Pinault: Slow Road for Kering’s Reinvention

The firm's chairman and ceo considers the group “in an excellent position” for future growth, following a year of “deep-seeded transformation.”

PARIS — When Kering, then PPR, started shedding its retail holdings in 2006 to become a luxury-to-lifestyle conglomerate, it probably didn’t expect it to be this slow and this painful.

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Still, François-Henri Pinault, Kering’s chairman and chief executive officer, considers the group “in an excellent position” for future growth, following a year of “deep-seeded transformation.”

“It’s been a hard path, but we have established a robust foundation to go ahead with our strategy,” Pinault told a press conference on Friday following the publication of the group’s 2013 results, which showed a 95.2 percent drop in net profit, heavily impacted by Kering’s ongoing reconstruction efforts. In 2013, recurring operating income fell 2.3 percent to 1.75 billion euros, or $2.32 billion.

The company, whose stable of brands includes Gucci, Bottega Veneta, Christopher Kane and Puma, is simultaneously developing on different fronts, and Pinault showed no signs of losing patience with any of them, most notably the group’s lagging cash cow Gucci, and Puma, the underperforming core of its nascent sport/lifestyle business division.

At Gucci, which accounts for more than half the group’s total business, sales slipped 5.5 percent in the fourth quarter, with a slim 0.2 percent improvement at comparable exchange rates.

The Italian brand has taken a hit during its ongoing luxury upgrade, the objective being to shift the focus to products with higher average value. According to chief financial officer Jean-Marc Duplaix, smaller tourist flows to Europe in the fourth quarter also dented Gucci’s fortunes.

Fielding questions about the brand’s slow road back to the top, Pinault said, “In the U.S., in Japan and in Europe, this strategy has already been implemented with success, which shows that tangible benefits to the sales trend are feasible.”

He added that even in China, where luxury growth has slowed in general, it was “progressing a lot.…We are working city by city to enhance our network of distribution there.”

According to Jean-François Palus, Kering’s group managing director, Gucci would open seven stores in China, close seven and refurbish seven more. “When we talk about luxury brands, you deal with a very sensitive metabolism, everything is gradual,” he cautioned. “The fiscal year doesn’t mean anything, because things happen every day and last a very long time. What we are building now is meant to last the next 20 years. You won’t feel the difference on a yearly or quarterly basis.”

Though some analysts viewed Gucci’s fourth-quarter and 2013 performance as disappointing, others saw the concerns as overblown.

“The brand has been upscaled successfully in Japan, where the no-logo handbag product reached about 70 percent in 2013. This gives us confidence regarding China. Our analysis suggests a reacceleration to 4.5 percent organic growth is achievable for Gucci in 2014,” said Helen Norris, luxury goods analyst at Barclays.

Duplaix said Kering expects “single-digit growth” for Gucci in 2014.

However, analysts, including Barclays, do not think Gucci could attain double-digit growth again. “We project 6 percent organic growth by 2015, 7 percent by 2016,” specified Norris.

Meanwhile, Saint Laurent’s revenues surged 17.8 percent last year, giving Kering’s luxury division a healthy boost. “It’s a stellar number and definitely higher than we expected,” enthused Norris.

“The transition of the artistic direction to Hedi Slimane was a huge success,” according to Pinault. “Men’s and women’s ready-to-wear were particularly well received, up 53 percent,” said the executive, while leather goods and shoes accounted for the lion’s share of revenues, 66 percent, driven by the brand’s new styles such as the Sac du Jour handbag and Paris shoes.

Kering said the new ysl.com Web site, redesigned at the end of 2012 and now serving 60 countries, fueled the brand’s e-commerce, while brick-and-mortar business, which comprises a retail network of 115 directly operated boutiques, was well balanced in geographic terms.

Revenues at Bottega Veneta rose 7.5 percent last year to surpass the billion-euro threshold. They totaled 1.02 billion euros, or $1.35 billion, led by “a solid progression” in leather goods, up 15 percent, as well as an “outstanding performance” of men’s wear, now accounting for more than 30 percent of sales.

As reported, Puma’s net loss widened to 115.2 million euros, or $156.8 million, in the three months ended Dec. 31, with the brand citing mostly a lack of a clear message and problems with distribution as negative factors.

Pinault was upbeat about the sporting and lifestyle category, saying “2014 will see an ambitious relaunch of Puma. We are very content with the new program.” He cautioned not to expect any fast results, given that Puma’s new image campaign is to be launched in August and a new package of products for spring 2015 is still down the road.

Kering warned in November that the group’s net profits would be sharply down due to one-off charges at Puma and nonrecurring impacts from discontinued operations. Exiting its last remaining retail businesses, the group suffered a net loss of 256 million euros, or $339 million, related to the disposal of shares in its books, music and electronics chain Fnac, and a net expense of 562 million euros, or $746 million, related to the catalogue retailer Redcats.

Kering is continuing the process for its planned sales of catalogue retailer La Redoute and Relais Colis.

Between 2005 and 2013, the group’s recurring operating income shifted from 66 percent retail distribution and 34 percent luxury to 89 percent luxury and 11 percent sports and lifestyle.

All dollar rates are calculated at average exchange rates for the period concerned.

In the fourth quarter, sales edged down 0.6 percent to 2.55 billion euros, or $3.47 billion, from 2.56 billion euros, or $3.32 billion, a year ago. At comparable scope and exchange rates, this represented a rise of four percent.

Pinault sidestepped questions regarding the conglomerate’s declared aim to triple its size by 2020, saying only that the group expected “growth in our revenue and recurring operating income in 2014.”

“We understand, tripling in size before the end of the decade has always been more of a vision than a target. Viewing how weak Puma is, it will be difficult to achieve,” Norris noted.

Shares in Kering closed down 2.3 percent at 151.45 euros, or $207.83, on the Paris Bourse on Friday.