PARIS — Fresh off another stellar quarterly performance, Kering signaled on Tuesday that it is on the hunt for acquisitions to flesh out its luxury portfolio, as Gucci switches to a comfortable cruising speed below the astronomical growth rates of recent years.
Sales at Gucci topped 8 billion euros in 2018, cementing its status as one of the world’s biggest luxury brands, hot on the tail of Chanel and Louis Vuitton.
With Kering reporting continued strong demand from Chinese shoppers in the fourth quarter, organic revenues at Gucci rose 28.1 percent during the period, topping consensus forecasts, but signaling a normalization after seven consecutive quarters of growth exceeding 35 percent.
At a press conference here, Kering chairman and chief executive officer François-Henri Pinault and other senior group executives confirmed their medium-term forecast for Gucci to grow twice as fast as the luxury market as a whole, pointing to the strong potential of underdeveloped categories like fragrance and cosmetics.
Yet they also conveyed their readiness to add brands to the “backbone” represented by Gucci, after a year of purging the group of non-core brands including Puma and Volcom as part of its transformation into a pure luxury player.
“Our ambition is to make Kering the most influential group in the world in terms of creativity, social and environmental responsibility, innovation and financial performance,” Pinault declared. “We have very important financial resources, which are growing regularly, and we are therefore in a position to seize opportunities.”
In a briefing with journalists following the event, he expounded on the subject. “We don’t need acquisitions to grow. We need brands that complete our portfolio, according to a very precise analysis of our brand portfolio, and we are also very vigilant not to overpay for brands, as has been the case recently,” he said.
While Pinault declined to comment on whether Kering might be circling Valentino, as rumored last year, his remark appeared to refer to the hefty $2.1 billion price tag paid by Capri Holdings, formerly known as Michael Kors Holdings, for Versace last September — another asset that Kering was said to have kicked the tires on.
“Fashion and leather goods is still the sector in which we are the most active. We are looking at opportunities in that sector, because it makes sense,” he said. “We have the means and now, on top of that, we have platforms that allow us to transition acquisitions very rapidly into the value creation phase.”
Sources suggested Salvatore Ferragamo could be another sizable Italian brand in Kering’s sights. Kering had no comment.
At the press conference, Pinault said Kering was also on the lookout for watch brands, noting the sector’s rapid evolution made it a potential hotbed for merger and acquisition activity. At the recent SIHH watch fair in Geneva, attendees were abuzz with rumors — relayed in a note by analysts at Berenberg — that Patek Philippe might soon be on the block.
Kering’s willingness to discuss potential acquisitions marks a departure from recent years, when its focus was on organic growth and brand divestments. In the last year the group has also parted ways with Stella McCartney, who opted to take back full control of her brand, and ended its partnerships with Christopher Kane and Tomas Maier.
Nonetheless, Pinault stressed that he still sees plenty of mileage in the group’s existing brands, including Balenciaga, which he predicted would top the one-billion-euro sales mark this year, and Alexander McQueen, which is set to double its retail network in the medium term.
“Each of our houses has a very strong potential for organic growth,” he said. “It’s a portfolio with an extremely strong backbone — Gucci — and you need that. All the big luxury groups that post strong performances have that backbone, and with Gucci, Kering has a backbone that is increasingly robust.”
Group sales rose 24.5 percent to 3.8 billion euros in the fourth quarter, capping a year that saw Kering’s net profit from continuing operations jump 49.3 percent to 2.8 billion euros. Annual sales were up 26.3 percent to 13.7 billion euros, outperforming sector leader LVMH Moët Hennessy Louis Vuitton, which last month reported a 10 percent full-year sales rise.
All regions contributed to the momentum at Kering’s luxury houses, which posted organic growth of 29.1 percent in 2018. Revenues in Asia-Pacific were up 34.1 percent on a comparable basis, North America rose 37.3 percent, Japan recorded 23.7 percent growth and Western Europe was up 23 percent.
In the fourth quarter, Saint Laurent posted a 19.4 percent rise in organic sales, while Bottega Veneta saw a 3.2 percent decline as it prepares for its first show by new creative director Daniel Lee during Milan Fashion Week. Other houses, a division that includes Balenciaga and McQueen, saw sales jump 25.5 percent in the quarter.
Jean-Marc Duplaix, chief financial officer at Kering, said tourist spending in Europe fell slightly in the fourth quarter, but Chinese consumers compensated by buying more at home. “For the Chinese clientele specifically, trends remained positive in the last quarter, essentially in Continental China and the rest of Asia,” he noted.
Spending by European, Asian and U.S. customers on the group’s three largest brands — Gucci, Saint Laurent and Bottega Veneta — rose between 20 and 40 percent in 2018, while clients from Russia and the Middle East tightened their purse strings.
Pinault said the positive momentum continued into the first quarter of the current year, though he cautioned the trend could not be extrapolated to the full year, since the month of January likely benefited from purchases linked to the Chinese New Year, which fell on Feb. 5, 11 days earlier than in 2018.
Looking ahead to the rest of the year, Kering cautioned in a statement that its “operating environment remains unsettled with regards to the macroeconomic and geopolitical uncertainties, national trade policies and fluctuations in exchange rates, events that could impact consumer trends and tourism.”
However, executives highlighted several bright spots.
Gucci sped to record profitability in 2018, with a recurring operating income margin of 39.5 percent, and could hit its target of 40 percent — announced by ceo Marco Bizzarri at an investor day in June — as early at this year. Kering is banking on a growth rate of twice the sector average of 5 to 6 percent in the medium term, in what analysts at the meeting described as a “soft landing” for the brand.
Gucci plans to present its first collection of high jewelry — a new category — in June, and makeup- and skin-care lines are also in the pipeline. Pinault said Kering was disappointed by the performance of its beauty license with Coty Inc., noting that it brings in less than 400 million euros in annual revenues.
“We can’t be satisfied with those levels when you see the success that the house can have in other categories,” he said. However, he excluded severing Kering’s long-term contract with Coty, which also holds the beauty licenses for Balenciaga, Bottega Veneta and Alexander McQueen.
The U.S. beauty products maker has struggled to integrate its 2016 acquisition of Procter & Gamble’s beauty business. “For two years, it was disruptive to us because nothing happened,” said Pinault. “It hasn’t grown much, and it hasn’t collapsed either. It’s been treading water.”
Addressing the controversy that erupted last week amid accusations that a balaclava-style sweater available on Gucci’s online shop and physical stores evoked blackface, Pinault said the group would step up diversity raining and awareness-raising efforts among its employees across all brands. (For more about Gucci’s reaction to the controversy, see separate story containing an interview with Gucci ceo Marco Bizzarri.)
“As you know, diversity is extremely important to the group and it’s a subject we’ve been working on for years. Clearly, that didn’t prevent us from making a mistake,” he said, noting the incident reflected “an ignorance of the sensitivity of the African-American community.
“It’s not enough to apologize and say we won’t do it again. We really have to make progress on this, because evidently we’re not yet up to speed,” he added.
At Bottega Veneta, Pinault reported a positive response to Lee’s pre-fall collection, presented in December, both in terms of feedback and order books, which should feed into the struggling brand’s revenues in the second half. Lee recently released his first campaign for the brand and is working on a new store concept.
“All of these efforts should mean that 2019 is the year of Bottega Veneta,” Pinault predicted — though Duplaix cautioned that profitability could be further dented by the investments necessary for the turnaround effort.
Regarding claims by Italian tax authorities that Kering owes them an estimated 1.4 billion euros in unpaid back taxes, the group reiterated that it does not have the necessary information to record a specific accounting provision based on a reliable estimate of the tax exposure.
Pinault said he hoped to resolve the matter before the end of the year. “We are contesting the findings of the audit report in terms of both substance and amount. Now we are entering the phase where we will present our arguments, and we have very strong arguments,” he said.
The company will propose a cash dividend of 10.50 euros a share at its annual general meeting to be held on April 24, up 75 percent from the 2017 financial year. Last year also saw Kering distribute 70 percent of its stake in Puma to shareholders.