Backstage at Gucci RTW Spring 2018

PARIS — Kering again defied all expectations in the third quarter, despite tougher comparatives and a strengthening euro, and said it expects to continue outperforming luxury competitors as the year draws to a close, thanks to the winning trio of Gucci, Saint Laurent and Balenciaga.

The French luxury conglomerate said group sales rose 23.2 percent to 3.92 billion euros in the three months to Sept. 30, with sustained growth across all regions and through all distribution channels.

In organic terms, revenues were up 28.4 percent in the third quarter, sharply exceeding analysts’ consensus forecast of 20 percent growth.

“Thanks to flawless execution of our strategies, at group level as well as in each of our brands, we delivered another quarter of outstanding growth,” François-Henri Pinault, chairman and chief executive officer of Kering, said in a statement published after the market close on Tuesday.

“We will keep concentrating on organic growth, value creation and strict financial discipline. Facing unfavorable currency impacts and a tougher base of comparison, we remain fully confident in Kering’s ability to achieve a record year, fueled by sector-leading growth,” he added.

The rise was propelled by cash-cow brand, Gucci, which posted a 49.4 percent leap in organic sales in the third quarter, versus a consensus estimate of 30 percent. This compared with 39.3 percent growth in the second quarter of this year and with a 17 percent increase in the third quarter of 2016.

“Simply put, this is still the Gucci moment, this year’s biggest winner in a sector where brand performance divergence remains substantial,” said Rogerio Fujimori, analyst at RBC Capital Markets.

The figures come on the heels of a 13.6 percent rise in third-quarter revenues at LVMH Moët Hennessy Louis Vuitton. Hermès International is scheduled to report sales for the period on Nov. 8, while Burberry is due to publish interim results for its fiscal first half the following day.

Kering’s luxury division as a whole, which also includes brands such as Balenciaga, Stella McCartney and Alexander McQueen, saw revenues increase 32.3 percent in organic terms.

Jean-Marc Duplaix, chief financial officer of Kering, said currency fluctuations shaved 90 million euros off luxury revenues, and this headwind would continue into the fourth quarter. Despite the stronger euro, tourist demand remained strong in Europe, with a double-digit rise in purchases by Asian customers.

Gucci is raising prices for its spring 2018 collection by an average of 5 percent to compensate for the resulting price gaps, and other brands have also started tweaking their price tags, he revealed.

“We are keenly aware of the potential pitfalls from political and economic scenarios and we’ll experience further headwinds from currency and comps, but the overall environment remains conducive for luxury goods and we are positioned to continue outperforming the industry,” Duplaix told a conference call.

The maker of Dionysus handbags and Princetown loafers has undergone a reinvention at the hands of creative director Alessandro Michele and ceo Marco Bizzarri.

Sales in directly operated stores, which now account for 82.7 percent of Gucci’s revenues, increased 50.9 percent and across all nationalities and regions, while wholesale posted a 43.9 percent rise. All product categories enjoyed double-digit growth, Kering said.

Royalties were up 28 percent in the third quarter, reflecting the introduction of new eyewear and the Gucci Bloom fragrance, and the brand has bolstered its offer in segments such as small leather goods, luggage and men’s wear.

Although Gucci expects to hit its target of doubling sales density to 30,000 euros per square meter by early 2018, Duplaix said there was still potential for revenues to grow.

“We consider that there is still room for expansion and improvement in some areas, so that we can still overperform the market, but probably not to that extent,” he said, noting that Gucci is banking on a combination of product mix, increased traffic and higher prices to boost revenues next year.

The brand aims to have 150 stores, or 30 percent of its network, converted to Michele’s new retail concept by year-end, with an additional 20 percent to 25 percent of stores featuring new visual tools.

In addition, it plans to open the Gucci Art Lab center of excellence for leather goods and shoes in early 2018. The 355,000-square-foot facility is a step toward increasing the share of production that is internalized.

Sales at Saint Laurent advanced 22.2 percent on a comparable basis, versus an increase of 23.7 percent in the previous quarter and a 33.9 percent jump in the same period last year. Revenue generated by directly operated stores progressed 21.1 percent in organic terms, while wholesale was up 23.4 percent.

The brand is set to launch a revamped e-commerce site on Wednesday, and is enjoying strong momentum following creative director Anthony Vaccarello’s spectacular spring show, staged against the backdrop of the Eiffel Tower, Duplaix said.

“The last show has been unanimously celebrated and commented. It was a magnificent show, really true to the spirit and the DNA of the brand, and I think that the reception of the buyers has been extremely good,” he remarked.

Sales for Kering’s other luxury brands increased 17 percent on a comparable basis. Couture and leather goods recorded a 19.3 percent rise, led by an “excellent” performance from Balenciaga, which the group expects to reach revenues of one billion euros.

“We are working to achieve that target mid-term and we are very encouraged by the development of the brand in the recent months,” Duplaix said. “In September, in retail, it was the fastest-growing brand.”

Revenues at Bottega Veneta inched up 0.9 percent in comparable terms, as the brand continues to invest in communications and digital marketing to conquer a younger clientele. It recently hired a new merchandising director and is putting the accent on smaller bags such as the Mini Montebello, Duplaix noted.

Those changes should become more apparent with the opening next year of flagships in Tokyo and on Madison Avenue in New York, he added.

Meanwhile, online sales in the luxury division jumped nearly 80 percent in the quarter, with Gucci’s e-commerce posting triple-digit growth, thanks in part to the launch of its online store in China in July.

The sports and lifestyle division posted a 15.9 percent rise in the quarter, driven by a 17.3 percent hike in currency-adjusted sales at Puma. While Kering officials have said in the past that Puma is no longer a core asset of the group, Duplaix hinted for the first time at a future sale of the German sporting goods maker.

“Puma is on a very nice trajectory, and we will have the occasion to consider and to contemplate some options but later — and probably not short-term — so let’s work first of all still on the turnaround and let’s deliver a very nice set of figures for 2017 — that’s the priority for us,” he said.

Thomas Chauvet, head of luxury goods equity research at Citi, believes Kering will wait for confirmation that profitability is improving before taking action.

“They’re saying it may not happen immediately, but we’ll have to wait two or three quarters, because they want to show there is a margin recovery story behind that topline recovery,” he told reporters recently.

Chauvet believes that Kering wants to get rid of its sports and lifestyle division, which also includes Volcom, in order to become a pure luxury player.

“Kering has maybe not been very good at extracting synergies between the two divisions,” he said, noting that the sports and lifestyle segment is dependent on wholesale, lacks pricing power and suffers from a lack of product differentiation between the different brands in the sector.

In a research note published last month following post-investor meetings with Kering management, the analyst wrote he was “optimistic about a near-term Puma exit.”

Given the valuation and size of Puma, which has a market capitalization of 4.9 billion euros, Citi believes Kering is more likely to opt for a spin-off or placing rather than a sale to a strategic buyer or private equity investor. That view was echoed by Luca Solca, head of luxury goods at Exane BNP Paribas.

“Kering has indicated that Puma is not a strategic asset long-term. In the ideal world, Kering could want to sell Puma outright. Yet, an outright Puma divestiture seems less likely, as Puma continues to increase in value,” he said in a report published on Thursday.

“We see the most likely scenario as Kering going for a ‘second IPO’ — placing [most of] its shares in the market, deconsolidating Puma, and possibly returning part of the cash to shareholders [while keeping a portion as ammunition for future M&A],” Solca added.

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