PARIS — French retail-to-luxury group PPR aims to sell its mail-order division Redcats by the end of the year, but is ready to defer the sale if global financial markets plummet due to the U.S. debt crisis or a possible debt default in Europe, PPR chairman and chief executive officer François-Henri Pinault said.
This story first appeared in the August 1, 2011 issue of WWD. Subscribe Today.
Pinault made the comments in an interview with WWD Friday after PPR revealed its overall sales growth slowed in the second quarter to 5.4 percent from 9.1 percent in the first three months of the year, as strong performances in its luxury goods and sports and lifestyle divisions were offset by weakness in the retail activities it is trying to shed.
PPR — whose assets range from luxury brand Gucci to books, music and electronics chain Fnac — posted sales of 3.51 billion euros, or $5.04 billion, in the three months to June 30 versus 3.32 billion euros, or $4.24 billion, in the same period a year earlier, up 8.4 percent on a comparable basis.
Driven by its luxury division, the group’s profits continued to climb, however, rising 16.1 percent in the first half to 450 million euros, or $631.3 million, from 388 million euros, or $496.6 million. PPR did not break out second-quarter profits. In the first half, sales rose 7.3 percent to 7.23 billion euros, or $10.3 billion, from 6.73 billion euros, or $8.61 billion, a year earlier.
Sales at the Redcats Group, which encompasses catalogue retailer La Redoute, registered the worst performance of any division in the second quarter, with sales down 3.6 percent to 821.5 million euros, or $1.18 billion. Dollar figures are converted at average exchange rates for the periods to which they refer.
Nonetheless, Pinault said the Redcats sale would go ahead as planned.
“These results do not call into question the sale, particularly since Redcats registered very strong growth last year,” he said. “Redcats has confirmed its turnaround and is showing consistent improvement.”
PPR chief financial officer Jean-François Palus said at a press conference that the group had started working with banks to arrange staple financing for potential buyers of the retail division. Redcats has an enterprise value of 1.4 billion euros, or $1.7 billion at current exchange, according to Pierre Lamelin, analyst at Crédit Agricole Cheuvreux.
Recurring operating income at Redcats fell 4.5 percent to 78 million euros, or $109.4 million, in the first half, a result Pinault blamed on the poor performance of plus-size retailer Avenue, casual chic clothing brand Somewhere and La Redoute’s physical stores, which are being gradually shuttered as their leases expire.
“Stripping out these three activities, which are not among the core priorities of Redcats, recurring operating income as of end June would have been up 10 percent,” he said. Pinault added that if Somewhere did not post better sales in the second half, it would be folded back into the La Redoute marketplace rather than being run as a separate brand.
All brands in the Redcats division are under close scrutiny ahead of the sale, which PPR hopes will be completed within the next six months.
“If the process follows its course, yes, in principle, that is roughly the timetable,” Pinault said of the year-end deadline. “But there are many uncertainties. We are in an environment that could change.”
The executive said mature economies presented the greatest danger.
“The risks stem essentially from the banking system, and in particular its vulnerability with regard to sovereign debt. If a country in Europe defaulted, for example, or U.S. government debt were downgraded, that could have fairly important repercussions on global banking systems and affect growth,” he warned.
PPR is forecasting its full-year results will exceed 2010 levels after the strong growth in profits in the first six months of the current year.
Illustrating the downward drag represented by the group’s retail activities, recurring operating income rose 14.5 percent in the first six months of the year for PPR as a whole, but was up 25.4 percent for the luxury and lifestyle brands alone, Pinault pointed out.
The Luxury Group division — which includes Gucci, Yves Saint Laurent and Bottega Veneta — posted sales of 1.11 billion euros, or $1.59 billion, in the second quarter, up 19.2 percent in reported terms and 24.4 percent in comparable terms.
The division was powered by strong growth at Gucci, which registered double-digit increases in sales of all product lines, and Yves Saint Laurent, which posted recurring operating income of 6.6 million euros, or $9.3 million, in the first half versus a loss of 6.4 million euros, or $8.5 million, in the same period last year.
Gucci is set to increase investment in new stores by 40 percent in 2011 as a whole, having opened 28 stores in the first half versus 12 during the same period in 2010, Palus said. Most of its openings in the second half will be in China and Brazil.
Pinault noted demand for extreme luxury was soaring among China’s top-tier consumers, who are keen to differentiate themselves from the logo-hungry new rich.
“What is quite remarkable is that in China, we are seeing a much faster evolution of tastes and purchasing habits for luxury goods than we previously saw in mature markets. What took 15 or 20 years in Western Europe or the United States or Japan is evolving much more rapidly in China,” he said.
The group’s smaller luxury brands such as Balenciaga, Sergio Rossi and Boucheron, whose results are not broken out separately, were all profitable in the first half, Palus said.
Alexander McQueen enjoyed a sales boost, thanks to the retrospective of the late designer’s work at New York’s Metropolitan Museum of Art and the publicity surrounding Catherine Middleton’s wedding dress, but its profits were dented by the costs of taking the fall collection for the McQ diffusion line back in-house, he added.
The sport and lifestyle division, under the aegis of German sporting goods firm Puma, posted sales of 673.5 million euros, or $968.9 million, in the second quarter, representing an increase of 9.4 percent in reported terms and a 14.1 percent rise on a comparable basis.
Fnac, which earlier this month unveiled an ambitious four-year turnaround plan, reported a 3 percent drop in sales to 906.4 million euros, or $1.3 billion, in the second quarter, a result Palus deemed “disappointing.”
PPR is seeking to get rid of its retail activities in order to focus on its luxury and lifestyle brands. It stepped up the pace of acquisitions in the first half with the purchase of Californian action sports brand Volcom Inc. and last month revealed it was taking over Swiss watch manufacturer Sowind Group.
Pinault declined to comment on rumors that PPR is potentially interested in adding Italian men’s wear brand Brioni and Italian fine jewelry company Pomellato to its fold.
“Every time a company launches an IPO or is looking to sell, we are among the rumored buyers. It’s systematic, but you must remember we are sticking to our criteria for buying brands, and when you look at those criteria of price, size and fit, a lot of the names we have been linked with don’t make sense,” he said.
PPR has said it is only interested in smaller brands with great potential for growth. Pinault said there was definitely a gap in the company’s jewelry portfolio, which counts Boucheron as its only pure player.
“If there were a good opportunity for a brand that is not positioned in fine jewelry but in fashion jewelry or jewelry, we could consider a brand like that. For the moment, there are none on the block,” he said.