0% (11.136,0) 41,0% (11.238,0) 37,3%

Depreciation (1.156,0) 5,0% (1.617,0) 6,0% (734,0) 3,0%Amortizaion (952,0) 4,0% (732,0) 3,0% (5.688,0) 21,0%

Ebit (15.292,0) 62,0% (13.794,0) 53,0% (17.558,0) 65,0%

Net interest (1.556,0) 6,0% (1.011,0) 4,0% (483,0) 2,0%Other expenses/revenues (368,0) 2,0% (537,0) 2,0% 3.659,0 14,0%

Ebt (17.216,0) 70,0% (15.342,0) 58,0% (14.382,0) 53,0%

Income taxes (21,0) 0,0% (22,0) 0,0% (76,0) 1,0%Minority Interests 0,0 0,0% 0,0 0,0% 0,0 0,0%

Net result (17.237,0) 70,0% (15.364,0) 59,0% (14.458,0) 53,0%

2004

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Corporate Finance

6 The decision to sell

Poor results led the Ferragamo

Board of Directors to decide

to sell the Company.

Not all the Directors agreed

Deloitte was engaged in 2004

Sale was concluded in 2006

Acquirer: Mr. Asim Abdullah

(Global Asset Capital, Llc), a

High Net Worth Individual who

made a fortune with Internet

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Corporate Finance

7 Other examples – success stories

Valentino

D&G

Armani

Gucci

LVMH

New investors - external

management

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