PARIS — Kering confirmed the resilience of the luxury sector with a solid performance in the third quarter, and said it was confident that all key regions would continue to deliver growth despite global economic upheaval.
The French luxury group said Thursday that sales rose 23 percent in the three months to Sept. 30, fueled by a stellar performance in Western Europe, where U.S. tourists have been splurging as a result of the weakness of the euro against the U.S. dollar.
“Western Europe was the most powerful growth engine,” Jean-Marc Duplaix, chief financial officer at Kering, said in a conference call with analysts.
“The region enjoyed strong demand both from local clients and from a sharp rebound in sales to tourists, which nearly tripled year-over-year,” he reported. “Americans came back massively this summer.”
Kering’s cash cow brand Gucci continued to underperform versus the group’s other brands, although organic sales picked up pace in the third quarter. Revenues at the Italian label totaled 2.6 billion euros, up 9 percent on a like-for-like basis, following a 4 percent rise in the second quarter.
That was slightly below a consensus of analyst estimates, which called for a 10 percent increase in comparable sales at the maker of Dionysus handbags and horsebit loafers. By comparison, organic sales at LVMH Moët Hennessy Louis Vuitton’s key fashion and leather goods division rose 22 percent year-over-year in the third quarter.
Reporting first-half results after the market close, Kering said group revenues in the third quarter totaled 5.14 billion euros, representing a rise of 14 percent in comparable terms. This was up versus the second quarter and above the consensus forecast for a 12 percent sales increase.
The group, whose brands also include Saint Laurent, Bottega Veneta and Balenciaga, said revenue in its directly operated store network continued to grow at a rapid pace, up 19 percent on a comparable basis.
Western Europe posted a 74 percent jump. Conversely, North America was up just 1 percent, further penalized by a high comparison base. Japan saw a 31 percent increase, while Asia-Pacific posted growth of 7 percent, despite ongoing restrictions in mainland China designed to curb the spread of COVID-19.
“We delivered sharp top-line growth, both versus last year and from pre-pandemic levels. Our ongoing focus on the exclusivity of our brands and on the quality of their distribution are yielding very positive results and reinforce their positioning in their key markets,” François-Henri Pinault, chairman and chief executive officer of Kering, said in a statement.
“In an increasingly complex environment, we maintain the required flexibility to support our profitability and sustain our investments in the long-term outlook of all our houses, Gucci first and foremost. We are as confident as ever in the potential and prospects of the group,” he added.
Duplaix said despite the shift in spending by U.S. customers to holiday destinations in Europe, and forecasts of a U.S. recession within the next 12 months, he remains confident in the country’s prospects.
“We have clearly no short-term plans to reduce or to review our ambition for the long run in the U.S.,” he said. “Beyond the percentage of evolution, if we look at the conversion rates, the sales density and so on, the business is still flying in the U.S.”
Reflecting a pattern seen elsewhere, trade remains brisk with top spenders, while more aspirational product categories have come under pressure.
In mainland China, COVID-19 lockdowns continued to weigh on business in the third quarter, with Gucci disproportionately impacted compared to the group’s other brands. Nonetheless, Duplaix believes that China will bounce back.
“We see that there is still a lot of appetite for luxury goods in China,” he said. “I don’t see why overnight, the potential of the region would have changed, so I think that we should keep calm and carry on in the country.”
Earlier this year, Gucci named Laurent Cathala president of Greater China fashion business, charged with reigniting the business. “Definitely it will take time, but we are very confident that we have the team in place, we have the products, the offer, to be successful in the country in the long run,” Duplaix said.
Cathala’s appointment was part of a broader reshuffle at Gucci that included the appointment of Maria Cristina Lomanto as executive vice president, brand general manager, a new position. Duplaix said she would oversee Gucci’s full return to the fashion calendar as soon as 2023 with six collections, after the brand trimmed its schedule to two shows a year during the pandemic.
“It does imply to work very closely with the design teams and marketing teams and the supply chain to ensure a unified and very coherent go-to-market capability,” he acknowledged.
One country where the outlook remains cloudy is Russia. Kering closed its directly operated stores there in March in response to Russia’s invasion of neighboring Ukraine, but has kept paying salaries and rent. It is now considering the ramifications of pulling out permanently.
“To protect the trademark, it does imply at least some presence in the country, so we will measure what’s the best balance in terms of business decisions, but we don’t expect that we’ll be able to operate again in the country, short-term or mid-term,” said Duplaix.
Overall, he underlined the need to remain agile to deal with a volatile global economic climate that offers little visibility.
“Our sector might be less correlated than others to overall economic conditions, but that doesn’t mean it is completely weatherproof. So our long-term investment plans in our houses and growth platforms are unchanged, but we are also ready to rapidly make the right decisions to maintain the group on course in the near term, should the need ever arise,” he said.
“All told, we remain confident in Kering’s fundamentals, in our capacity to meet challenges and in our prospects for the coming quarters,” he added.
Kering’s share price has fallen by 35 percent since the start of the year against the backdrop of looming recession, surging inflation, supply chain disruptions, Chinese lockdowns and the war in Ukraine. But Luca Solca, analyst at Bernstein Research, believes its current valuation is fair due to the potential of the group’s smaller brands.
“The ‘small’ Kering brands are not so small anymore, as they represent a larger portion of Kering’s profits,” he said in a report dated Sept. 21. Solca noted that the non-Gucci brands accounted for 28 percent of earnings before interest and taxes in the 2021 financial year, up from 20 percent in 2010, with absolute profits tripling in the same period.
“The Gucci relaunch will take some time, in all likelihood. But in the meantime the ‘small’ Kering brands continue to shine. At this valuation level, and with the prospect of a boost from China reopening next year to outbound travel, it is difficult to be bearish on Kering. Even if it may not produce significant positive surprises short-term, the relative downside seems limited from here,” he said.
Kering said recently it is targeting revenues of 15 billion euros at Gucci. It also outlined Saint Laurent’s potential to become a megabrand, with a medium-term revenue target of 5 billion euros, double the 2.5 billion euros in sales registered last year.
Saint Laurent was the group’s star performer in the third quarter, with 30 percent organic sales growth. Though revenues were driven by all product categories, Duplaix singled out the success of the higher-priced Icare handbag, launched in the second quarter. The maxi shopping bag in quilted lambskin retails for 3,500 euros.
“Saint Laurent’s excellent showing this quarter, notably with locals, confirms the house’s very positive trajectory,” he said.
Comparable sales were up 14 percent at Bottega Veneta as it continues its upscaling drive under new creative director Matthieu Blazy. “Bottega Veneta is diligently implementing its roadmap and we are confident that the house will amplify its successes across all markets,” Duplaix said.
While Kering does not break out revenues for Balenciaga, analysts estimate the brand has annual revenues in the region of 2 billion euros. The “other houses” division, to which it belongs, posted a 13 percent rise in like-for-like sales in the third quarter.
“The brand is growing very nicely in all categories with the great success of the leather goods collections and products,” said Duplaix, noting that there was also a rebalancing toward more formal pieces in footwear and ready-to-wear.
Although Kering has been working to increase the average selling price of its products across the board, Duplaix declined to give any insight into future price increases linked to rising input costs, particularly energy prices, which are hitting its entire production chain in Europe.
“As usual we will support our network of suppliers. We did it several times including during the COVID-19 crisis. So, of course, we will absorb part of that inflation in the production cost,” he said. “We have some room to find some savings and of course, we can still also increase the prices, even if there are some other considerations when it comes to price increases.”
Namely, he cited the risk of high volatility in terms of currencies. “We have not increased the prices during [the third quarter] and I will not comment about what will happen in [the fourth quarter] and in 2023,” he said.
The Kering results come on the heels of figures from Hermès International earlier in the day showing sales at constant exchange rates rose 24 percent in the July-to-September period, with double-digit revenue gains across all regions. Meanwhile, LVMH reported its sales grew 19 percent in the quarter on an organic basis, in line with the trends observed in the first half of the year.