By Joelle Diderich
with contributions from Samantha Conti
 on October 23, 2018
Backstage at Gucci RTW Spring 2019

The Gucci locomotive is still going strong, with another market-beating performance — fueled by Chinese and U.S. shoppers — propelling sales at parent company Kering in the third quarter.

As luxury stocks tumble amid fears that Chinese consumption is slowing, Kering reported that Mainland China posted its strongest quarterly growth so far this year, with no significant deceleration during its Golden Week holiday. In addition, Kering chief financial officer Jean-Marc Duplaix played down concerns that Chinese government efforts to crack down on daigou shoppers could dampen business. “The Chinese cluster was very positive during the quarter,” he said on a conference call with analysts after the Paris stock market closed on Tuesday.

“There is an obsession now about daigou and what could be the impact on the business of luxury brands,” he noted. “Daigou has always existed as a business and will continue to exist, but we can say it’s not a big chunk of our business, including with the Chinese clients.” The parent of brands including Saint Laurent, Balenciaga and Boucheron said group sales rose 27.6 percent to 3.4 billion euros in the three months to Sept. 30. This compared with a consensus forecast of 3.27 billion euros, according to analysts polled by FactSet.

Kering flexed its muscle during Paris Fashion Week with spectacular shows by Saint Laurent, which had models walking on water against the backdrop of the Eiffel Tower, and Balenciaga, which built a tunnel of high-definition screens broadcasting an immersive video by artist Jon Rafman.

Adding to the buzz, Gucci showed exceptionally in the French capital, staging its show — including a performance by Jane Birkin — at the legendary theater Le Palace.

“We expect that the efforts will continue to pay off, and we are very confident as we enter the final months of the year,” Duplaix said.

Organic sales at Gucci jumped 35.1 percent to 2.1 billion euros in the third quarter, representing the seventh consecutive quarter of growth exceeding 35 percent and sharply exceeding analysts’ forecasts that the growth rate would normalize to a level below 30 percent.

Gucci’s retail sales were up in all regions, led by a 41.9 percent rise in Asia-Pacific and a 40.7 percent increase in North America. Duplaix said the brand was still on track to meet the medium-term goal of 10 billion euros in annual revenues set out by Gucci chief executive officer Marco Bizzarri at an investor day in June.

“Whatever the turmoil on the market, whatever the fears of the market, we continue to implement in a very disciplined way our strategy, and we don’t want to be influenced by this anticipation and speculation,” Duplaix said. The executive highlighted the fact that carryover styles represent 70 percent of the brand’s sales across the board. “We saw growth across all age segments: the strong evidence of the deep-rooted appeal Gucci nurtures over the long run,” he added.

Gucci continues to refurbish its store network in a bid to increase productivity, and expects to have 45 percent of boutiques converted to the retail concept by year-end. While the brand’s growth has slowed versus previous quarters, it should be around 25 percent in the fourth quarter, Duplaix said.

The luxury goods sector is on alert for signs of a slowdown in demand from Chinese shoppers, who account for one-third of luxury sales worldwide, amid tougher comparatives and ongoing uncertainties about trade tensions with the U.S. Stripping out the impact of foreign exchange fluctuations, Kering’s revenues were up 27.5 percent in the third quarter, adding to evidence that high-end brands are so far immune to the turmoil in Asia.

The Kering results come on the heels of a 10 percent rise in revenues at LVMH Moët Hennessy Louis Vuitton in the third quarter. Hermès International is due to publish its results on Nov. 7.

“Our growth, whose pace is unprecedented in the luxury sector, is sound, well-balanced and sustained across all regions and distribution channels,” François-Henri Pinault, chairman and ceo of Kering, said in a statement. “Beyond short-term developments, we know that the secular growth of the luxury market, but particularly our solid fundamentals and the discipline with which we implement our strategy, will continue to support our operating and financial outperformance,” he added.

Kering is focusing on organic growth as it repositions itself as a pure luxury player. The French conglomerate has engaged in a flurry of house-cleaning moves since the beginning of the year, notably spinning out of the group its stake in Puma, selling its holding in Stella McCartney and Christopher Kane back to the designers, shuttering the Tomas Maier brand and selling action sports brand Volcom. McCartney’s separation from Kering is understood to be on track. As reported, the handover process, announced in March, will take two years. The first 12 months will see the financial transaction completed, while Kering and McCartney have given themselves a further year to work together and sort out the final details.

In Kering’s 2018 financial report, Stella McCartney will be listed as a discontinued operation, while the profit-and-loss statement for 2017 will be restated to reflect the brand’s status within the Kering stable. Both parties have promised a “smooth transition” in order to maintain the brand’s momentum in the market. Addressing concerns that the recent restructuring has left Kering excessively reliant on Gucci, and therefore vulnerable to a reversal in fickle fashion trends, Duplaix said he believes the group’s fundamentals are solid.

“I love to have this dependence on Gucci so far, because we are confident that Gucci will continue to grow. I think also if you look at the contribution of brands like Balenciaga, Saint Laurent and McQueen to the growth during the quarter, it has been also significant,” he noted. “Going forward, without adding any brands to the portfolio in the long run, I think the share of Gucci should normalize in the total sales to come back to something which is very comparable to what is the situation of some competitors.”

Sales growth at Saint Laurent slowed to 16.1 percent in the quarter, compared with a 19.8 percent increase in the second quarter and a rise of 22.2 percent during the same period last year. Duplaix said the performance was in line with projections, driven by like-for-like sales and store openings.

“It’s quite reasonable to consider that next year Yves Saint Laurent could continue to grow double digits,” he added.

Kering’s “other houses” division posted a 32.2 percent rise in revenues in comparable terms, driven by “exceptional momentum” at Balenciaga and “ongoing sales growth” at Alexander McQueen, Kering said. Duplaix noted that Balenciaga’s spring collection signaled a broadening of its ready-to-wear offer in a more formal direction. The brand has potential to grow in several categories, including leather goods, and its midterm target of one billion euros in revenues is “not so far,” he added.

Sales at Bottega Veneta, meanwhile, fell 8.4 percent on an organic basis as it prepares to unveil the designs by new creative director Daniel Lee in Tokyo in early December, ahead of his first full runway show in February. The pre-fall presentation will coincide with the opening of the brand’s Ginza flagship.

Duplaix acknowledged the brand faces a “long journey” and said 2019 would be another year of investment, with no improvement in profitability in sight.

Rogerio Fujimori, analyst at RBC Capital Markets, said Gucci’s performance was “reassuring” and should help Kering’s stock price rebound after a recent slump. “Kering remains a core sector holding thanks to substantial market share gains from Gucci, YSL and Balenciaga comfortably offsetting weakness at BV,” he said in a research note, though he reckoned the group was “overly dependent” on Gucci.

Kering shares have lost nearly 25 percent since the beginning of October, amid a general sell-off in luxury stocks triggered by reports of the Chinese clampdown on daigou shoppers during Golden Week, seen as a prime time for those intent on bringing home goods from abroad for resale. The company’s share price closed down 3.3 percent at 353.10 euros on the Paris Stock Exchange on Tuesday, before the results were published. This was down by almost one-third from an intra-year high of 514.60 euros on June 14.