Gucci

PARIS Kering is bracing for a tough year as the shock waves of the coronavirus pandemic force it to cut costs and delay deliveries of new collections, despite glimmers of recovery in Mainland China.

The French luxury group, which owns brands including Gucci, Saint Laurent and Bottega Veneta, said its sales took a larger-than-expected hit in the first quarter as the coronavirus outbreak curtailed travel and shuttered its stores and warehouses, sharply impacting revenues at its cash cow brand Gucci.

Group revenues in the three months to March 31 fell 15.4 percent to 3.20 billion euros, representing a decline of 16.4 percent in comparable terms.

In percentage terms, the decline was broadly in line with sector leader LVMH Moët Hennessy Louis Vuitton, which last week reported a 15 percent drop in first-quarter sales, but it was below the guidance that Kering issued last month.

The group had warned that consolidated revenue for the first quarter would likely be down between 13 and 14 percent, or 15 percent in comparable terms, versus the same quarter last year. Kering blamed the gap on a greater-than-expected drop in wholesale revenues after its logistics hubs were forced to close late in the quarter.

It expects second-quarter revenues to be sharply impacted, and forecasts a decline in the recurring operating margin in the first half.

“The COVID-19 pandemic took a heavy toll on our operations in the first quarter,” François-Henri Pinault, chairman and chief executive officer of Kering, said in a statement on Tuesday.

“We are working hard on ensuring the continuity and readiness of all our businesses. Adapting our cost base and preserving our cash position are top priorities, implemented at all levels of the group. Our solid financial structure and our agility serve us well in this difficult period,” he said.

Jean-Marc Duplaix, chief financial officer of Kering, said the group was planning “drastic” cost reductions at brand level, with strong double-digit decreases in capital expenditure, although it will maintain planned spending on big projects including new logistics facilities, improved digital and e-commerce capability, and IT.

“We know we will face a very difficult second quarter and a challenging year overall, but I can assure you that we are not only adapting to these unexpected circumstances, we are also using these lessons to improve our efficiency, resilience and agility to emerge better prepared for the future,” he told analysts on a conference call.

Providing a vivid snapshot of the disruption caused by COVID-19, Duplaix revealed that 53 percent of Kering’s stores worldwide were closed as of March 31. Since then, the situation has worsened, with additional boutiques shuttering in Japan and Southeast Asia in early April, resulting in the closure of two-thirds of its store network as of last week.

Nonetheless, Kering noted “encouraging signs” in Mainland China in March as most of its stores there reopened.

“Globally, we saw a steady improvement in sales in many cities, first and foremost in the southern and eastern parts of the country, and it’s starting to materialize also in the western and northern parts, despite more contrasted trends. Our stores may record in some cities double-digit growth of their sales compared to last year,” Duplaix reported.

“Gucci, being the largest brand, is clearly in that trend and we are back to positive since the beginning of April for Gucci and for most of the brands. Gucci is leading the pack in Mainland China,” Duplaix added.

Despite an expected increase in the repatriation of Chinese luxury purchases and a triple-digit rise in online sales in China in February, the executive was cautious about the outlook for 2020 as a whole. “We don’t expect a major inflation in terms of consumption patterns,” he said.

Meanwhile, Kering is gradually reopening its logistics hubs in Italy and Switzerland, including Gucci’s leather goods and shoes prototype industrial complex called ArtLab.

Organic sales at Gucci fell 23.2 percent during the first quarter, compared with a rise of 10.5 percent in the fourth quarter of 2019 and an increase of 20 percent during the same period a year ago. The brand has a disproportionate weight, accounting for more than 60 percent of Kering’s revenues, and 82 percent of its operating profit, last year.

Duplaix noted that while Gucci enjoyed a positive start to the year, with sales in North America up double-digits in January and February, it suffered from its high exposure to Asia-Pacific and to the Chinese consumer.

“Everywhere, Gucci’s performance was outstanding until it came to a halt, confirming the brand’s underlying might and our confidence in its ability to rebound swiftly as each market reopens,” he said.

“Gucci is ideally positioned to take advantage of the recovery of the Chinese market and actively fostering sales wherever its stores are reopened, reallocating inventory across regions,” Duplaix added.

Saint Laurent posted a 13.8 percent drop in organic sales, conversely shielded by the fact that it is still underrepresented in China. “Saint Laurent showed good resistance in the quarter, and we have plenty of reasons to be confident, starting with the strong growth potential the house still enjoys in Mainland China,” said Duplaix.

Bottega Veneta bucked the general trend, posting an increase in sales of 8.5 percent, confirming its momentum as more of creative director Daniel Lee’s new designs land in stores. Wholesale revenues were up 55 percent, reflecting strong orders for the spring-summer collection.

“While it is clear that this performance cannot be sustained now that our North American and European store networks are under lockdowns, we can see even under these circumstances that the appetite for the brand and its new products is building up unabated,” said Duplaix.

Other houses, a segment that includes Balenciaga and Alexander McQueen, saw sales decrease by a relatively modest 5.4 percent. Watches and jewelry were more adversely impacted than the couture and leather goods houses in the division, with Boucheron and Pomellato’s high retail presence in Western Europe penalizing their performance in March.

Duplaix forecast the recovery would be led by emerging markets. “We feel that the consumer confidence is higher compared to the mature countries. We feel that there is an appetite for purchasing again,” he said. “We are very encouraged by the signs we see, by the steady increase of traffic in the stores.”

Kering expects to have production up and running fairly soon, with winter collections delayed by two to four weeks across the board.

“Probably we will postpone some deliveries and we will have a longer period in terms of sales for the spring-summer collection,” said Duplaix, adding this would result in an increase in markdowns versus last year.

“We don’t feel that we have a major delay in terms of production. We are not able to recoup. There will be clearly an adaptation of the calendar this year, but I think also if we consider the expectations of our consumers, we don’t feel that it should be a major issue,” he added.

Brands are adapting by reallocating inventories and adapting their upcoming collections in terms of volume and merchandising, focusing on fast-moving items and reducing the number of sku’s. “It will be clearly a priority for us to capitalize on our bestsellers and our evergreen products to rebound,” said Duplaix.

As part of its effort to rein in costs, Kering will propose cutting its planned dividend by 30 percent at its annual general meeting, which will now be held on June 16 behind closed doors.

As reported, Pinault has decided to cut the fixed portion of his salary by 25 percent from April until the end of the year. He and Jean-François-Palus, group managing director, have also decided to waive the variable portions of their annual remuneration for 2020.

The luxury market is expected to contract by 25 to 30 percent in the first quarter, according to management consulting firm Bain & Co., which also modeled three scenarios for the whole of 2020 — with the intermediate scenario suggesting a contraction of between 22 percent and 25 percent.

Exane BNP Paribas said in light of the International Monetary Fund’s forecast of a 3 percent contraction in the global economy, it now expects the luxury market to shrink by 20 percent in 2020, versus a forecast of 4 percent growth at the beginning of the year.

It said Kering was among the companies best equipped to weather the storm.

“Gucci is among the brands that should continue to benefit from the ongoing polarization in soft luxury,” analysts Melania Grippo and Guido Lucarelli said in a recent report.

“Furthermore, M&A could help lower the dependence on Gucci,” they added. “Kering could undertake an acquisition given its low leverage, and spend up to 20 billion euros in such a transaction.”

However, Duplaix brushed off the possibility of an acquisition, saying M&A was not a priority for the group at present.

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