Los Angeles Retail Reopening amid COVID-19 Pandemic - 28 May 2020

PARIS Fresh off its worst quarter on record, Kering is betting that Millennial and Gen Z customers will help it bounce back from the coronavirus crisis in the second half, led by a recovery in the key Asia-Pacific region.

Net profit fell 63.4 percent in the first six months of the year after COVID-19 forced the French luxury group to close stores and factories worldwide, and brought tourism to a halt. Kering warned that it does not expect its lost revenues to be offset by the end of the year.

Group revenues in the three months to June 30 fell 43.5 percent to 2.17 billion euros, representing a decline of 43.7 percent in comparable terms. This came on the heels of a 15.4 percent drop in the first quarter.

In percentage terms, the decline was greater than the one recorded by sector leader LVMH Moët Hennessy Louis Vuitton, which on Monday reported a 38 percent drop in second-quarter sales. But it was below a consensus of analyst estimates, which had called for a 48 percent fall.

Kering flagged an “encouraging” recovery as stores reopened, with sales in mainland China rising more than 40 percent in the second quarter, and positive trends emerging in Europe and the U.S. from mid-June. In addition, the group reported a 72.4 percent jump in online revenues during the period.

But organic sales at its cash cow brand Gucci fell 44.7 percent in the second quarter, compared with a 23.2 percent drop in the prior three months.

Luxury stocks took a hit on Tuesday on the back of the LVMH results — despite the fact that it also flagged a strong rebound in China — and Moncler posting a first-half loss for the first time in its history. Kering was dragged down by the sell-off, losing 2.7 percent to close at 483.20 euros on the Paris Stock Exchange.

“It is fair to say that the first half of 2020 has been the toughest period we have faced,” François-Henri Pinault, chairman and chief executive officer of Kering, said in a statement issued after the market close.

“Our results today underscore the extent of the disruption exacted by the pandemic on our operations. Even more importantly, the resilience of our performances validates our model and supports our confidence that we will come out of this crisis even stronger,” he added.

In particular, the brand believes that its focus on sustainability and diversity will serve it well amid the current retail sector upheaval, said Jean-François Palus, group managing director of Kering.

“We have no doubt that luxury is here to stay, and the appetite of Millennial and Gen Z customers is not diminishing. As a matter of fact, they were the first ones back in our stores as we reopened,” he told a conference call on Tuesday.

“But trends we have flagged in the past are intensifying, not just under the influence of COVID-19, but also stimulated by the push for inclusivity and transparency we are seeing more and more today. These trends are well aligned with our culture and core values,” he added.

Palus cited the example of Gucci’s sustainable Off the Grid collection, launched last month with a campaign featuring personalities including actress Jane Fonda and rapper Lil Nas X.

The pandemic has also accelerated efforts to reduce waste. “We are working at all levels of the value chain, lowering the number of prototypes, reducing production waste and livestreaming fashion shows, to name a few. COVID-19 has proved a major driver of awareness and push to virtualization in this regard,” Palus said.

Finally, Kering has intensified its use of artificial intelligence to power everything from product recommendations to supply chain forecasting.

“We are not only pleased that all these projects were already under way when things got tough, giving us a significant head start, but we were also able to further enhance them in real time under particularly demanding conditions,” he said.

“We are confident in our ability to return to growth and higher profitability as soon as the worldwide environment stabilizes,” Palus concluded.

Kering, whose brands also include Saint Laurent, Bottega Veneta and Balenciaga, posted net income of 569.3 million euros in the first half. Recurring operating profit was down 57.7 percent to 952.4 million euros, yielding an operating margin of 17.7 percent, down from 29.5 percent in the same period last year.

“The lack of visibility about how the worldwide personal luxury goods market will evolve in the next few months makes it impossible to forecast the group’s second-half sales with any sufficient degree of reliability. The loss in revenue experienced in the first six months of the year should not be offset in the second half,” Kering predicted.

It declined to forecast its operating margin for 2020 as a whole, but said the cost-cutting measures implemented in the first half should bolster results during the second part of the year.

Gucci saw wholesale revenues shrink as the market struggled and it continued to streamline its distribution. “As stores reopened, the house regained a favorable momentum with local customers in its main markets. Online sales performed particularly well in the first half, up 51.8 percent,” Kering said.

Chief financial officer Jean-Marc Duplaix said the recovery in Asia-Pacific started in mainland China and spread to South Korea and Taiwan, while Hong Kong and Macau remained depressed. “Some Asian markets, as well as all key European countries, are heavily penalized by the lack of Chinese tourism,” he noted.

Saint Laurent posted a 48.4 percent drop in like-for-like sales, following a decline of 13.8 percent in the first quarter, reflecting its exposure to Western Europe and North America.

After bucking the general trend last quarter, Bottega Veneta also turned negative, with organic sales falling 24.4 percent, though the drop was contained by positive momentum in the stores that remained open and a rebound in mainland China and South Korea.

Other houses, a segment that includes Balenciaga and Alexander McQueen, saw sales decrease by 44 percent. Balenciaga maintained a double-digit operating margin during the first half, but watch manufacturers incurred losses as their markets contracted sharply, Kering reported.

“We are very pleased with the resilience of our brands in this context but we remain very vigilant about the trends for H2. There are a lot of moving pieces. The only one thing we know and we are clear about is the lack of tourism that will continue in 2020, and probably at least for the first half of 2021,” Duplaix said.

“What we know and we are convinced of is that the e-business will continue to grow,” he added.

Online sales accounted for 13 percent of Kering’s retail revenues in the first half, versus 6 percent in the same period a year ago, with Saint Laurent and McQueen launching Chinese web sites in June.

“In North America, where e-comm was already a key channel, it reached record levels. In Asia-Pacific, penetration roughly doubled year-on-year, with plenty more potential. In all regions, trends kept a very strong momentum, near or above triple-digits in June, despite gradual store reopenings,” Duplaix said.

Palus dismissed the prospect that Kering would offload its loss-making brands, which include men’s wear label Brioni.

“We think that they have their place in our portfolio of brands, and we are quite confident that when the environment stabilizes, they will have a decent growth pattern and they will come quickly back to profitability,” he said.

Analysts said the results indicated Kering was successfully containing costs, partly because it is able to adapt its outsourced production to drops in demand.

Piral Dadhania, analyst at RBC Capital Markets, said although Gucci has a disproportionate weight on the group’s sales and EBIT, some of the other assets, such as Bottega Veneta and Balenciaga, have potential in the medium term.

“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,” he said in a research note on Tuesday.

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