Roberto Cavalli: What Went Wrong?

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On Monday, employees of the Italian fashion house Roberto Cavalli picketed in a Florence square, many wearing bibs that said: "We Create the Future." The unionised workers, whose company filed for the equivalent to Chapter 11 bankruptcy protection in Italy last Friday, were standing up in a show of solidarity with the 93 American employees who were laid off in the US last week, where the company's local entity plans to file for Chapter 7 bankruptcy.

In Italy, the house is asking the court for a maximum 120 days of protection against creditors while it searches for an investor. In the US, it has given up altogether, liquidating its remaining assets in order to pay back its debts.

Later on Monday, workers sat down with the Cavalli team, including global chief executive Gian Giacomo Ferraris, as well as Italian government officials, to better understand their future. In the end, their unions released a statement saying that they still didn’t understand why private equity firm Clessidra Capital Partners, which acquired Cavalli in 2015, had stopped investing in the brand and why management didn’t ensure the company would be supported by Clessidra before taking out loans in order to continue with its turnaround plan.

The confusion and uncertainty surrounding Monday’s proceedings were symbolic of the chaos that a challenging turnaround can bring.

Protests outside a Roberto Cavalli store in Florence, Italy

Roberto Cavalli came to prominence in the 1970s, earning early notoriety for his patchworked fabrics cut into sexy silhouettes. (Perhaps no other brand is more closely associated with animal prints than Cavalli.) By the time the designer wanted to sell the business in the mid-2010s, he and his family were looking for a sizable valuation, according to market sources.

This, despite the fact that the company began posting annual losses starting in 2014, when, despite sales growth, the company lost €12.2 million mostly due to a bad debt provision.

In 2015, the Cavalli family sold 90 percent of the business to Clessidra, which mostly invests in family-run Italian brands across a host of different categories (it raised €2.5 billion to become the largest Italian private equity firm). On its website, Clessidra’s objectives include developing family businesses and “supporting the ‘Made in Italy’ label in the global market.” The deal valued the brand at €390 million, less than what Mr. Roberto Cavalli had original sought, though he walked away with €230 million and has remained silent through the recent turmoil.

Since acquiring Cavalli, Clessidra has experienced its own fair share of upheaval. In 2016, founder Claudio Sposito passed away and the firm was sold to investment fund Italmobiliare, which brought in a new board. But regardless of what was going on behind the scenes, Clessidra understood that in order to capitalise on Cavalli’s global name recognition, the label would need a serious overhaul. Former Pucci designer Peter Dundas was installed as creative director and given rein — and budget — to not only re-imagine the collections, but also the brand’s stores and other creative assets.

Dundas, who had worked at Cavalli earlier in his career, was considered a good aesthetic fit, but his expensive changes didn't immediately resonate with customers and the company suffered financially. Sales contracted, particularly in the Russian market, an important region for the brand. In October 2016, a newly installed Ferraris — a turnaround specialist, best known for reviving Versace — reorganised the business as part of a five-year strategic plan, closing its Milan office, cutting 200 jobs (out of nearly 700) and parting ways with Dundas. The company lost €55 million that year.

About six months later, Ferraris finally installed a new design lead: Paul Surridge, a veteran of Z Zegna, Acne Studios and the Raf Simons era at Jil Sander. (He also did time with Calvin Klein in the 1990s and Christopher Bailey at Burberry.) Ferraris and Surridge had worked together at Jil Sander, but the appointment was puzzling to some industry observers, especially given the maximalist leanings of the Cavalli label and consumer appetite for such wares.

Ferraris’s explanation suggested that it may have been Surridge’s corporate experience — his understanding of how business and marketing worked — more than his design credentials that won him the job. “He is a great team leader, and has a great sensibility for digital communication, and he can really interpret and play a role in the future DNA of Roberto Cavalli,” Ferraris said at the time.

Italian maximalism has enjoyed quite a run over the past few years. But it seems that the label has missed its window for an epic revival.

Surridge's collections, while not entirely outside of the Cavalli wheelhouse, lacked the whiz-bang to keep critics truly interested, despite the fact that all seemed to like his designs outside of the Cavalli context. In February 2019, Vogue Runway's Nicole Phelps put it nicely when she said, "Paul Surridge's tenure at Roberto Cavalli has been slow to heat up."

And sales did begin to pick up, if not exponentially. In 2017, the company posted a 3 percent increase in direct revenue. And while it still lost a lot of money that year — €33.7 million — the losses had begun to shrink, indicating to management that the turnaround was underway.

However, in 2018, sales began to drag once again. It was a polarised year for luxury in general, with certain brands, like Gucci and Versace, posting record results, while others suffered. At Roberto Cavalli, plans to revamp the company’s store fleet were stalled. It was estimated that the brand would need €50 million to €100 million more, in order to complete the turnaround.

Ferraris and his team asked Clessidra for more money and were given €5 million, with the promise of another €10 million to come. "The company is making big improvements, but to remain competitive, it needs to invest," Ferraris told Reuters in October 2018, adding that Clessidra was "fully supporting" that growth.

But by the fall, sales were worse, and in September Clessidra hired banking firm Rothschild to search for potential investors, despite denying this publicly. By the end of the year, there were nine interested buyers, including Phillip Plein and OTB, the group owned by Renzo Rosso.

On March 25, 2019, Surridge quit, announcing the change via Instagram. "I have given much consideration to this decision and reached the conclusion that the mission I have signed on has changed and enters a new direction with a new perspective," he wrote.

In the documents filed to the Italian government asking for 120 days of bankruptcy protection, Roberto Cavalli listed six potential investors, including Plein and OTB, but also Interparfums Inc. and Marquee Brands, the American company that owns BCBG. The judge will award the company to the investor with the best offer.

Right now, it’s looking like Bluestar Alliance, a US-based brand management company that mostly deals in low-to-mid-priced mall brands like Tahari and Bebe, will be the winner. According to a source within the Roberto Cavalli business, those talks continue to progress and are close to being finalised. In the government filing, it says that Bluestar would invest over €105 million into the company through the acquisition of trademarks.

However, nothing has been communicated regarding Bluestar’s plans for the brand, and whether they will use Cavalli to fully enter the luxury market or take this as an opportunity to reposition the label to something on the lower end of the pricing spectrum remains unknown.

At this point, Clessidra doesn’t have much of a choice but to sell, unless it wants to invest further in the label’s turnaround efforts. But a source familiar with the situation said that the firm simply does not have adequate expertise in the fashion space and became fearful of allocating more funds to something it doesn’t really understand. While private equity firms typically stay out of operations, they often employ partners with an understanding of the category to help support. But the sum of money needed to attempt a successful turnaround made the firm too uncomfortable to keep going, said the source.

In the end, it's unlikely that Ferraris will be given the opportunity to see his turnaround plan through, regardless of who owns Cavalli. And it seems that the label has missed its window for an epic revival. Italian maximalism has enjoyed quite a run over the past few years, with the rise of Alessandro Michele's Gucci, the continued popularity of Dolce & Gabbana and the revival of Versace, leading to a 2018 acquisition by Capri Holdings that valued the house at $2.1 billion.

But Roberto Cavalli’s global brand equity is currently nowhere near that of Versace, if it ever was, and now the Italian maximalist moment in the fashion cycle is beginning to die down.

THE NEWS IN BRIEF

FASHION, BUSINESS AND THE ECONOMY

Hudson's Bay | Source: Shutterstock

Hudson's Bay profit beats estimates as Saks Fifth Avenue sales rise. The department-store owner reported a quarterly profit that topped estimates, as sales at its Saks Fifth Avenue stores rose almost 4 percent during the holiday shopping season and the Canadian company benefited from an increase of 8.7 percent in online sales. However, Hudson's Bay Company's total comparable sales decreased 1.4 percent with a $170 million loss from continuing operations in the fourth quarter.

American Eagle says spinoff for Aerie could happen. The retailer may spin off its highly successful Aerie lingerie brand (which has captured consumers from Victoria's Secret with its body-friendly marketing), but not yet, says company CFO Bob Madore. Investors' attention turned to potential spinoffs after Gap announced plans to split its Old Navy chain into a standalone company, which provided a big, albeit temporary, stock boost and prompted calls for similar moves by other apparel chains.

Apple, Louis Vuitton, Gucci drop China prices for VAT cuts. China cut its value-added tax rate on April 1 in a move to  rebalance its economy. Consumer brands promptly lowered prices for their products in China to reflect the cut. Prices at LVMH's Louis Vuitton and Kering's Gucci dropped 3 to 6 percent, and Apple discounted some latest iPhone models by up to 500 yuan ($74.44). It is the second VAT cut in 11 months as the Chinese government tries to narrow the China-overseas price gap to boost domestic spending and cut out daigous.

Weak US retail sales underscore slowing economy, while Hong Kong retail sales drop for first time in two years. North American retail sales fell unexpectedly in February, the latest sign economic growth has shifted into low gear as stimulus from $1.5 trillion in tax cuts and increased government spending fades. In the same month, Hong Kong retail sales fell ending a 23-month expansion streak, and the total for 2019's first two months was down year-on-year as US-China trade tensions kept consumers cautious and a weaker Chinese yuan made the city more expensive.

Superdry shares slump following founder's return. Despite the board opposing his return, saying it would be highly disruptive and could trigger resignations, Julian Dunkerton is set to return to the board after winning the support of shareholders by a narrow margin. The result indeed sparked the exit of most board members, including five-year chief executive Euan Sutherland who resigned immediately. Shares in Superdry subsequently fell more than 11 percent.

Sports Direct says Debenhams investors back Ashley's bid for CEO. The sportswear group bought department store chain House of Fraser out of administration last year and has been trying to wrest control of Debenhams for months. Sports Direct, which has a near-30 percent stake in the British retailer, said it has been contacted by an unknown number of shareholders in the Debenhams group expressing their support to install Mike Ashley as chief executive.

THE BUSINESS OF BEAUTY

Fenty's "Geisha Chic" highlighter | Source: Instagram

Fenty Beauty pulls "Geisha Chic" highlighter. Rihanna's makeup brand has halted the launch of its Killawatt Freestyle Highlighter "Geisha Chic" due to negative feedback from fans about the name's racial insensitivity. The metallic brick-red product was originally slated to launch this week along with two new highlighter compacts. Many fans were quick to express their disappointment in the brand's choice of shade name on social media.

Kourtney Kardashian launches Poosh, her answer to Goop. Inspired by her daughter Penelope, the reality star has launched her own lifestyle and e-commerce site, which will curate content on non-toxic beauty alternatives, advice for mothers, recipes, home decor ideas, workout and style tips in the form of interviews, tutorials and lessons from experts. The oldest Kardashian's media launch is the latest business venture from Kris Jenner's (very successful and lucrative) family empire.

Bain has a new beauty investment. Bain Capital Private Equity has acquired a majority stake in Maesa, the beauty firm that manufactures Drew Barrymore's Flower Beauty. The transaction is expected to complete in the first half of this year. Maesa generates approximately $230 million in global annual sales, employing 300 people across seven offices worldwide.

Indie fragrance brand files a lawsuit against Urban Outfitters. 3-year old fragrance company Eris alleges that the retailer copied its federally registered trademark for a private label perfume collection and "deliberately" copy-and-pasted "marketing text almost verbatim from [Eris'] website" to sell its mass-market scents.

Pat McGrath Labs launches in Selfridges. McGrath's brand of pro makeup products sold out in a matter of hours when it launched in 2015, four years later the company is a billion dollar business with over 100 products. The launch in Selfridges marks her first brick and mortar location in the UK, and includes product collaborations with Prada, Comme Des Garçons and other brands — the first time a makeup artist has collaborated with luxury brands in this capacity.

PEOPLE

Condé Nast appoints global chief executive. The privately owned publisher of Vogue, Vanity Fair and GQ has appointed Roger J Lynch, former head of Pandora, as the company's first global CEO, as it aims to stem losses and transform itself for the digital age. Jonathan Newhouse has been appointed chairman of the board, and Lynch also will join the board when his appointment takes effect on April 22.

Beyoncé teams up with Adidas to sell clothes and shoes. The sportswear firm and pop star have joined forces to develop footwear and apparel, as Adidas seeks to reignite growth in its casual fashion lineup. Beyoncé ended a venture with fashion tycoon Philip Green last year by buying out his stake in her Ivy Park brand. Adidas will succeed Green as the athleisure brand's backer.

Antoine Arnault invests in Lapérouse. The chief executive of Berluti, chairman of Loro Piana and head of communication and image for LVMH, which his father Bernard Arnault controls, has taken a minority stake in the historic Paris restaurant. The art-stuffed 18th-century Lapérouse has played host to a number of fashion events over the years. Thanks to Arnault being a new minority stakeholder, the restaurant's ties to the fashion industry are about to become even stronger.

MEDIA AND TECHNOLOGY

H&M launches online fashion advice forum. The fast-fashion giant has launched a fashion advice forum resembling Quora called Itsapark, where users can give and receive advice on a range of topics, from what to wear to a job interview to how to accessorise a look. As a growing share of fashion sales moves online, mass retailers are investing heavily in technology to gather data and better understand changing consumer behaviour.

Mastercard to invest in Africa online retailer Jumia. The US credit card giant has agreed to invest €50 million ahead of the e-tailer's planned IPO in New York. Mastercard joins shareholders such as French drinks maker Pernod Ricard and founder Rocket Internet. The Pernod deal valued Jumia at about €1.4 billion, making it a rare African unicorn. Meanwhile, Rocket Internet has revealed plans to establish even more start-ups in 2019 than it did last year.

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