PARIS – Kering posted better-than-expected revenues in the third quarter, driven by a strong recovery in North America and Asia-Pacific, but its star brand Gucci lagged behind sector peers, with sales remaining in negative territory during the quarter.
Gucci’s performance could take the shine off a generally positive quarter for the French luxury group, as the maker of Jackie 1961 bags and Jordaan loafers has to pivot from a reliance on sales to Chinese tourists toward courting more local customers in markets like Western Europe and Asia.
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“Gucci’s underperformance relative to luxury peers Louis Vuitton and Hermès may be a cause for concern. Experts indicate that mega-brands are recovering fastest in the luxury sector and Gucci may now be falling behind the pack,” said Harry Barnick, senior analyst at research firm Third Bridge.
Kering said revenues in the three months to Sept. 30 fell 4.3 percent to 3.72 billion euros, representing a decline of 1.2 percent in comparable terms, with the company noting “excellent momentum” in Mainland China. This came on the heels of a 43.5 percent drop in the second quarter.
The figures beat a consensus of analyst estimates, which had called for an 11 percent fall in reported sales to 3.35 billion euros.
By comparison, sector leader LVMH Moët Hennessy Louis Vuitton last week reported a 10 percent drop in third-quarter sales, with its key fashion and leather goods division recording a 12 percent jump in revenues, led by Louis Vuitton and Dior. Meanwhile, Hermès International posted 4.2 percent sales growth during the period.
“Against a backdrop that remains uncertain, and despite limited visibility, we are well prepared and confident in our ability to deliver good performances over time,” François-Henri Pinault, chairman and chief executive officer of Kering, said in a statement.
Kering chief financial officer Jean-Marc Duplaix indicated the momentum continued into the month of October. “We continue to observe globally trends which are very coherent with what we saw in September,” he told analysts on a conference call after the market close on Thursday.
Organic sales at Gucci fell 8.9 percent in the third quarter, compared with a 44.7 percent drop in the prior three months, but Saint Laurent and Bottega Veneta returned to positive territory, as did the “other brands” division which houses Balenciaga and Alexander McQueen.
Gucci continued to prune its wholesale network, with the aim of lowering the channel’s share of overall revenues to less than 10 percent by next year, and has yet to recoup all the lost sales in its own stores, Duplaix explained.
Meanwhile, the halt in global tourism is weighing not just on the performance of certain regions but also on the travel retail segment. Duplaix estimated that without the negative impact of travel retail, Gucci’s retail sales would have been up 2 percent in the quarter, instead of down 4 percent.
“The growth of Gucci has been outstanding in the past few years, supported largely by the success of the brand with Chinese tourists. And it’s true, there is a lot of room for improvement for Gucci with local clientele. So of course, it could be perceived as a weakness. I think we see that rather as an opportunity,” he said.
Duplaix pointed to the performance of North America, where sales jumped 44 percent in the quarter, indicating the brand is regaining market share. “The American cluster is growing massively,” he said, citing the repatriation of tourist dollars, a buoyant stock market and government subsidies as contributing factors.
“I think that clearly we are heading in the right direction. The work we have started with local clientele will pay off in the long run,” Duplaix said. Gucci is also counting on a switch in its aesthetic from baroque eccentricity towards more minimalist, timeless styles.
“We are opening a new chapter at Gucci,” he said, citing the introduction of more classic handbag styles like the Horsebit 1955 and the Jackie 1961. “So I think we are just at the beginning and it will continue.”
Luca Solca, analyst at Bernstein, saw potential downside from Gucci’s performance, even though it was slightly better than the consensus forecast for a 10 percent organic sales drop.
“This could cause short-term share price adjustment. The key question for Kering is how fast and effectively Gucci will be able to renew itself. Meanwhile, we salute Gucci’s decision to take a tighter grip on distribution and aim to reach 90 percent retail exposure,” he said in a research note.
Duplaix said he was confident that strategy would pay off. “We have decided to work on the exclusivity, the desirability of the brand going forward and we don’t want to deviate from that strategy,” he said. “The brand heat is still very strong.”
By contrast, Bottega Veneta registered a 20.7 percent jump in comparable revenues in the third quarter, confirming the “resounding success” of its collections, Kering reported. The brand enjoyed strong sales across the board, with customers below 40 representing half of sales.
Organic sales at Saint Laurent were up 3.9 percent, with online revenues more than doubling year-on-year after the house successfully internalized its e-commerce platform. Saint Laurent reported a strong start for its Chinese e-commerce site, launched in June.
Other houses were up 11.7 percent as Alexander McQueen and Balenciaga delivered double-digit growth in both retail and wholesale channels. On the jewelry side, Boucheron registered an “outstanding” performance in China, where Qeelin also grew very rapidly, but Kering’s hard-hit watch brands were still regrouping.
“Alexander McQueen became the first brand to fully migrate its online operations to our internal platform in early July with great success and improvement in all key metrics,” Duplaix reported.
Group online sales shot up 101.9 percent in the third quarter, led by North America and Asia-Pacific, as Kering continued the process of bringing its e-commerce activities back in-house. Online sales accounted for 12.5 percent of the group’s retail revenues in the first nine months of the year, versus 6 percent in the same period a year ago.
“In Western Europe and in North America, where the base was already quite high, we made significant progress and e-commerce now represents 19 percent and 24 percent of retail sales, respectively. Online penetration doubled in Asia-Pacific and obviously, there is plenty more potential in that region,” Duplaix said.
Kering said group revenues in North America were up 44.1 percent in the third quarter, while Asia-Pacific was up 18.5 percent. Sales in Western Europe fell 41 percent and Japan was down 22.8 percent, both sharply hit by the halt in tourism.
In Europe, for example, foreign visitors represented 70 percent or more of sales for some brands in the third quarter of 2019. “Domestic demand could not offset this drag in such a short period of time,” Duplaix said.
While sales in Mainland China were up more than 80 percent, he warned it would face tougher comparables in the fourth quarter. The rest of Asia was mixed, with Hong Kong and Macau down 50 percent or more from an already depressed base. Singapore and Australia were still negative, while Taiwan and South Korea were supportive.
As a result, Western Europe’s share of overall revenues has fallen to 26 percent from 36 percent during the same period a year ago. Asia-Pacific now accounts for 38 percent of sales, versus 32 percent previously, while North America has a 23 percent share, compared with 18 percent previously.
Duplaix said Kering would continue to invest in logistics, I.T. and innovation, noting that the recent sale of a portion of its shares in German sporting goods brand Puma, for a total of more than 655 million euros, was “perfectly timed and executed.”
As a result, he expects second-half profitability to be dented, although it should globally improve versus the first half.
“I think the market is underestimating the need for the brands and for the industry to reinvest after a phase where we have frozen a lot of projects,” Duplaix said. ”There is a need for us to resume a phase of investments in terms of communication, marketing, animation in the stores.”
These investments are all the more necessary because the outlook remains uncertain. “It’s very difficult to predict what will happen after the U.S. elections and what will be the impact of all the new sanitary measures we start to see in many regions,” Duplaix remarked.
“We are very confident that what we are doing with local clientele will in any case pay off, especially for the year-end period and all the sales we are making in December,” he concluded.