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Benetton's Colors Are Running

Benetton Group (NYSE: BNG  ) , owner of one of the most famous clothing exports from Italy with its United Colors of Benetton brand, had a rough day Monday.

First, its CEO and CFO resigned, leaving a yawning leadership void at the top of the company that may not be filled until May 2007. Second, it reported rather underwhelming earnings, making me wonder if the Benetton family, which controls roughly 67% of the company, really does have the right idea about where the company is going.

For the third quarter, revenues grew 6.1% to $606.7 million, while net profits grew 7% to $37.1 million. Year to date, however, operating margins dropped to 10% from 10.7% last year, as the company invested in the continued development of its commercial partner network, which it depends on for sales growth. Like many retailers, Benetton only wholly owns a small fraction of its store base (about 280 stores at the end of 2005), farming out the rest to its partners.

Benetton is rather unusual in the fact that instead of relying on franchise fees and royalty payments like U.S-based franchisers, which include Yum Brands (NYSE: YUM  ) and McDonald's (NYSE: MCD  ) , it relies on a network of sales representatives to push Benetton product to their retail stores. The sales representatives (who also may own stores) are assigned by geography and paid commissions based on how the stores do. The strategy seems to have worked, in the sense that the retailer is one of the world's most famous brands and has about 5,000 stores in about 120 countries.

While the company might be known worldwide for its often brilliant yet controversial advertising campaigns, it definitely has some public-relations clean-up to do now. Last month, Benetton founder and chairman of the board Luciano Benetton announced plans to retire and pass the reins to his son. Thus, it is particularly bad timing to see CEO Silvano Cassano announce his resignation over differences with the Benetton family on how to develop the business internationally. With strong international growth in areas like the Mediterranean basin, China, India, and eastern Europe poised to drive the company's results for some time, it is crucial to execute on a sound plan, and Benetton's leadership is looking rather shaky on that score at the moment.

While the appeal of the brand has its place for this Fool, Benetton is looking relatively expensive with a P/E of 26 when we consider its low growth rates, somewhat saturated store base, and single-digit returns on equity and assets. Monday's events leave this Fool wondering if the influence of the Benetton family may be a negative for the company. Investors looking to invest in retail might consider investigating Hidden Gems pick New York and Co. (NYSE: NWY  ) , or perhaps the downtrodden Urban Outfitters (Nasdaq: URBN  ) .

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Fool contributor Stephen Ellis does not own shares in any companies mentioned. You canview the stocks he owns and check out his98th-percentile ranking in Motley FoolCAPS, the Fool's new stock-rating community. The Motley Fool has adisclosure policy.

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