Backstage at Gucci RTW Spring 2020

PARIS Kering defied disruption in Hong Kong and ongoing weakness in the U.S. to deliver a solid third quarter, with a better-than-expected performance from its star brand Gucci and signs that Bottega Veneta is starting to recover from an extended slump.

Overall sales rose 14.2 percent in the three months to Sept. 30 as Chinese consumers continued to snap up the French luxury group’s brands, compensating for a drop in business of around 35 percent in Hong Kong, where tourism has plummeted in response to nearly four months of violent antigovernment protests.

“We achieved another strong quarter, and all our segments contributed to our solid top-line gain,” François-Henri Pinault, chairman and chief executive officer of Kering, said in a statement. “Our progress, on top of considerable expansion in the past two years, is healthy and well-balanced across all houses.”

Jean-Marc Duplaix, chief financial officer of Kering, said the slowdown in Hong Kong was compensated by a “massive repatriation” of purchases to mainland China, and gains in other markets such as South Korea, Singapore and Australia. “The Chinese cluster is still massively up,” he told a conference call.

The pace of slowdown at Gucci began to flatten. Revenues rose 10.7 percent on a comparable basis in the third quarter, exceeding consensus estimates for an 8 percent increase. This was down from 12.7 percent in the second quarter, and from 35.1 percent during the same period a year ago.

The brand has seen its growth normalize after several years of stratospheric increases under ceo Marco Bizzarri and creative director Alessandro Michele. Gucci accounted for more than 60 percent of Kering’s revenues, and 82 percent of its operating profit, in the first half.

Duplaix said the brand was delivering on the objectives set out by Bizzarri at an investor day last year. “Gucci is implementing its strategy with determination,” he said on the call. “Its brand desirability is strong and fueled healthy growth in key product categories.”

While retail sales in North America again fell by 2 percent, amid continued fallout from the scandal over a balaclava-style sweater that critics said evoked blackface, Duplaix said Gucci has resumed marketing activities in the region, including a takeover of the Saks Fifth Avenue flagship windows in New York City.

The executive predicted that Gucci would meet its target of high-single-digit growth in the second half, and said he still expected an improvement in its operating margin, which stood at a record 40.6 percent in the first six months of the year.

He did not address the upcoming management changes at Gucci, with news on Thursday that Jacopo Venturini, its executive vice president, merchandising and markets, is leaving the firm. Venturini is a highly regarded and experienced industry veteran who joined Gucci in 2015 from Valentino and, before that, worked at Prada.

Growth at Saint Laurent also slowed in the quarter, with organic sales rising 10.8 percent, down from 15.8 percent in the second quarter and from 16.1 percent in the same period a year ago. The brand was penalized by its high exposure to France and its relative under-penetration of the Chinese market, Duplaix said.

Saint Laurent opened its first three flagship stores in China at the beginning of the year and sees more opportunities to expand in mainland China, Italy and in the travel retail channel. Meanwhile, it has been working to redress its reliance on leather goods by tweaking its price architecture for ready-to-wear and shoes.

“There was a need to be more balanced in terms of price and just to be sure that we can address all the different types of clientele,” Duplaix said. “For example, in shoes, there was no offer in the sneaker category.”

Bottega Veneta saw some improvement as creative director Daniel Lee showed his second collection for the label, with like-for-like sales up 6.9 percent in the three-month period, following an increase of just 0.8 percent in the second quarter. The brand had registered an 8.4 percent drop in sales in the third quarter of 2018.

Customers in Western Europe and North America have responded enthusiastically to the new product offer, but Japan and China are still lagging. “Bottega Veneta’s momentum is building up,” Duplaix said. “We expect the brand to gradually return to the status it deserves within our ensemble of brands.”

While Kering’s performance lagged that of other French luxury players, analysts sounded a positive note, underlining the likelihood of a “soft landing” for Gucci and the group’s resilience in the face of the Hong Kong turmoil.

Earlier on Thursday, Hermès reported sales rose 18.2 percent in the third quarter as Asian revenues surpassed growth in all other regions. Meanwhile, LVMH Moët Hennessy Louis Vuitton said earlier this month its revenues were up 17 percent during the period, despite a 25 percent drop in business in Hong Kong.

“All in all, Gucci’s performance in Q3 should reassure the market and supports our thesis on Kering as having the greatest potential for re-rating in the luxury sector for 2020,” said Rogerio Fujimori, analyst at RBC Capital Markets.

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