By  on February 28, 2008

PARIS — Business may be cooling in America, but PPR chief executive officer François-Henri Pinault on Wednesday said emerging markets like China should stoke luxury growth this year.

Pinault made the comments as he reported that PPR's net income advanced 34.6 percent in 2007 to 922 million euros, or $1.26 billion at average exchange, from 685 million euros, or $860.4 million, thanks to robust luxury business and the integration of Germany's Puma, which PPR bought control of last year.

PPR's full-year sales, reported last month, rose 16.1 percent to 27.08 billion euros, or $18.39 billion, from 17.03 billion euros, or $21.38 billion, a year earlier.

"It was an excellent year," said Pinault of the results, which exceeded most analysts' expectations and drove PPR's stock up 0.73 percent to 96.19 euros, or $143.32 at current exchange, in trading on the Paris Bourse.

Recurring operating income at Gucci Group bounded 29.3 percent to 731 million euros, or $1 billion, led by exceptional growth at Bottega Veneta as well as sustained momentum at the Gucci brand. Both Stella McCartney and Alexander McQueen moved into the black last year.

The Gucci brand's operating income improved 5.7 percent to 647 million euros, or $886.9 million, from 612 million euros, or $768.7 million, on sales of 2.2 billion euros, or $3.01 billion, while Bottega's operating income jumped 68.9 percent to 92 million euros, or $126.1 million, from 55 million euros, or $69.1 million, on a 37.1 percent increase in sales to 366 million euros, or $501.7 million, from 267 million euros, or $335.3 million.

Losses narrowed 35.4 percent at Yves Saint Laurent to 32 million euros, or $43.9 million, from 49 million euros, or $61.5 million, on a 13.9 percent rise in sales to 221 million euros, or $302.9 million, from 194 million euros, or $243.7 million. But while PPR lauded great gains at the iconic brand, it again declined to pinpoint a breakeven date.

"[The breakeven schedule of YSL] has haunted me since Dec. 14, 2004," said Gucci Group chief executive Robert Polet, referring to the date he disclosed his strategic plan to rev up the luxury business.

Polet said PPR's recent deal to sell YSL Beauté to L'Oréal should accelerate YSL's breakeven quest as the licensing revenue from YSL perfumes now will be pumped back into YSL's fashion coffers.

"[The deal with L'Oréal] should help YSL reach profitability quicker than we thought a year ago," said Polet. "That's the most diplomatic way of saying [when breakeven may occur]."

The specter of a luxury slowdown hung over much of the presentation, with analysts asking Pinault to repeatedly deliver projections.

Pinault dismissed an apocalyptic reading of market conditions and said luxury sales in America continued to expand in the first part of the year.

"It's less than last year, but still significant," he said, while admitting, "Our mall-based businesses such as Puma are feeling a slowdown."

Pinault said Gucci Group sales should expand faster than the market this year, with 7 percent growth a "realistic" target.

"Trading is good so far," said Pinault. "We are waiting for a slowdown because the luxury market will be impacted by the slowdown [of the economy] in America."

Pinault added that robust expansion in Asia — in particular China — would buttress Gucci against vagaries in the economy elsewhere. "The Chinese clientele is radically different," he said. "They are attracted by fashion and newness. We are very optimistic for growth in Asia."

To wit: Pinault said of the 17 new stores planned for Gucci this year, six are earmarked for China. Of the 12 stores planned to open for Bottega, three are in China.

"Asia-Pacific will be the growth motor in the coming years," said Pinault. "Gucci has a lot of resonance with the Chinese."

The health of the Japanese luxury market was another concern among analysts. Japan has been a difficult market for many luxury brands for the last 18 months, given a shift in consumer tastes and the difficult economy.

Pinault said Gucci has continued to grow in the island nation by migrating more upscale. "It's moving more to high luxury from mass luxury," he said of the market.

Among the so-called "other" brands, Pinault singled out Balenciaga for a remarkable year. He said the label would continue to accelerate growth by opening stores, including a unit in Los Angeles soon. Recurring operating income among the smaller brands — Boucheron, Balenciaga, Sergio Rossi, Stella McCartney and Alexander McQueen — reached 33 million euros, or $45.2 million, from 10 million euros, or $12.6 million, a year ago.
YSL Beauté — for which PPR in January reached a strategic alliance with French beauty giant L'Oréal to sell some parts of the business and license out other core brands like YSL, Boucheron and Stella McCartney — saw its operating income improve to 65 million euros, or $89.1 million, from 32 million euros, or $40.2 million, last year.

Pinault said the company could continue to divest businesses considered noncore. And he said acquisitions were a possibility, too, especially since recent market turbulence had wiped out a lot of value from certain players.

"We could be interested in making an acquisition in watches," said Pinault, adding that was one of the areas in which Gucci Group remained underrepresented.

Among PPR's other businesses, results were mixed. Operating income dropped 8.7 percent to 168 million euros, or $230.2 million, at the Conforama furniture chain and declined 15.9 percent to 187 million euros, or $256.3 million, at the Redcats mail order business.

Meanwhile, the Fnac music and book chain saw operating income improve 15 percent to 199 million euros, or $272.8 million, while income advanced 27 percent to 232 million euros, or $318 million, at the CFAO African trading operation.

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