MILAN, Italy — In September 2007, when Valentino Garavani and his business partner Giancarlo Giammetti stepped down from the luxury house they had built together for over 45 years, they made it clear they were not pleased with private-equity firm Permira — which had just taken a 29.9 percent stake in Valentino Fashion Group (VFG) — or the decision to appoint Alessandra Facchinetti as the brand's new creative director.
"We haven't met. I gave her some advice, it will be up to her to find her way," Mr Valentino said to Italy’s Il Messaggero newspaper at the time. "I regret not to have had the time, nor the will to groom an heir." But insiders whispered that he had already anointed Jack McCullough and Lazaro Hernandez of Proenza Schouler as his successors, hence the recent investment by VFG in their fledgling business.
Shortly thereafter, speaking about the waves of different investment groups he had worked with over the years, Mr Giammetti told Cathy Horyn: “Why should we go on explaining? Why should we go on fighting? For what?”
The Permira transaction took place at the height of the market bubble, valuing the business at €2.6 billion (about $3.6 billion at current exchange rates), making it the largest-ever leveraged buyout in the luxury sector, with the deal's main value stemming from Hugo Boss, in which VFG had a majority holding.
Ms Facchinetti took the creative helm at Valentino just as the financial crisis hit and was ousted after only two seasons. In 2009, revenues at Valentino shrank by 9 percent from the year earlier to around €232 million (about $318 million) and the company's EBITDA, a measure of operating profit, dropped into negative territory. Permira had to renegotiate its loans with international banks and, reportedly, wrote down the value of its investment in Valentino by more than 50 percent.
Valentino had become a case study on the poor fit between private equity players, generally focused on short-term results, and luxury brands, which often demand a longer-term outlook. But when Pierpaolo Piccioli and Maria Grazia Chiuri (who worked directly with Mr Valentino in the company's accessories department for over a decade) took the reins as co-creative directors, the brand finally began to shift gears. Soon, Valentino had made a real dent in the accessories market, with its ‘Rockstud’ bags and shoes, and camouflage sneakers for men. The core women's ready-to-wear offering felt modern again.
Then, in July 2012, in a surprise move, the iconic Italian house was snapped up by Mayhoola For Investments — a firm widely thought to be a vehicle for Sheikha Moza bint Nasser al-Missned, the mother of the Qatari emir — for a reported €700 million ($960 million), a figure believed to be significantly more than what its existing investors thought it was worth. Permira made a surprisingly decent return on its investment in Valentino and held onto its stake in Hugo Boss. (Proenza Schouler had been set free, the year before, in a deal with Andrew Rosen and a consortium of other investors).
Since then, Valentino has been on fire, sharpening its new modern identity and rolling out statement retail stores around the world. In 2013, revenues at Valentino SpA were up 25 percent to €488 million (about $669 million) over the previous year. EBITDA almost doubled to €65 million (about $89 million) and operating profit rose a whopping 240 percent to €36 million (about $49 million). All this, in the context of a luxury market that grew only 2 percent in 2013, according to Bain & Company, a consulting firm.
At the brand’s show for Autumn/Winter 2014, the company's founding fathers (now onside with the brand) wept as the new designers took their bow and paid homage. And there, through it all, was Stefano Sassi, who joined the company as chief executive in December 2006 and has steered the business through the ups and downs of the intervening years. BoF sat down with Mr Sassi to discuss the incredible Valentino turnaround and understand exactly how they did it.
BoF: I’ve been watching Valentino from afar since the Permira investment happened, followed by the market crash in 2008. Things were tough.
SS: It was a huge investment, obviously because of Hugo Boss, but in any case it was a huge investment. Many things [happened] together: new shareholders, Valentino Garavani leaving the company, and the financial crisis. It was kind of a perfect storm.
BoF: The perfect storm that led to a really difficult situation. But, I’ve been amazed to see how things have changed. What are the key factors that have played a role in this turn of fortunes?
SS: For sure, the major difference is people. I think that we should recognise Maria Grazia [Chiuri] and Pierpaolo [Piccioli] and the management team, [and] their capability to work in a very consistent way, in a very tough way, on a vision. We were coming from a glorious past in which a couple of geniuses had done something unbelievable in terms of setting up a brand with global notoriety, but the business of Valentino [was] still small.
BoF: How big was the business back then?
SS: It was €250 million. Why did Gucci, Prada or Chanel [become] 8 to 10 times bigger than us? [Valentino had] the same notoriety, with the same level of exclusivity — that capability to seduce and secure a certain kind of customer.
But we strongly needed to update it. In the past we were talking to ladies that were more formal, more well-defined. Today’s girl is completely different. She’s living in contradictions. It can be very formal and very informal at the same time. So Maria Grazia and Pierpaolo, with that in mind, tried to update the style, the design of the brand, everything, according to this vision.
The major task for us was the idea of bringing back Valentino as a cool brand. Not about the [brand] recognition or the standing — all [of that] had been done before. But it had to become cool again.
BoF: The most noticeable changes have been in the product and the communications.
SS: We were trying to bring a brand that was super-exclusive, in a way, down to earth. The starting point was the product. We were not open to new licensing, just to really focus on the core and to send out a very consistent and very clean message: from the collection to the way you present the collection, the way you talk to the press, the shows, retail, then communication and media. Everything has been done with this focus in mind and, apparently, something [is] working because the brand is back in terms of coolness and modernity. That was a crucial target for us.
BoF: What came next?
SS: And then, you have to work on the organisation. Organisation means you have to update all the processes inside the company. You have to go into retail, because retail is the only way, today, to emphasise the image and concept you have in mind. You cannot really do that through wholesale.
A very important turning point was when we presented the new store concept in Milan. It was three years ago, maybe. With the Milano flagship store, designed by [David] Chipperfield, we got [an] immediate response: the retail concept and the product [worked] in such a way that we [were] ahead in that store, 60 percent in one year. That store was poof that the message of the new Valentino was [becoming] clearer.
BoF: When I arrived in Shanghai, last autumn, everyone was talking about the new Valentino store in IAPM. How did you take that original retail concept in Milan and extend it globally?
SS: Our original idea was ‘We don’t want to stop.’ We [did not] say, ‘This is the mood, this is the concept, this is the collection, done.’ Competition is very tough and, on top of that, we are smaller than the other guys. We want to evolve and become more and more sharp.
Stores today are one of the best ways to communicate. It’s really [creating] the customer perception of who you are, what you want to be, and so on. The store concept is something that is continuously evolving and this is [why] the relationship [with] David Chipperfield is crucial to us. Every single new store [is an opportunity] to do something new and better; to learn from the past and to evolve.
We need to talk, we need to impress, we need to communicate, we need to show who we are. We need to talk to people. It’s no [longer] the time of [the elitist] brand. Maybe for somebody else; not for us.
BoF: So you’ve had a major focus product and retail, but the amount of investment required is not small, especially for a brand of the scale of Valentino. I think it was an investment of around €200 million from Mayhoola.
SS: Very correct. All we have done setting the basis for competition in a positive way was done with Permira’s support [during] the Permira period. It means that you can also work with private equity in developing companies. But at that time, we had limited possibility to invest money because of financial constraints. We were able to test the store concept, but not do a major rollout of new stores.
With the new shareholders, we have the possibility. The company was demonstrating that a successful story was possible and they decided to come, to join, to buy Valentino, and to accelerate our trend. The company is doing better and better. And so we are generating cash and it is less risky to open big new stores.
This year, especially, we are going to open three major stores on Fifth Avenue in New York, Canton Road in Hong Kong, and in Piazza di Spagna in Rome. From 1,000 to 2,000 square metres, [these] kinds of dimensions we have never experienced before. We realised that Valentino can be very effective and very powerful from a commercial point of view, if we have the capability to offer and present the whole world of Valentino in a certain way. It’s not just a matter of number of SKUs we can present.
BoF: You talked about the transition from the private equity investment from Permira, which allowed you to create a template and the recent injection of capital from the Qatari investors that has allowed you to take that template and really, as you said, roll it out. What do you think are the characteristics of a good investor for fashion businesses at the scale of Valentino that are looking to grow?
SS: For fashion, it is crucial to have a shareholder that is really looking long-term. Fashion is not a mass market product. It’s about creating a brand, creating a dream, creating a perception. And private equity [is] usually not that. By definition, it’s looking short-term. And this is something that is not easy.
The second fact is that sometimes fashion is about vision. You have a vision, you need to realise that, and you’re blind, in a way. You cannot demonstrate immediately that you are able to do this — and this is, in a way, not exactly the way that private equity works.
Having said that, we worked very well [together]. I think that the relationship we developed with the Permira team, personally, was a very positive one. We trusted each other, we knew we trusted each other, and we were trying to set up a strategy and execute a strategy that was, even within private equity limits, a long-term strategy.
In one way, the relationship could be difficult because of the different nature of the two industries, but our story is demonstrating that if people are working the right way, if [you have] the right mindset and the capability to understand each other, you can be successful in any case.
BoF: And they made a really good return in terms of the valuation from the Qatari investors.
SS: Yes. And it was recognised by everybody inside the industry as a top, top value and price for the company.
BoF: As an outside observer, another element of success has been the success of the brand in accessories and menswear, where Valentino had not been strong before.
SS: This is a matter of talent, in my opinion, and the capability to translate a vision into products. It is not easy. On top of being clever, they are very respectful, taking into consideration that Maria Grazia and Pierpaolo have been working for ten years together with Mr Valentino. You were at the show yesterday — the smiles, the crying, it's coming from the heart, from respect, from working together, and recognising that he is the one that set up the brand. If we can put these [kinds] of ingredients on top of what we have done, it is even better.
BoF: Do you think that Valentino could become the next billion-euro fashion business?
SS: I mean, we’re working for that. It’s not easy at all, but four years ago, we were €230 million. So we doubled our performance. We are expecting that 2014 [will be] another important step in terms of revenue development. I don’t know exactly one billion or whatever, but let’s continue to grow. This is important. Let’s keep thinking about what we have to do to accelerate our development.
BoF: Mr. Valentino is still very much a visible figure in the fashion community. I wonder, how does that help or hurt the process of putting a new stamp on the brand?
SS: To be very honest, at the very beginning we were quite worried about the situation, because it was not that easy [for] all of us —managing and defining a new way of working together with Mr. Valentino [who] just left the company. I think everybody felt the weight of the situation.
Talking about today, I think that the situation is very, very positive. It seems to me, first of all, that they are happy with Maria Grazia and Pierpaolo. They can see that the company’s increasing in terms of visibility and quality. The brand is more important than before in terms of visibility. The heritage is continuing; it is continuing in a positive way.
Yesterday, [it] was pretty visible. They wept because there is respect from everybody. Tears, but in a natural way. It’s not to show off or something. We are happy to see him happy, that’s it.
This interview has been edited and condensed.