Gucci RTW Fall 2018

PARIS — As it prepares to formally complete its transition to a pure luxury player, Kering continues to beat the competition, with first-quarter sales powered by another “spectacular” performance at its cash-cow brand Gucci.

Revenues rose 27.1 percent to 3.11 billion euros during the period. Stripping out the impact of currency fluctuations, namely the strong euro, sales were up 36.5 percent. The group posted double-digit growth in all regions, led by North America and Asia-Pacific, while online sales more than doubled versus the same quarter last year.

Despite a strong comparison base, organic sales at Gucci vaulted up 48.7 percent to 1.87 billion euros in the first quarter, representing the fifth consecutive quarter of growth exceeding 35 percent.

Kering maintained its outstanding sales momentum in the first quarter. Under its new luxury pure player profile, the group clearly outperformed a market that remains well oriented,” François-Henri Pinault, chairman and chief executive officer of Kering, said in a statement on Tuesday.

“In the balance of the year, we face a high base of comparison and a tough currency environment, but we are confident in the ability of our houses to continue doing better than their peers, leveraging their innovativeness and creative audacity,” the executive added.

The quarterly increase compares with a rise of 27.8 percent in the fourth quarter of 2017, and with a jump of 39.6 percent in the same period last year, according to pro forma figures provided by Kering to reflect its changing composition.

It comes on the heels of a 10 percent rise in revenues at rival French conglomerate LVMH Moët Hennessy Louis Vuitton in the first quarter. Hermès is scheduled to publish quarterly sales on May 3, while Compagnie Financière Richemont will report its annual results on May 18.

Thomas Chauvet, analyst at Citi, noted Kering’s first-quarter performance sharply exceeded analysts’ expectations — a beat that should support the share price near-term. He has a target of 490 euros on the stock, which closed up 0.4 percent at 438.20 euros on the Paris Stock Exchange on Tuesday, before the results came out.

“Strong demand patterns have been observed at key competitors (e.g. LVMH) but not to the same extent, while several peers are still showing weak or slightly negative retail like-for-like trends (e.g. Burberry, Ferragamo, Tod’s),” Chauvet wrote in a research report.

Kering’s shareholders are set to vote on Thursday on the spin-off of the bulk of its stake in German sporting goods firm Puma, but the French group, which also owns brands such as Yves Saint Laurent, Balenciaga, Boucheron and Brioni, has already restated its revenues to reflect the move.

Likewise, it has stripped out Stella McCartney’s revenues after the decision by the designer to buy back Kering’s 50 percent stake in her brand, a transaction that should be completed in the first quarter of 2019.

Both companies are now classified as noncurrent assets held for sale and discontinued operations, alongside action sports brand Volcom, which Kering has decided to sell to focus fully on its luxury activities.

Kering said its first-quarter growth was well-balanced across all distribution channels. Directly operated stores continued to see strong growth momentum, up 40 percent on a comparable basis, while revenue from the wholesale network increased 30 percent.

Retail sales in North America grew 54 percent, with virtually all brands reporting a strong performance, while the Asia-Pacific region advanced 42 percent, benefiting from an acceleration in Hong Kong, and to a lesser extent Macao, and a sustained performance in Mainland China, South Korea and Singapore.

Japan, meanwhile, saw a 33 percent jump in retail sales, fueled by solid local consumers and a rise in spending by Chinese tourists, who have redirected some of their luxury spend to Asia as a result of the strong euro. Western Europe posted a 30 percent increase, reflecting the impact on tourism of the strong European currency.

“After years of soft consumption, all the more fashion-forward brands gained some traction with more sophisticated U.S. customers,” Kering’s chief financial officer Jean-Marc Duplaix said on a conference call.

“Although the environment was more favorable, I think that also what we see, and which is maybe more relevant for America, is a sort of polarization of the market, and I think that brands which are the most attractive, the most desirable, are performing better in the U.S., be it in retail or in wholesale,” he added.

Gucci enjoyed “exceptional” growth in the region, with retail sales in North America rising 64 percent in the first quarter, though all categories and nationalities posted strong double-digit progressions.

Retail sales, which account for 85 percent of the brand’s revenues, were up 50 percent overall, while wholesale revenues rose 44 percent, despite the closure of some doors. Online sales, meanwhile, recorded triple-digit growth versus the same period a year earlier, Kering reported.

The maker of Jordaan loafers and Ophidia bags will face a tougher comparison base in the second half, though Duplaix did not expect the brand to break its stride. “We are confident for the remainder of the year. We see also very positive signs when we look at wholesale orders,” he remarked of Gucci.

As reported, Gucci raised prices for its spring collection by an average of 5 percent, excluding the euro zone, to compensate for price gaps resulting from the stronger euro. It expects to follow up with low single-digit increases in Europe on some items from the fall collection, Duplaix said.

As a result, he forecast Gucci’s operating margin would exceed the consensus forecast of 35.4 percent in 2018, despite continued investments, including the opening last week of the Gucci ArtLab, the brand’s new manufacturing plant in Scandicci, near Florence.

However, Duplaix cautioned against relying excessively on price rises to keep driving productivity in stores. Having exceeded its initial target of doubling sales density to 30,000 euros per square meter, Gucci expects to unveil new objectives at Kering’s annual investor day, scheduled for June 7 in Florence.

“We have been quite cautious in the past when it comes to price increases. I think that we have to be very smart when it comes to pricing, just to have the right pricing to maintain also the attractiveness,” said Duplaix, saying the brand would rather boost productivity through other methods such as clienteling and store animation.

“The first priority is to have the relevant offer in all the different price clusters, and also to have a relevant offer in the different categories. It has been clearly the recipe to attract new clients and especially the Millennials,” he added.

“We had some complaints, to be fair, about the pricing of some ready-to-wear products. We have not decreased the ready-to-wear average price. We have rather played again with the assortment in order to be sure that we have a relevant offer for all our clients,” Duplaix revealed.

Meanwhile, revenues at Yves Saint Laurent rose 19.6 percent in comparable terms, reflecting a normalization after several years of high growth.

The label’s retail sales were up 15 percent, a performance Duplaix deemed “still quite remarkable,” but they were penalized by a high comparison base and the poor performance of Western Europe, where revenues fell 1 percent due to lower spending by Asian tourists.

Pinault confirmed in February he expects the brand to achieve sales of 2 billion euros to 3 billion euros in the medium-term, versus 1.5 billion euros in 2017. To that end, Kering in investing in expanding Saint Laurent’s retail network, opening six new stores in the first quarter, mainly in North America and Asia.

“The brand continues to deliver on its strategy,” said Duplaix, pointing to Saint Laurent’s spectacular fall fashion show, held opposite the Eiffel Tower, and the positive reception of its new Niki handbag collection. “We are not really concerned by the situation and I think it’s a very normal evolution.”

While Bottega Veneta showed muted growth in the first quarter, with sales up 0.7 percent in organic terms, Duplaix was confident business would pick up following the opening of its flagship on Madison Avenue in New York City in February, and its largest store in the Middle East at the Dubai Mall in March.

“With wholesale rationalization behind us, the brand starts from a lower base, but should benefit from a healthier environment in the coming quarters,” he said.

Though Kering does not break out revenues for Balenciaga, the “exceptional momentum” at the brand – whose bestsellers include the Triple S trainer and Bazar shopper — helped generate a 37.9 percent bump in revenues from “other houses.”

The brand is bolstering its men’s offering, which is expected to provide an additional pillar of growth this year and beyond. To support this, Balenciaga has converted four points of sale in Paris and London department stores into directly operated stores.

Alexander McQueen posted “solid” double-digit growth driven by retail, including a near doubling of its revenues from e-commerce. The London-based brand benefited from a rebalancing of its ready-to-wear offer that has led to a significant rise in the share of full-price sales, Duplaix noted.

The executive reported no news on the tax front, noting that an ongoing Italian tax investigation into Gucci was still in the early stages. “We have not received any notification of tax adjustments so far,” he said.

Mediapart, a French investigative and opinion newspaper, last month alleged that the probe may implicate other brands, citing “confidential documents.” It estimated that Kering had saved 2.5 billion euros in taxes it should have paid in Italy and France by attributing wholesale revenues from brands including Gucci and Yves Saint Laurent to its LGI logistics center in Cadempino, Switzerland, thereby benefiting from a lower local tax rate.

“The figures mentioned in the article are not supported, so I won’t comment on that,” said Duplaix. “There is no further criminal investigation in other jurisdictions, be it France or Switzerland, or concerning other brands of the group. Of course, like other groups of its size, Kering is regularly audited.”

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