By  on July 30, 2014

PARIS — Kering hopes its transition out of retail and into a luxury and lifestyle group will help it weather a tougher-than-expected economic environment this year.

The French conglomerate said Wednesday that net profit fell 4.7 percent to 555 million euros, or $761 million, in the first six months of 2014, during which it closed the sale of struggling mail-order retailer La Redoute.

At the same time, Kering revealed it is reinforcing its recently created watches and jewelry division with the acquisition of Swiss luxury watch brand Ulysse Nardin.

The profit decline at Kering is further evidence of the headwinds facing the luxury sector as it struggles against a slowdown in demand in China and Russia, and continuing volatility in global currencies. The drop comes on the heels of LVMH Moët Hennessy Louis Vuitton reporting last week that its profits fell 4.3 percent in the first half.

Kering said that despite the difficult economic and currency environment, it saw signs of improvement going forward. Revenue growth accelerated in the second quarter, fueled by the strong performance of luxury brands like Saint Laurent and Bottega Veneta, which compensated for continued weakness at its cash cow brand Gucci.

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Kering said sales rose 1.8 percent in the three months to June 30 to 2.35 billion euros, or $3.22 billion, compared with a 1.2 percent increase in the first quarter. At constant exchange rates, group revenues gained 4 percent in the second quarter versus a 4.1 percent increase in the first three months of the year.

Dollar figures are converted from euros at average exchange rates for the period in question.

François-Henri Pinault, chairman and chief executive officer of Kering, said growth in the group’s luxury activities in the first half of the year was driven by a “solid performance” from directly operated stores, while sport and lifestyle activities posted higher

comparable sales, which he deemed an “encouraging” trend.

“Our overall performance during the period confirms the strength, appeal and strategic coherence of our brands. In an unsettled operating environment, we are pursuing the implementation of our strategy, all the while keeping tight control over costs and safeguarding our gross margins,” he said.

“This enables us to anticipate an improvement in our operating performance in the second half of the year,” Pinault added.

Sales from Kering’s luxury activities were up 4.8 percent in the second quarter, while its sport and lifestyle companies posted a 4.7 percent drop. Gucci recorded a 5.7 percent decrease in sales, while struggling German activewear firm Puma slipped 5.2 percent, as reported in a separate results statement on Tuesday.

Gucci, which accounts for more than half the group’s total business, continued to pay the price for its ongoing luxury upgrade. Wholesale revenues were down 12 percent in the second quarter as the brand continued to shift its business toward directly operated stores.

Retail sales were flat in Japan in the second quarter and trends in Mainland China were unchanged, though North America posted a 10 percent rise after a first quarter dampened by bad weather, Kering chief financial officer Jean-Marc Duplaix said in a conference call with analysts late Wednesday after the close of the Paris Bourse.

Western Europe was “soft” with mixed local spending and some pressure on tourism flows from Russia and China, while Hong Kong, Singapore and Taiwan were hit by the combination of falling spending and the brand elevation efforts, he added.

Duplaix said Gucci should return to positive comparable growth in the second half, but it was “realistic” to expect a “low-single-digit” increase, with most of the improvement concentrated in the fourth quarter. The brand should benefit from the imminent appointment of a new ceo in China, he added.

The executive said Gucci was satisfied with its product mix in leather goods, noting that entry-price handbags now represent just 2 percent of the category revenue worldwide, down from 32 percent five years ago.

“Handbags constitute the category in which we have made the most progress across all markets and where we are closest to where we want to drive the brand. The results are probing, especially in Japan, where the brand is fully in sync with its clientele, and in North America, where the brand ramp-up is solidly on track,” Duplaix said.

He singled out the positive reaction to Gucci’s Swing and Bright Diamante bags.

“The new series have been very well received and we expect them to become significant contributors to revenue growth. Combined with our ongoing efforts to further enhance our retail excellence across the network, these new handbags will definitely strengthen Gucci’s competitive position when end demand and traffic — notably in Asia — pick up strength again,” he predicted.

Sales at Saint Laurent jumped 26.9 percent in the second quarter, with all regions posting high-double-digit growth. All product categories were up, with a strong reception for the Monogram and Sac de Jour bags. Retail sales of ready-to-wear soared 42 percent in the first half, boosted by strong growth in the men’s line.

Revenues at Bottega Veneta rose 16.1 percent in the quarter, with leather goods and men’s lines driving growth.

Among other brands in the group’s portfolio, Alexander McQueen and Stella McCartney boasted “outstanding” performances during the period, according to Duplaix. Balenciaga recorded double-digit trends at retail, accelerating in the second quarter.

The picture was mixed elsewhere. Brioni’s performance was deemed “satisfactory,” though it was impacted by a decline in spending by Russians. The Russian market for luxury has been hit by a soft economy as well as the ongoing crisis in the Ukraine. Boucheron was hit by a sharp drop in sales in Japan in the second quarter, while Girard-Perregaux felt the impact of a change in distribution in the Asia-Pacific region.

Revenues and profit at Sergio Rossi again fell below expectations, but Duplaix said Kering’s more recent acquisitions — Christopher Kane and Qeelin — were still in the investment phase.

Regarding the purchase of Ulysse Nardin, Pinault noted that the watchmaker, founded in 1846, benefits from a rich heritage, high profitability and solid growth prospects.

“Independent high-end watchmaking manufactures are rare. This is an opportunity that we had to seize, particularly because this structural acquisition will enable us to take advantage of numerous synergies with our existing brands,” he said.

Jean-François Palus, group general manager at Kering, said the acquisition price represented 13 times Ulysse Nardin’s earnings before interest, taxes, depreciation and amortization in the most recent fiscal year, a level he considered “fair.”

Though he would not provide figures, he described as “reasonable” market estimates that the group has an annual turnover of around 250 million euros, or around $340 million at current exchange, and produces some 27,000 units a year.

The deal is subject to regulatory approval and is expected to be finalized in the second half of the year.

Duplaix said Kering had booked a loss of 348 million euros, or $477 million, stemming from discontinued operations in the first half, which included the balance of the cost relating to the disposal of La Redoute and anticipated costs linked to the sale of the last two small remaining assets in its Redcats division.

“After this, you should not expect any more material impact from this line,” he said.

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