Gucci sales decline slows in boost for Kering's turnaround efforts
Kering's Financial Performance and Strategic Initiatives
By Dominique Patton
PARIS, July 28 (Reuters) - Sales at Kering's flagship brand Gucci fell less than expected in the second quarter, as strong U.S. demand for its new handbags partly offset weaker spending elsewhere, suggesting the luxury group's turnaround efforts are gaining traction.
Gucci sales totalled €1.4 billion ($1.6 billion), above analysts' consensus forecast of €1.37 billion, or a 4% decline, according to Visible Alpha.
The result marks a significant improvement from the previous quarter's 8% decline, though still represents the 12th straight quarterly sales drop at Gucci, once Kering's profit engine but more recently experiencing years of weakening demand.
Kering's results come a day after larger rival LVMH reported a small rise in quarterly sales at its much bigger fashion unit, sending shares down earlier on Tuesday.
Sales Drivers and Market Trends
U.S. Demand and Product Innovation
SALES LED BY U.S. DEMAND, MEN'S BAGS
The better-than-expected performance could reassure investors that Gucci is on track to return to full-year growth this year, a pledge made by CEO Luca De Meo in an April plan to revive the €30 billion French conglomerate's fortunes.
Analysts expected the turning point in the third quarter.
"Across the group, we are seeing early signs of progress in brand desirability, commercial momentum and operating performance," de Meo said in a statement on Tuesday.
Gucci sales in the United States, luxury's strongest-performing market thanks to new wealth from the tech boom, rose 9% in the quarter, finance chief Armelle Poulou said, accelerating from the first three months of the year.
Sales were helped by new products such as the Borsetto and Paparazzo lines, as well as demand for men's bags.
Analyst and Market Reactions
"These results confirm further progress at Gucci," Royal Bank of Canada analysts said in a note. "We would expect consensus estimates to modestly increase to reflect (the first semester) beat, and perhaps increasing belief that Kering can achieve its goals which is not fully reflected at present."
Financial Health and Debt Reduction
Improved Margins and Debt Position
CUTTING DEBT
Overall, Kering's sales rose 2% in the quarter when adjusted for currency swings, just above analyst expectations for growth of 1.7%, with the Iran conflict shaving one percentage point off growth.
The group also posted a first-half recurring operating margin of 12.8%, above analysts' forecast for 12.3%.
Kering's net debt was €3.3 billion at the end of June, down from €8 billion at the end of last year.
The group closed a net 84 stores in the first half, out of the 100 targeted for this year.
Strategic Expansion and Future Outlook
Jewellery Business and Brand Diversification
EXPANDING ITS JEWELLERY BUSINESS
Once the group's stellar performer, Gucci has seen sales halve over the past three years after aggressive price hikes and changing tastes alienated some customers.
De Meo, who took the reins last year, told investors in April he wanted to reduce Kering's reliance on the brand, expand its jewellery business, and more than double the group's profit margin over time.
Growth Potential in Jewellery
"We also see significant growth potentially in jewellery across our fashion houses," he said on Tuesday. "The recent high jewellery activation of Gucci in Times Square generated strong client engagement and illustrated the potential for expansion."
Kering's shares are down about 17% so far this year.
($1 = 0.8778 euros)
(Additional reporting by Ingrid Melander. Editing by Mark Potter)
