Backstage at Gucci Men's Fall 2020

PARIS Kering has scaled back its investment and activities in China as a result of the coronavirus, but expects Chinese consumers to bounce back quickly once the epidemic is under control.

With half of its stores in China closed and the other half operating with shorter opening hours, the luxury group is redirecting inventory to other regions, reviewing product launches, pushing back store and pop-up openings, and postponing social media campaigns.

François-Henri Pinault, chairman and chief executive officer of Kering, said it was impossible to evaluate the impact of the coronavirus and how fast businesses will recover, but he remained confident about his group’s prospects in the medium and long term.

“I don’t want to engage in guesswork, but based on past experience and knowing how dynamic and resilient the Chinese people are, we expect things to return to normal promptly, once the emergency is over, and we are already working on the next steps,” he said Wednesday.

Pinault spoke after Kering posted better-than-expected growth in the fourth quarter, powered by strong sales in the Asia Pacific region.

It capped a year that saw the group set several milestones: revenues rose above 15 billion euros for the first time, Saint Laurent topped the 2 billion-euro mark, and sales at Balenciaga were “significantly” above 1 billion euros. In another first, Kering’s operating profit margin crossed the 30 percent threshold.

Pinault said the group’s performance in the first three weeks of 2020 was “absolutely exceptional,” but was impacted beginning Jan. 24, after China imposed travel bans to curb the coronavirus outbreak.

Praising Chinese authorities for their response to the epidemic, Pinault said Kering has implemented measures for its staff in China such as making masks mandatory, screening their temperature daily, disinfecting offices and stores every two hours, and providing taxis for employees so they don’t have to use public transport.

With editors, buyers and influencers from Asia expected to sit out the upcoming round of European ready-to-wear shows, Kering’s star brand Gucci expects 30 percent fewer guests at its fall display in Milan, scheduled for Feb. 19, Pinault said.

However, Kering, the owner of brands including Saint Laurent, Balenciaga and Bottega Veneta, does not plan to implement any special safety measures at its shows in Milan and Paris, he added. “If any Chinese guests would like to come to our shows, they are welcome, to be very clear, and they will even be seated next to me,” he said.

Touting the group’s flexible Italian production chain, he said production of carryover styles for the upcoming pre-fall collections might be delayed until the situation in China normalizes. Although Balenciaga produces some sneakers in China, he did not see any impact from supply bottlenecks there.

Chinese consumers account for slightly more than 30 percent of overall revenues at Kering, broadly in line with the luxury sector as a whole, and sales in Mainland China grew by more than 30 percent in the fourth quarter, even as revenues in Hong Kong plummeted 50 percent due to ongoing violent antigovernment protests.

“Overall, the Chinese cluster continued to grow significantly in Q4,” said Pinault, expressing confidence that Kering will weather the crisis and continue to grow. The group is stepping up outreach efforts to local customers in Western Europe to compensate for the drop in tourists from China.

“We have extremely good prospects for each of our brands. The fundamentals of the luxury industry remain very strong, independently of these periodic events, so we remain very confident in our capacity to continue developing our activities in the future,” he explained.

Chief financial officer Jean-Marc Duplaix sounded a slightly more cautious note.

“It’s very difficult to predict today what could be the trends for the coming months, so of course we can imagine that if the trends witnessed since last January continue in February and in March, a negative outcome is not out of the question for the whole industry, for all the brands and of course for Gucci,” he warned.

Group revenues in 2019 were up 16.2 percent year-over-year to 15.88 billion euros, a notch above in percentage terms of sector leader LVMH Moët Hennessy Louis Vuitton, which last month reported a 15 percent rise in full-year sales.

Net profit from continuing operations rose 15.1 percent to 3.21 billion euros, while recurring operating margin increased to 30.1 percent from 29.2 percent the previous year. Group sales were up 13.6 percent to 4.36 billion euros in the three months to Dec. 31, beating analysts’ forecasts.

Revenues at Gucci, Kering’s cash cow brand, rose 10.5 percent on a comparable basis in the fourth quarter, exceeding consensus estimates for an 8.8 percent increase. This was broadly stable versus the third quarter, when sales rose 10.7 percent, and down from 28.1 percent during the same period a year ago.

The brand has seen its annual comparable growth rate plummet to 13 percent in 2019 from 37 percent in 2018 and 45 percent in 2017. However, Pinault said Gucci still has plenty of room to grow. “Gucci is in a position, over the long run, to outperform significantly the industry,” he predicted.

As part of its radical transformation under creative director Alessandro Michele and ceo Marco Bizzarri, the brand has renovated 60 percent of its stores worldwide. The remaining 40 percent should be overhauled in the next two years, leading to productivity gains, Pinault said.

Gucci this week opened a restaurant on Rodeo Drive in Los Angeles as part of its ongoing collaboration with critically acclaimed chef Massimo Bottura, and another Gucci Osteria will open in Tokyo in the next few months, the executive revealed.

The brand has turned around a lackluster performance in the U.S., where it has weathered a scandal over a sweater that critics said evoked blackface, thanks in part to its Gucci Pin pop-ups, selling capsule lines like the GG Psychedelic Collection or the Mickey Mouse collaboration celebrating the Chinese Lunar New Year.

And Michele is broadening his potential audience with launches like the recent 1955 handbag, and his spring 2020 collection, which marked a departure from his signature baroque style. “It’s true that we’re not only growing with the Millennials, but we’re also growing with the more mature clientele going forward,” Pinault said.

In addition, the executive noted the brand has room to expand in categories such as jewelry, following the launch of its first high-jewelry collection last year, and beauty. Despite the successful launch of Gucci’s lipstick line last year, Pinault lashed out at licensee Coty Inc. for failing to capitalize fully on the segment.

“The potential is absolutely huge and we are quite frustrated by the speed at which this potential is being exploited,” he said, noting that Saint Laurent, which is five times smaller than Gucci in terms of revenues, has a bigger beauty business under its license with L’Oréal.

Saint Laurent saw an acceleration in the fourth quarter, with comparable sales up 14 percent following a 10.8 percent increase in the previous quarter. The brand has been underrepresented in China, where it opened its first flagships, in Shanghai and Beijing, last year.

Pinault said the French fashion house, which has a network of 222 stores, would add another 20 this year. It will expand its rtw offering with more daywear and entry-price point pieces, and is boosting its shoe collections.

“We have grown it to over 2 billion euros last year, and we will continue to grow it, first to 3 billion and then further, and we will do it carefully, without veering from what constitutes its essence,” he said.

Bottega Veneta also picked up steam in the fourth quarter, with organic revenues up 9.4 percent, following a 6.9 percent increase in the third quarter. Pinault said the brand was reaping the benefits of its overhaul under creative director Daniel Lee, with new products accounting for 60 percent of its assortment in the fourth quarter.

“We couldn’t be happier with the way Bottega Veneta is responding to its reinvention strategy,” said Pinault, noting Lee scooped four awards at the Fashion Awards in London in December: brand of the year, accessories designer, British women’s wear designer and designer of the year.

“I really do consider that it’s a new start for the brand, and the brand has the potential to grow very significantly in the near future,” he added.

“In a very short amount of time, we have built an entirely new aesthetic, once closely associated to a single leather good design. This also led us to reorganize Bottega Veneta’s manufacturing processes, resulting in some product delays, but these are gradually being resolved,” he said.

While Bottega’s sales were up just 2.2 percent in comparable terms in 2019, to 1.17 billion euros, Pinault noted that included a high level of discounted sales which would not be reproduced this year. “The beginning of the year was very impressive at Bottega in terms of full-price sales,” he noted.

“There is still much to be done to consolidate this transformation, and we shouldn’t expect growth to be linear, particularly in the early stages, but the past six months have been very encouraging,” he concluded.

Piral Dadhania, analyst at RBC Capital Markets, was positive on the outlook for the group.

“Kering remains a key holding in our luxury coverage. Its brand portfolio (particularly in soft luxury) is strong, and whilst Gucci has a disproportionate weight on sales and EBIT, we see potential in some of the other assets such as Bottega Veneta and Balenciaga on a medium-term view,” he said in a research note.

“Investments and significant progress in recent years of the Kering corporate platform (logistics, digital, personnel, retail network) set the business up well to continue nurturing assets, in our view,” Dadhania added.

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