Standing on Two Legs: Luxury and Retail Drive PPR Net Up 28 Percent

PARIS — PPR still loves both its children.Despite speculation that the group would further trim its retail operations in favor of higher-margin luxury goods, chairman and chief executive officer François-Henri Pinault insisted PPR remained committed to both businesses. "The principle of diversification is very important to me," Pinault told analysts Thursday. "We have always built our group on two main divisions…which are complementary."Pinault made the comments as PPR reported a 28 percent increase in net profits last year, to 685 million euros, or $860.5 million, from 535 million euros, or $666.3 million, a year earlier, powered by a buoyant luxury sector and improvements in the retail arm. And the executive remained bullish, forecasting further improvements in PPR's performance in 2007. Pinault said the company would ramp up store renovations in luxury and retail to boost productivity and outpace the market.He noted, for example, that a switch from horizontal to wall-mounted displays of eyewear in Gucci stores resulted in a 30 percent sales bump. Twelve new stores are planned for Gucci in 2007, plus five relocations, along with 10 new units for Bottega Veneta, he added.Reporting its financial results, PPR said operating profits rose 19.9 percent, to 1.28 billion euros, or $1.6 billion, led by a 44.2 percent leap in luxury goods and a 29.1 percent bump from the core Gucci brand. Operating income from retail businesses improved 4.1 percent.PPR reported in January that total group sales rose 5.9 percent, to 17.93 billion euros, or $22.52 billion. Currency conversions were made at average exchange rates for the respective periods.PPR noted retail sales in January and February accelerated from the fourth quarter, and luxury sales were "broadly in line."In an interview with WWD after the presentation, Pinault also confirmed a continued drive upscale for the core Gucci brand, scuttling persistent media suggestions PPR might take the brand down market."There is no project of launching a second line [for Gucci]. That is not at all the strategy," he said. In fact, he noted the average price for Gucci's top 10 selling handbags zoomed up about 25 percent last year."We will be going upward in the watch category. It's our vision in all product categories," he said.A similar upgrade is also in the cards for Sergio Rossi. "We would like to grow this brand significantly in the future," Pinault said. "We have a huge potential in the United States."At the presentation, with runway and advertising images flashing behind him on a giant screen, Pinault revealed that Gucci Group's "other brands," which include Stella McCartney and Bedat & Co., swung into the black last year, posting profits of 10 million euros, or $12.5 million, versus a loss of 14 million euros, or $17.4 million, last year.Boucheron moved to profitability last year and Balenciaga tripled its operating results, he said, later noting all brands would meet the 2007 profitability deadline set by Gucci Group ceo Robert Polet three years ago.Profits at Bottega Veneta catapulted almost four times to 55 million euros, or $69.1 million, from 14 million euros, or $17.4 million a year ago.Pinault declined to give a breakeven deadline for Yves Saint Laurent, but stressed the brand's turnaround was on track. He reiterated YSL would get out of the red when sales total 300 million euros, or about $390 million. YSL narrowed losses by 24.9 percent last year, to 49 million euros, or $61.5 million, on sales of 194 million euros, or $243.7 million. "Trends at the start of the year confirm our confidence," Pinault said, noting that accessories already accounted for more than half of YSL's sales. "The brand's potential will allow it to grow well beyond the 63 stores already open."Operating profits at YSL Beauté improved 79.9 percent, to 32 million euros, or $40.2 million, reflecting the positive impact of a recent restructuring and a sharper focus on key brands and markets.Pinault called 2006 an "excellent year" for luxury with "strong dynamics," while retail faced a "tricky and competitive environment." Last year, PPR sold its Printemps department stores and the Orcanta lingerie chain, and added the Sportsman's Guide to its Redcats portfolio. Operating profits at Redcats slipped 2.6 percent, to 225 million euros, or $282.6 million, which management blamed partly on erratic weather.Pinault highlighted strong outlooks for the group's book and music chain, Fnac, and CFAO, an African company selling everything from automobiles to pharmaceuticals."Often people say Fnac is not really profitable. That is wrong," Pinault told analysts, saying new store formats and better procurement were showing results. (Profits last year rose 10.4 percent, to 170 million euros, or $213.5 million.) "The outlook is quite positive in terms of growth and profitability. Our concept is far more powerful than it was in the past."He also pointed to greater political stability and economic indicators in Africa for CFAO.Last year, PPR reduced its debt by 1.12 billion euros, or $1.41 billion, to 3.46 billion euros, or $4.35 billion, for a gearing of 37.9 percent. Pinault said that put the firm in a healthy situation to do medium-size or significant acquisitions — not that he is in any hurry to do so."We are very serene in terms of acquisitions," he told analysts. "The focus on all the teams around Robert [Polet] is organic growth. It's much better in terms of value creation than making a pricy acquisition."Suggesting no imminent comeback for the buying frenzy of the late Nineties, Pinault said PPR would focus on organic growth and international expansion, echoing recent comments by Bernard Arnault, chairman of LVMH Möet Hennessy Louis Vuitton.Pinault told WWD any acquired brands would have to complement PPR's current portfolio in terms of categories and market position."For instance, in the ready-to-wear field, we have a good portfolio with YSL, Alexander McQueen, Stella McCartney, etc.," he said. "We would be much more interested to reinforce our jewelry and watch brands or our cosmetics brands."Pinault voiced optimism for continued strength in luxury, but said the sector would likely slow slightly in 2007, to growth of roughly 7 percent to 8 percent versus about 10 percent in 2006. Challenges for the sector in 2007 include weakness in Japan and Taiwan and a dip in American tourists in Europe due to the strong euro.On the plus side, "the rest of Asia is still very, very strong," Pinault said. "In any case, we think we'll be in a position to do better than the market."HSBC in Paris, which has an overweight rating on PPR stock, applauded Thursday's numbers and said consensus earning estimates should move up. In a research note, analysts Antoine Belge and Erwan Rambourg noted the main risks to the stock "are linked to possible acquisitions, especially if the target is not a pure luxury brand but an 'in-between luxury and retail' business."Shares in PPR gained 1.3 percent, to close at 115.66 euros, or $151.74, on the Paris Bourse.