PARIS — Kering is putting acquisitions on hold as it focuses on turning around its struggling cash cow luxury brand Gucci and sportswear maker Puma.
“We will not make any acquisitions this year and we will focus all our efforts on organic growth,” François-Henri Pinault, the group’s chairman and chief executive officer, said at a press conference detailing its 2014 results, which saw a 5 percent dive in operating profits on a 4 percent increase in revenues. “I consider that my portfolio today is more or less ideally positioned in the different market segments with growth potential,” he added.
Despite a slight improvement in the fourth quarter, Gucci ended the year with revenues down 1.8 percent at 3.5 billion euros, or $4.65 billion. The brand enjoyed positive sales in Japan and the United States but faltered in Europe and the Asia-Pacific region, where antidemocracy protests strangled tourist flows to Hong Kong and Macau in the fourth quarter.
As analysts expressed skepticism about any quick fix, Pinault promised a turnaround as early as the second half of 2015, noting that Gucci’s new ceo, Marco Bizzarri, and creative director, Alessandro Michele, were working to revamp the brand’s product offering, communications and stores.
“These are initiatives that will last a long time, but the results will already be very tangible in the second semester. It won’t take three years,” he said, predicting the brand would return to “normalized” growth this year.
“A brand like Gucci should be able to at least enjoy the same growth as the worldwide market for luxury, but by effect of excellence in execution…We should be able to deliver significant growth,” Pinault added.
Kering surprised markets in December by revealing the departures of former ceo Patrizio di Marco and creative director Frida Giannini. Michele is to present his first women’s ready-to-wear collection in Milan on Feb. 25 and his first cruise collection will be shown to buyers in June, with delivery set for October. Praising Michele’s “passion” and “intimate understanding” of the Gucci house codes, Pinault promised a fresh look for the brand, known for its horse bit loafers and hobo-style Jackie carryall.
“Alessandro’s interpretation will be very different, as you will see next week, but it remains very much anchored in the heritage of the house,” he said.
On the product side, Michele — previously Gucci’s head accessories designer — has been charged with revitalizing the brand’s entry-price assortment, after several years focused on upgrading its offering and weeding out logo-driven designs.
“The house has done an exceptional job on the upgrade, with very good results for midpriced and top-of-the-range products. Unfortunately, this was achieved at the cost of its capacity to bring permanent novelty in the entry-price categories, and in particular on small leather goods and luggage,” Pinault said.
He suggested the house’s trademark double-G logo had been unfairly associated with low-end products. He revealed the logo would be making a comeback as part of the house’s new creative direction, as it was key to drawing emerging luxury consumers to the brand.
“A brand’s logo is its signature, its history,” he noted. “I’m not saying we should lower prices, but on entry-price segments, we must be more attractive and, in particular, use this extraordinary asset that is our logo. That is really what we are working on.”
Gucci will also bring a fresh spotlight on bags. “We have extraordinary products. The problem is that the house has lost some of its seductiveness,” said Pinault, adding that a new communications strategy would be unveiled “very rapidly.”
Kering does not plan to open new stores for Gucci this year and will focus instead on upgrading its existing network of about 500 boutiques, although expenditures will remain moderate and store refits will be mainly cosmetic.
As reported, revenues at Puma fell 0.4 percent last year to 3 billion euros, or $3.97 billion, but Pinault reiterated Kering has no plans to sell the German firm, which is in the midst of a costly relaunch initiative that includes the recent signing of pop star Rihanna as brand ambassador and creative director of its women’s lines.
The fate of Italian luxury shoe brand Sergio Rossi, on the other hand, is up in the air.
“We have decided to look at all the strategic options for the brand. Selling is also an option,” said Pinault. “It’s the only brand where we have to ask ourselves whether it really has an essential role in our portfolio in the medium and long term.”
Citing market sources, WWD reported Feb. 13 that Kering is quietly preparing a sale process for the Italian footwear company, confident it can get a good price.
On Tuesday, Kering said group revenues rose 8.7 percent to 2.74 billion euros, or $3.42 billion, in the fourth quarter, with luxury activities up 9.1 percent, slightly underperforming its sector peers. Hermès reported its revenues rose 11.8 percent during the three-month period, while LVMH Moët Hennessy Louis Vuitton registered a 10 percent jump.
Kering, whose brands range from Bottega Veneta to Boucheron and Volcom, said full-year sales totaled 10 billion euros, or $13.34 billion, up 4 percent versus 2013.
Luxury activities saw revenues rise 6 percent to 6.76 billion euros, or $8.98 billion, while the sport and lifestyle division registered a 0.1 percent drop in revenues to 3.24 billion euros, or $4.31 billion. All dollar rates are calculated at average exchange rates for the period concerned.
Kering has proposed a dividend per share of 4 euros, or $4.56 at current exchange, up 7 percent from the previous year.
Operating profit from continuing operations fell 5 percent to 1.66 billion euros, or $2.21 billion, in 2014 — below analysts’ expectations.
Kering’s operating margin declined to 16.6 percent from 18.1 percent in 2013. This was due largely to unfavorable foreign exchange and currency hedging effects, which should also have an impact on profitability in the first half of 2015, explained chief financial officer Jean-Marc Duplaix.
Pinault predicted the recent weakening of the euro would have a mixed impact. “In itself, the decline of the euro is good news. It should have a positive impact on our revenues and our operating result, but of course it will weigh on profitability in the short term,” he noted.
Detailing plans for the French group’s other luxury brands, he said Bottega Veneta would focus on expanding in the United States, which accounts for just 13 percent of its sales, and growing product categories such as men’s wear. The brand’s revenues rose 11.3 percent last year and its operating profit was up 8 percent.
Similarly, Kering will focus on opening Saint Laurent stores in Asia-Pacific, as the region represented only 22 percent of the brand’s sales in 2014. Under creative director Hedi Slimane, Saint Laurent logged a 27 percent jump in revenues and a 28.5 percent increase in operating profit last year. Duplaix noted the brand has doubled its revenues in three years to 707.3 million euros, or $940 million, in 2014.
Revenue at Kering’s other luxury brands rose 14.4 percent in 2014, with double-digit increases at Balenciaga, Alexander McQueen, Stella McCartney and Christopher Kane.
Brioni was penalized by a sharp drop in demand from Russian customers, while Sowind Group struggled as wholesalers in the key markets of Hong Kong and China pared back inventory in the face of lower demand for luxury watches.
Jean-François Palus, group managing director at Kering, said the group would focus this year on boosting underdeveloped categories at all its brands. These included small leather goods at Saint Laurent, accessories at Balenciaga and eyewear at labels including Alexander McQueen, Stella McCartney and Bottega Veneta.
Last September, Kering unveiled plans to bring eyewear development and production fully in-house under the stewardship of former Safilo Group ceo Roberto Vedovotto. Palus forecast eyewear would make a positive contribution to group revenues from 2017, deeming “reasonable” an analyst’s forecast that the segment would post revenues of 600 million euros, or $684 million at current exchange, by 2020.
In a research note, Bernstein analyst Mario Ortelli warned that a turnaround in Kering’s fortunes would take time amidst a difficult trading environment for Gucci.
He said he expects the Italian brand to be under continued pressure in 2015 because consumers could defer purchases until the arrival of Michele’s first collection. “We expect this to impact financials no sooner than 4Q15, and thus expect this potential turnaround to not crystallize for at least another 12 months,” Ortelli said.
Earlier this month, HSBC downgraded Kering to neutral, saying it “believed more patience will be required regarding Gucci’s turnaround. In addition, Kering is achieving great success with Bottega Veneta and Saint Laurent, but less so with other brands.”
Kering shares closed down 1.4 percent at 178.55 euros, or $203.50, on the Paris stock exchange.