Good day, welcome to the Kering's 2018 third quarter revenue conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean-Marc Duplaix. Please go ahead, sir.
Good evening to all of you. We are pleased to welcome you to this call to review Kering sales in the third quarter of 2018. On slide four, we have summarized the group's performance. We had another quarter of outstanding double-digit growth. With sustained top-line gains, Kering continues to significantly outperform. Total revenue from continuing operations was up nearly 28% to EUR 3.4 billion in the quarter, with reported and comparable terms converging as there were no changes in scope and virtually no FX impact in the period. As you know, Volcom, Stella McCartney, and Christopher Kane, treated as discontinued operations under IFRS 5, are excluded in both last year's and this year's third quarter, as is Puma's contribution. The sharp increase in our revenue comes on top of significant growth rates in the third quarters of 2016 and 2017, as you see on the bottom part of the slide.
This demonstrates the tremendous momentum of our brands and their first-rate customer appeal. Turning to our luxury houses on slide five, as a whole, they delivered remarkable growth of over 27%, harmonious across all regions and channels. Revenue exceeded EUR 3.3 billion. The impact from currency fluctuations was negligible. Retail, which represents three-quarters of total revenue, was up 28%, with all regions posting high or very high double-digit increases above the considerable gains in the same quarter last year. North America, up 36%, posted the best growth, with Asia-Pacific close behind, up 33%. The momentum in Greater China was very strong, in line with Q2. In Japan, revenue was up more than 22%. Growth in Western Europe was 19%, with all countries, apart from the U.K., posting double-digit gains. Regarding key nationalities for our three main brands, the Chinese cluster was up more than 30% worldwide, similar to Q2.
Chinese spending was partly redirected towards their home market, it held firm in Asia-Pacific and Europe. All other nationalities also proved extremely solid, especially the American cluster, both at home and abroad. Overall, all clusters, apart from Middle Eastern clients, achieved healthy double-digit increases in the quarter. Online revenues were up more than 80% as North America and Europe, which account for the bulk of our e-commerce, experienced significant progressions. Online sales also grew at a rapid pace in Asia-Pacific, of course, from a lower base as our platforms there are more recent. By product category, growth rates in leather goods, shoes, and ready-to-wear are all in the same ballpark. Wholesale was also up 27%, a very substantial performance. The out-performance of our houses is the direct result of the creativity and innovativeness for which they are recognized around the world.
Their vision is not limited to products and collections. Our houses work systematically through every step and every stage of their engagement with customers. The recent fashion shows of all our houses have gained great attention for their intensely creative content and imaginative settings. Gucci and Saint Laurent catwalk shows ranked among the very top brands in terms of web traffic this season, and Balenciaga attracted rave reviews. The digital footprint of our brand is highly scored and expanding rapidly. They constantly enhance every facet of in-store excellence to recognize their customers wherever they shop over the globe, and to provide a smooth interface between physical and online shopping experiences. The CRM solutions we implement at brand level and the tools we roll out throughout our stores represent a huge step forward in personalizing and deepening relationships with our clients, raising satisfaction and loyalty.
Our CRM application for sales associates should be in place in all major brand locations by the first half of 2019. In the stores where it has already been rolled out, its impact on average ticket is very noticeable. This unique combination of art and science is really the motto of our quality organic growth. Once again, we grew from an nearly unchanged retail network. At September end, we directly operated 1,400 stores, a net increase of just 18 units in the quarter, primarily aimed at filling in gaps in selected markets or converting third-party representation. Let's turn to Gucci on slide six. Gucci delivered another substantial outperformance with revenue up 35% comparable. Growth was both global and balanced. Retail rose 35%, driven by like-for-like, underscoring further improvement in sales density. Sequentially, the store network was stable.
All regions were up strong double digit on top of very demanding comps. Asia Pacific and North America led the pack both up more than 40%. Greater China, including Mainland, Hong Kong, and Macau, grew above 40% in line or even slightly higher than Q2. Japan and Western Europe showed further strength up 33% and 25% respectively. All key nationalities were up double digit and contributed to the strong performance in the quarter with the U.S. and Chinese clusters, particularly dynamic. Worth highlighting and comparable to patterns in recent quarters, we saw growth across all age segments, a strong evidence of the deep-rooted appeal Gucci nurtures over the long run. In terms of product category, growth was also broad-based with double-digit increases across the board. Carryovers are gaining strength, and the product offer is constantly evolving, thanks to introduction of newness. Online revenue grew nearly 70% in the quarter.
As planned, Gucci continued the rollout of its e-commerce, launching in Hong Kong and New Zealand in the quarter. Wholesale increased 36% on a stable number of doors, and as expected this quarter, performance is aligned in the two channels. Finally, travel retail enjoyed strong momentum. You remember that this important channel where Gucci remains under-penetrated is a strategic lever for the brand. Gucci continues to invest to sustain its competitive advantage on top of the solid foundations it has built in recent years. Its teams around the world are working methodically and tirelessly to consolidate its positions and drive Gucci to the next stages of this incredible journey. Moving to slide seven, Yves Saint Laurent posted further growth with comparable revenue up 16%. Saint Laurent sound trajectory is wholly consistent with its strategy and the ambitions it has set for itself.
Retail was up 18% with double-digit increases in all regions and an especially good performance in North America. Overall contribution to growth is well-balanced between like-for-like and new store. In wholesale, Saint Laurent grew 14%, taking into account some variance in the timing of deliveries, as well as a high comparison base, this is a very good showing. The brand's highly disciplined execution fueled this consistently strong result. Its recent Paris show was spectacular, anchoring the fashion Parisian authority of the house. New and bag lines were well-received while carryovers continue to enjoy broad success. Saint Laurent opened six stores in the quarter, either to increase its market penetration, as in Australia and mainland China, or to operate directly with three conversions in the Middle East. On slide eight, some highlights for Bottega Veneta.
Revenue was down 8% comparable as weak tourist traffic hampered retail, especially in Western Europe, and this was not offset by repatriation of purchases in Asia-Pacific. Conversely, it is worth mentioning the improving penetration of the brand among local customers in the U.S., as well as the positive performance of newness in leather goods, although not enough to compensate for the shortfall in permanent models. Wholesale progressed for the second consecutive quarter. The brand is carefully resuming targeted development with new partners. The brand transition is in progress. We knew the journey would take time and are very confident. Since the arrival of Daniel Lee as creative director in July, the teams are energized, and new ideas are taking shape to rejuvenate the brand. The Pre-Fall 2019 collection, to be unveiled around the opening of the Ginza flagship in Tokyo early December, will mark a major inaugural step.
An impactful communications plan will ramp up until the first fashion show in February next year. In the meantime, the brand is selective in terms of retail expansion and closed two net doors in the quarter. On slide nine, revenue at our other houses rose more than 32%, propelled by a 38% increase in sales in our own stores. This accounts for more than half of the total. Across all regions, sales were up high double digits with particularly remarkable performances in North America and Asia-Pacific, both up 50% or more. In soft luxury, Balenciaga kept growing at a fast pace thanks to the continuing success of its ready-to-wear and shoes. It is also making rapid headway in its men's business, a new vector of development. In leather goods, we are pleased by its ability to leverage momentum and amplify growth in this category as well.
The house's recent fashion show was a masterful display of the art of tailoring, keeping up the legacy of Cristóbal Balenciaga. Alexander McQueen also turned in a good quarter, notably in the key women's ready-to-wear category, but also in shoes and with some promising developments in handbags on good success of recent introductions. Online, both brands are performing extremely well. Hard luxury had a good quarter, with all three jewelry houses posting higher performances and leveraging strong positions in their respective home markets to expand further. New collections as well as additional items in existing lines were key drivers. Innovation aligned with brand DNA was also an important factor in watches, where recent introductions supported visibility and top line. Patrick Pruniaux, CEO of Ulysse Nardin, with longstanding experience in the sector, has been given the additional responsibility of managing Girard-Perregaux.
We believe that unifying the leadership of our Swiss watchmaking houses will enable us to step up the pace and generate even more synergies. Turning to Corporate and Other on slide 10. As you know, Kering Eyewear accounts for the bulk of that line. In the quarter, its total sales amounted to EUR 99 million. After elimination of intragroup sales and royalties earned by the brands, net consolidated revenue of Kering Eyewear was EUR 76 million, up 48% comparable. The business is performing well across all regions and is driven by the strong results of Gucci, the highly successful rollout of Cartier, and accelerating trends at Saint Laurent. Next year, Balenciaga and Montblanc will further enhance the portfolio. All will take advantage of the new fully automated logistics center located in Italy. Before we take your questions, a few words of conclusion here on slide 11.
We are more than pleased with this excellent quarter and confident that our brands will continue achieving superior performances on top of the high accounts accumulated in the past couple years. For the most part, their strong momentum and intense creative energy enabled them to deliver sharp top-line increases in absolute terms, even if relative growth rates are obviously narrowing. Year-on-year, our luxury houses have created more than EUR 700 million of incremental revenue in Q3, commensurate with earlier quarters. In addition to each of our brand's own dynamics, our success is also attributable to the way in which we manage them together. With solid fundamentals, both our intrinsic strength and the positive secular dynamic of our sector, we are confident in the prospects of each of our houses, as well as those of the group as a whole.
This being said, we know that we are operating in a fast-moving environment. This means that agility and strict discipline are required to ensure optimal financial performances and continue creating value regardless of circumstances. You can be assured that this is our top priority. We are now ready to take your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. Again, please press star one to ask a question. We will now take our first question from John Guy of MainFirst. Please go ahead. John appears to have dropped his question. We'll take our next question from Aurélie Husson of Kepler. Please go ahead.
Good evening, everyone. Three questions for me, please. You mentioned several times in the past the progressive return to normalized growth at Gucci. It seems to me that +35% is not really normal, is far above normal. Should we expect a big step downwards towards normalization in Q4, or will it be more gradual? My second question regards the price index. Could you remind us the price index at Gucci by region at end of September? Are we still around 134 in mainland China for 100 in Europe? If you also can give us what is it in Hong Kong? Finally, is it possible to give a rough estimate on how much Daigou sales would represent in total Gucci turnover? Thank you very much.
Good evening, thank you, Aurélie, for your questions. Let's start with your question about the normalization. I think that what I can say is that we are so far on par or maybe slightly above the growth rate we had in mind when we were mentioning normalization and what has been presented by Marco Bizzarri during the Capital Market Day. By the way, if you look at a two years stack growth overall, maybe this quarter was overall more positive than the last one or the two last ones, but I think that globally we are on par we don't expect, we don't see so far any deviance in terms of normalization.
To make it simple, if we could anticipate what could be the two year stack growth for H2, I would say that it should be close or slightly above the one we have delivered in H1. So far, I would say that there is no good or bad surprises, rather good surprises in terms of normalization. Again, I think that the brand is doing everything which is possible in order to be on par with the trajectory that had been presented. I think it also demonstrates that all the levers we had mentioned in order to monitor and to manage this normalization, this landing are performing well and are doing well. We are very pleased with the execution of the plan at Gucci. Now, your question about the price.
In fact, if you look at the price difference between Europe and mainland China, there is a 26% gap to be compared to 29% one year ago. If we consider Hong Kong, it's a 15% gap, which is quite close to what it was one year ago. It was 16%. As a reminder, you know that we had adjusted the prices for the fall-winter collection in Europe, which had reduced the price gap with China. After that, you had somehow weakness of the CNY, following the price adjustment we passed at the beginning of H2 to reflect the custom duties adjustment, we came back to this gap. Regarding your last question, I think there is an obsession now about Daigou and what could be the impact on the business of luxury brands. I will, of course, elaborate only about our brands and especially about Gucci.
I will be very straightforward. If I look at the performance of Gucci in the past quarters, you can imagine that the growth has been driven, first of all, by the appeal and the attractivity of the brand. I will remind you that the success of Gucci started to materialize first in Europe with European customers. If I look also at the performance of Gucci in mainland China, definitely, we see that Daigou is not a driver of the performance. We have some rules in our stores to contain as much as possible the Daigou business. Globally, I would say that we are very pleased to see that there is a repatriation of the purchases in mainland China. We have always said that we prefer to have a more sound consumption in China, I think that the focus on Daigou is probably a little bit over-exaggerated.
I think that we tend to forget now what has been a good measure, which was to reduce the custom duties. I think it's normal that the flip side of that measure taken by the Chinese government is also to control more the Daigou. I think that the rules have not changed regarding Daigou. There is probably more strict application of the rules. We know that there is preparation change regarding e-commerce. Here again, we are welcoming very favorably this new regulation that will favor our business directly operated online in China. Daigou has always existed in that business, will continue to exist. We can say it's not a big chunk of our business, including with the Chinese clients. I remind you that when I look at the Gucci performance, we have almost 50% of the Chinese customers buying on the domestic market.
It's 45 to be accurate. I think that it would be completely foolish to consider that among the 55 remaining, it's only about Daigou, it does represent a non-significant part.
Thank you very much. Maybe just a quick precision on what you said as an answer to my first question. If we assume no particular slowdown versus H1 on a two-year basis, that would lead us to, in Q4, 25%-30%. Are my calculations correct?
I think that your calculation is roughly correct. Once again, it's difficult to predict, but we consider that the brand has a good trajectory and should deliver something quite robust in terms of 20s growth. Let's say that your assumption around 25 is something which is correct.
Thank you very much.
We will now take our next question from John Guy of MainFirst. Please go ahead.
Yes. Thank you. Good evening, Jean-Marc. Thanks for taking my questions. My first question is really just looking at the growth rate of Gucci, obviously, in the third quarter. On that multi-year stack, anything over 25% highlights an acceleration. Surely that should give us confidence and reassurance going into, not only 4Q that you just talked about, but going into the first half of 2019 in terms of growth on what is a very challenging multi-year stack. That's my first, I guess, quasi-question/observation. My second question is around the store refurbishment program. Could you maybe give us some indication as to where you are now in terms of the rollouts with Gucci? Where you think you'll be by the end of the year relative to previous comments? If you can provide any incremental around footfall and conversion uplifts on the new stores, that would be most helpful.
With regards to maybe the exit rate on Gucci, I'm thinking about October. I appreciate that this is about Q3, but when we look at our Baidu proprietary search share tracker, we see a very strong acceleration again so far at the beginning of the fourth quarter, which I guess underpins your confidence around the fourth quarter. My final question, apologies for 4, is on Saint Laurent. You've been talking about maybe a normalization of growth around maybe into the low double digits going forward into Saint Laurent into next year. You've had 7 consecutive years of double-digit growth. Could you maybe give us an indication of where you think a sensible growth rate for Saint Laurent is going forward? Thank you.
Thank you, first of all, for coming back on the call, and for all your questions. Regarding your first question/observation, I will confirm that it's more an observation. When it comes to confidence and reassurance, I think that we have always been not overconfident, but confident about the relevance of the strategy we have. I think that I won't comment, of course, what are our expectations for 2019. I would just say that the figures for Q3 confirm that once again, all the initiatives launched by Gucci management, by Gucci teams, are working well, are bearing fruits, will continue to pay off, and that the reason why that there is no reason so far to consider that the trajectory presented by Marco, or what was an underlying trajectory based on the midterm ambition, should be challenged so far.
Regarding refurbishment, that was your second question, if I remember well. We were, during Q3, slightly below our expectation in terms of refurbishment. We have postponed some refurbishment to Q4, so that we add 14 additional stores under the new concept, so that we are now at 196, which represents something like 36%-37% of the total directly operated stores. Nonetheless, it's just a question of postponement. We are still confident that we can stick to the plan we have for 2018, so that we could have 45 additional stores under the new concept during the last quarter if we combine openings, relocations, and refurbishments, so that we are still aiming at reaching something like 45% of the total network with the new concept by the end of the year.
Both concepts are still performing very strongly, but we are still, if we look basically at the figures, the new concept stores, which are outpacing the non-refurbished stores in terms of sales growth. We know that the gap will gradually narrow, depending, of course, on the maturity of the market. For example, in Europe, now the growth between the two concepts is more or less similar, even if the new concept is still performing slightly above. Just as a reminder, I think that we have already mentioned the fact that depending on the region, depending on the cities, all the stores are not yet at the level we are expecting in terms of sales density. There is still room for improvement there, and you know perfectly that it's one of the levers for next year additional improvement in terms of sales growth and in terms of profitability.
As regards the exit rate, of course, I will come back to the comment I just made for trying to answer your first question. I think that, of course, the comps are very challenging, but I think if I look at where is the consensus for next year, I think that you have quite listened carefully to the comments made by Marco Bizzarri during the Capital Market Day or to the comments we made in the past calls. We have still the ambition to grow faster than the market. I think, again, that we have some confidence there considering the performance of Q3. You can imagine that I won't elaborate too much on the current trading. What we can say is that globally, all the events, especially in China we had in September or in October, we saw quite good figures.
I think that underlying trends are still very solid. I think that globally, growth is not moderating more than the compare would suggest. Now, finally, regarding Saint Laurent, that was your last question. I think that obviously, once again, we had a very transparent and comprehensive presentation by Francesca of the strategy in June 2017. We have delivered so far on par with the plan. I think that for next year, we have already mentioned that the growth will be driven both by still an improvement of the like-for-like performance, or would be driven by like-for-like performance, but also as well by some stores opening. We had mentioned some opportunities here and there. I think that the growth could be still driven half by like-for-like growth and by store opening.
That is quite reasonable to consider that next year, Saint Laurent could continue to grow double-digit.
Thank you very much, Jean-Marc. That's very clear.
Our next question is from Helen Brand of UBS. Please go ahead.
Hi, good evening. Firstly, on Gucci's EBIT margin, I think consensus is at 38.5% for this year. Given obviously the strong trends in Q3, and it sounds like the beginning of Q4, where could that go to? Do you think is a level above 39% achievable? How should we think about FX hedging into H2 and next year? Secondly, we're talking about 2019, and I know you highlighted a lot of initiatives that you invested in June for the midterm. I was just wondering if you could talk a bit about the priorities into 2019, specifically for Gucci. How should we think about the percentage of additional stores moving into the new concept next year? Perhaps also some trends in the licensed business. Finally, I think Balenciaga has a target of EUR 1 billion of revenue.
Where are we annualizing on revenue for that brand over the last 12 months, and what are the plans here for 2019?
Thank you, Helen. As you can assume, we don't provide guidance for the profitability of Gucci for the full year. Q3 was above our expectations, and we had overperformed. It's clear that even if Gucci keeps investing to sustain its future growth, it will deliver strong operating leverage again in H2, probably not to the same magnitude as in H1. I will remind you that during H1, we had a 620 basis points of improvement. It's clear that the EBIT margin for the second half should be closer to 40%. We can improve an operating or an improvement of the EBIT margin, for H2, that could be materially above 300 basis points, based on what the comment I've just made. You had mentioned the FX and the hedging impact.
Considering the current situation, or the spot rate compared to the hedging rate, and what we saw in Q3 in terms of currency mix with limited impact or limited variance between reported and constant currency, we can assume so far that the bulk of the impact has been taken during H1. I believe there will be also some impact during H2, but very limited, and it has nothing to do in terms of significance or in absolute terms with all the operating leverage we have. It won't have any impact in a way, in terms of improvement of the EBIT margin. In any case, of course, we could see some other variances of currencies of FX in the last two months. So far, it's not an issue regarding the profitability.
For 2019, you can imagine that it's surely too early to comment for what are the initiatives or the strategic initiatives for 2019. I think that once again, the strategy has been very clearly and comprehensively presented by Marco. There is no reason to deviate from that strategy. You know that there is a focus on store productivity with still the refurbishment, so we will continue some relocations. There is no plan to expand massively the store footprint in terms of numbers of units. There will be some, but very limited. Still, the ambition to have more directly operated e-commerce business or at least some more travel retail. You have also all the actions and initiatives we have started to work on for now two years as regard CRM, all the tools regarding allocation and replenishment, S&OP.
We will continue basically to roll out all the different tools we have created and developed. I think that, of course, we will have the occasion during the presentation of the 2018 results to elaborate more on what will be the priorities for 2019. In any case, I think that once again, what we try to convey as a message is that 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 these anticipations and speculations. As regard Balenciaga, of course, I could make more or less the same answer in the sense that it's not the time to comment or to elaborate on what could be the development of Balenciaga for 2019.
I think that here again, we are implementing the strategy in a very disciplined manner. You will have noticed that the fashion show was a good example of how the brand also can present more formal ready-to-wear with a great legacy or tribute paid to the legacy of Cristóbal Balenciaga in terms of tailoring, in terms of cut. I think it was part of the journey to enter that segment and to broaden the offer. I think that the strategy is clearly and properly executed by the team. You know that there is a potential of further growth in several categories, including the main one, which is leather goods. We will continue to open store, and this is typically a brand where we plan to invest. What I can tell you is that the milestone, which was EUR 1 billion of sale is not so far.
Great. Thank you very much.
Our next question is from Louise Singlehurst of Goldman Sachs. Please go ahead.
Hi. Good evening. Hi, Jean-Marc, Claire. Just three relatively short questions from me, if I may. Firstly, Jean-Marc, I wondered if you could just clarify the comments you made earlier regarding the Chinese cluster and whether that was obviously for Gucci brand, I think it was for the group actually as a whole. Secondly, in the presentation, you mentioned around the carryover versus the newness across the brands, particularly at Gucci. I think when we think about Gucci brand, we think obviously about a lot of newness, but I wonder how we can think about the development or the progress of the carryover as a proportion of the total product offering. Thirdly, just given the strength that we're obviously seeing in the online development and e-concessions or virtual concessions that were talked about by Mr. Bizzarri back at the Capital Markets Day.
I think Mr. Bizzarri has spoken more recently talking about using potentially third-party platforms, but is currently in a wait-and-see situation. I imagine given the growth that you're currently seeing, you don't need any help from third-party platforms. The volume is clearly very high, but what is it that you probably need to see from third-party platforms that help the dialogue there? Thank you.
Yes, thank you, Louise. I will try to clarify what we commented on the Chinese cluster. What we said is that if we consider the Chinese cluster as a whole for the three major brands of the group, the growth of the Chinese cluster in Q3 was very close to the one delivered in Q2 and above the one delivered in Q1. Of course, you can imagine that this comment is the same for Gucci if we look at Gucci specifically. Now, once again, I think that there were a lot of questions and concern about the situation with the Chinese cluster. Again, we have not a crystal ball, and we don't want to elaborate on what could happen.
What is very clear and obvious, if you look at the figures, is that the Chinese cluster was very positive during the quarter with, of course, and that's not a surprise, a repatriation of purchases in the domestic market. That's the reason why we also said that in terms of growth, Q3 was the strongest quarter if we look at mainland China compared to Q2 and Q1. Once again, my comment is about the three main brands and first of all about Gucci. I think that it does clarify completely. As regard to carryover, I won't spend too much time on that. I think that we have already mentioned that today, it was the case in Q2, more or less, it's still the case in Q3 for Gucci, carryover lines represent approximately 70% of the sales across the board.
Of course, with differences between categories, but even in ready-to-wear and shoes, I think that we have, or the brand Gucci has been very strong and very talented in selling carryover lines with some seasonal interpretations, new colors, new functionalities. Overall, the product mix is this one, 70/30, with some very positive drop of newness along in the new collections, in the new shows. You will have noticed also that during the show you see some lines which were existing with new interpretations. Overall, the growth is very well-balanced across the different categories, and if we look at newness and carryover. Carryover lines are performing still very well, and we don't see so far here, again, any sign of slowdown if we consider the carryover lines. Your last question was about.
Platform.
Yes, the online platform. Although if we consider the digital strategy of the group and for Gucci specifically, but I think that what I would say is the same for the other brands. We are fine still to collaborate with some etailers or marketplace with different models. It can be wholesale or concessions, as long as the brand integrity is preserved. What has been said by Marco very clearly is that that's a priority. I think that we have been always very clear about the fact that the priority is to develop the business that we are controlling, that we are operating directly. That's the reason why we have invested massively in our digital penetration, our digital tools, and the online platform of Gucci, and there was some new steps in the rollout of the platform with New Zealand and Hong Kong during the quarter.
Clearly, the priority is to develop the directly operated business. It is true that the development with some platforms is not at the level we could have expected, and it is demonstrated in a way that where we find the growth and where we have the growth is on the business that we are operating directly. It just confirms that, to a certain extent, online distribution is very similar as physical distribution. You need to have a certain knowledge and to have certain skills to choose your assortment, to propose products, to showcase products, and I think that all the retailers have not necessarily this capacity. It depends also on the quality of service. Overall, there will be gradually also sort of polarization among the retailers, and we will be probably going forward more selective.
Once again, the priority is to develop our online business, and we have mentioned what was the growth rate for Q3. Now at Gucci, for the luxury houses, that is more or less the same for Gucci. We have 6% of the retail sales made online, which is very encouraging and which continues to develop very rapidly.
Thank you very much.
We will now take our next question from Antoine Belge of HSBC.
Yes. Hi, it's Antoine at HSBC. Three questions. The first one regarding the 40% growth at Gucci in the first nine months, how much was price on volume, when you think about the next collection on the pricing of those, what type of average price increases are you anticipating? Second question, I think on Reuters, you were quoting that priority was organic growth. Having said that, with Gucci exceeding your own expectations, it's now representing an ever-increasing share of your profit. Could you update us on the M&A strategy, especially in terms of the maximum size? I think there has been different views on this in the market. Also, what are the priority categories? Finally, I've got an ESG CSR question for you.
With Gucci growing at 40% in the first nine months, what are the challenges for you to make sure that the supply chain is safe, in terms especially of making sure that the environment is protected and that also your workforce is also safe, I would say. I imagine that there must be challenges in terms of increasing the number of auditors, et cetera. Thank you.
Thank you, Antoine, for your question. Q3 sales, obviously, were once again driven by like-for-like, because we have not extended the total print. Driven once again by full price sales, which clearly highlight the ability of the brand to combine growth and increase in terms of exclusivity at the same time. It's clear that today, since the beginning of the year, globally, sales have been driven principally by volumes, which is a combination of traffic, but also improvement in terms of retail KPIs like the conversion and also the retention. I think that overall, it's across the board very positive if we look at the different retail KPIs. The price effect is more limited and varies by region and product. Especially if you remember that we did not back price adjustments to the same extent in all regions.
We had for the fall/winter 2018, a low single-digit increase on selected items in the Eurozone, but conversely, we had a price decrease of 5% in mainland China following the custom duties adjustment. Overall, the price effect is more limited. The growth has been principally driven so far by volumes. Regarding the dependence on Gucci and M&A, I think that it's a call focused on Q3. I love to have this dependence on Gucci so far. We are confident that Gucci will continue to grow. I think also, if you look at the contribution of brands like Balenciaga, Saint Laurent, or McQueen to the growth during the quarter, it has been also significant.
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. I think that if we are executing the strategy and we are focusing on organic growth going forward, this share of Gucci should gradually normalize and come back to something which is more on par with what we had before the disposal of Puma, or something which is comparable to our main competitors. Again, the focus is on organic growth. You have some speculations about the possible consolidation in the market. Let's see what will happen. You know that we have a very sound financial position, but M&A is not a top priority short-term and mid-term.
Your question about the supply chain is a very good one because it's clearly an obsession within the group to be sure that we have a supply chain, which is the best-in-class in terms of quality, in terms of working conditions, in terms of supply. You know how difficult it is because of the multiplication of vendors in the value chain. Nonetheless, I think that when Gucci started to rationalize and to reorganize its supply chain, I had already mentioned that there was an objective to build a sort of a hierarchy among the vendors, the suppliers, with the first row of suppliers with whom we are used to work and which are very close to the Gucci people, so that we have quite a certain degree of confidence in the quality of the work done there, and the respect of all the rules and working conditions.
That said, it's true that we have decided to increase massively the budget in terms of audit. It's not only about internal resources, but we are also using external resources to audit as regularly as possible, and we have increased the frequency of the audit of our suppliers. We have imposed strict rules in terms of traceability of the schemes, in terms also traceability about the value chain, and where either are some sub-suppliers, sub-vendors. I think that the zero risk does not exist, but I think that we have implemented a lot of rules and guidance within the Kering organization to improve and to try to have the best-in-class governance into that respect. It's also the reason why we have a more centralized organization with all the industrial operations, under the governance of Kering, so that we can roll out all the best practices within the group.
I think that we have built, throughout the years, a suppliers database, in which we can track if a supplier is working for one brand, several brands of the group, to try also to neutralize as much as possible the audits and the check in terms of compliance.
Okay, many thanks. Maybe just regarding what you said about volumes, is it fair to say that at least three quarters of the 40% growth in the first nine months was volume-related?
Hi, Antoine. It's Claire. It's probably slightly more. It's probably really the bulk of the growth is volume.
All right. Thank you.
Which was not the case, just to remind it, in 2017, when there was the end of the markdown activities, which had contributed to a substantial price impact.
Thank you.
We will now take our next question from Zuzanna Pusz of Berenberg. Please go ahead.
Good evening. I have three questions, please. First of all, generally on the Chinese consumer, as you're probably perfectly aware, everyone is quite worried about the potential slowdown. You don't hear anything like that is happening. At this stage, I know you can't really share anything on current trading, but can you maybe tell us when you look at the consumer, and I think you've been one of the first companies to really flag the different behavior of the millennial consumer and the way that Gucci was really able to nicely capture that consumer cluster. Would you say that there is something in the behavior of the millennial consumer, especially in China, that makes them slightly less reliant of the, let's say, usual macroeconomic factors?
Any thoughts around why the entire market is expecting a big slowdown, but it looks like no company in the sector has mentioned it at this stage, would be very helpful. Secondly, on Bottega Veneta. I remember you were guiding previously to the margin maybe staying around 25%, 24% EBIT. Now, given the deceleration we've seen in Q3 and all of the plans regarding, let's say, the relaunch of the brand turnaround, would you be able to maybe share some comments around the level of margin you see as sustainable at Bottega Veneta? Finally, also on e-commerce. Now that you've had the online site gucci.cn in operation for over a year, would you be able to tell us a little bit more around the current penetration you see of the online business for Gucci in China? Thank you.
Thank you, Zuzanna. Your first question is not an easy one, because we consider we are not the most qualified to comment about macro trends and the behaviors of consumers. Once again, I don't want to be overconfident. What I just say is that the figures are what they are, and they don't show so far a massive deceleration, and conversely, it's more, as I mentioned before, something which is completely coherent in terms of stack growth. What we can say also is that globally, as I mentioned before, recent events in China, if we consider the different events we had, like the Golden Week and so on, we didn't see any sign of, once again, massive deceleration. To consider that, or to explain how the millennial behavior could impact or change the modernization of the Chinese consumption patterns, it's obviously very difficult.
What we know is that you have so much money still available in China, if you consider the level of savings in China, which represent two years of deposits. Because they are just deposits, it does represent probably something like two years of GDP to be compared to 30% of a year, or let's say three months in the Western countries. You remember that you have the one-child policy, so that each child has four grandparents with less issue compared to Europe or the America to rent or to have a flat or an apartment or a house. So it's clear that in terms of spending power, the situation is still quite sound in China. The demographics should help as well.
What we see also, and of course, it's difficult to predict, but overall, across the board, we see that the retention rate with millennials is not deteriorating, is rather improving quite on par with the improvement we see with the other clusters of clientele. So I think that the comment I would make is that as expected, it does require a different way of doing business, with more engagement with the millennials, with the customers, with more touchpoints, which is more demanding in terms of content, in terms of actions, in terms of initiatives. That costs more, and I think it's a different way of doing business. But to predict what could be the evolution of the Chinese market or the Chinese cluster based on the behaviors of the millennials, obviously, I'm not the best qualified to comment.
When it comes to BV, it's true, and it's important to flag this, that we don't expect much improvement in the short term in terms of top-line trends. So this could lead to some more pressure on 2018 margin. So I think that the ambition to reach or to protect the EBIT margin around 25%-24% is no more relevant considering the evolution of the top-line. I'm sure that in 2019, the brand will invest more in communication, but also in design, in samples, in order to fuel the growth and the injection of newness in ready-to-wear and leather goods. We have also a program of refurbishment and relocation of stores that will require some additional CapEx with additional depreciation. So as a result, profitability should not improve materially next year.
E-com in China.
Yeah, e-com in China. Obviously, we cannot provide figures. What we can say is that it's developing well, globally on par with expectations. Once again, I think that what the market see as a half-empty glass regarding some possible regulation in e-commerce, we see that favorably as a half-full glass, because clearly it will avoid and reduce the possible competition of some, let's say, parallel online platform to our directly operated platform. I think that it could be a booster for online business in China, which has developed, by the way, so far quite on par with expectations.
Okay, perfect. Thank you so much.
To make it simple, Sorry, Zuzanna. Starting from a low base, of course, I could tell you that we have a triple-digit increase, which is very satisfactory, we are starting from a very low base.
Okay, perfect. Just sorry, sir, one follow-up on the millennial consumer. Can you confirm whether this is the right estimate, more or less? I think based on some of your comments in the past, we kind of tried to calculate what more or less could be the millennial consumer as a percentage of your Chinese cluster. Is 70%-80% the right estimate?
Hello, Zuzanna. You already asked me the question and I said you have to make your own estimate. You are going to get the answer more from Jean-Marc than from me, I guess. You have to make your own estimate. I think we have provided sufficient elements for the equation so you can make your own estimate.
Okay, perfect. Thank you.
Thank you. Bye bye.
Bye bye.
We will now take our next question from Omar Saad of Evercore ISI.
Evening. Thank you for taking my question. Three questions. I wanted to ask on the North American business, it still seems to be very strong, especially when you look at the two-year trend. What you see, if anything, is driving that business. Is it tourists? Is it locals? Do you see a change in behavior, kind of more of a longer-term shift in behavior, in North America? I also wanted to ask about the sneaker category, not just for Gucci, but for the broader group. Is that becoming a much bigger category for the company, and what's your longer-term view on sneakers across the different brands? Lastly, my last question is, on the Met Gala. It was recently announced that Gucci is going to be corporate sponsor.
Of course, Mr. Michele is going to be one of the key co-hosts, maybe what you're thinking around that event early next year, what it means for the brand, and if you think it'll be a big deal. Thank you.
Well, thank you, Omar, for your questions. Regarding North America, to be very clear, the growth is principally driven by locals, with quite satisfactory trends with tourists, especially from South America and also some European. Not so much with Chinese. Chinese cluster is okay in the U.S., but not really driving the performance. It's clearly linked to the local customers, and I must say also that if you look at Europe, the performance in Europe has been really sustained thanks to American tourism, which has been very positive and very dynamic in Q3. Across the different geographies, the U.S. consumers have clearly supported the business. The reasons behind this, I must say that it's a question of, once again, consumer confidence and also, I think the relevance of our communication strategy in the different brands with the U.S. customers.
The fact that we have a dedicated approach by region in terms of communication, in terms of initiatives, in terms of events, and I will rebound on that when I will come to the Met Gala, I think is working well, and it's clearly another sign and another demonstration of the agility of the group and the agility of our brands to have dedicated approach by region. Sneakers, as you know, is a key category among the shoes, especially for the men's shoes. It's not so relevant or so true for the women's shoes, especially at Gucci, where it's more balanced between sneakers and the other sub-segment in shoes for the women. I think that the U.S. is not specific as regard the sneakers. It's a key market, of course. It's historically the first market for sneakers.
When we look and when we try to analyze with this level of granularity by splitting the sales of sneakers by nationalities, we don't see specifically another representation of the American cluster. Regarding your last question, I think that obviously, it's clearly linked to the strategy of Gucci to have a 360 approach, to be relevant with all different profiles of customers. I've already mentioned in the past calls, and I reiterated that during that call that the brand is relevant with all the different cluster in terms of ages or in terms of nationalities. I think also it's a brand which is clearly a fashion authority, which is a strong brand in the streetwear, but also in a more formal part in terms of evening dresses.
I think it's a good occasion, once again, to demonstrate that Gucci is a very global brand, able to tackle all the different profile of clients and all the different categories. I think also it's an occasion for Gucci to demonstrate its leadership when it comes to communication and to communicate around an event. I am very confident that Gucci will do a great job by promoting the brand around the event, and that's it.
Jean-Marc, the sneaker comments are interesting, being able to see the similar trends kind of across all the different geographic clusters. Can you say how big of a category this has become for the company, maybe versus five years ago? Is that possible?
What I can say is that if you look at the shoe category or if you look at the product mix, especially for Gucci, the share of shoes have not changed dramatically. It was explained by Marco Bizzarri during the Capital Market Day that overall, if you look at the product mix between different categories, it has not changed dramatically in the past few years. Maybe we had a slight increase in terms of percentage of sale of the shoe category, but it's not overrepresented compared to what it was a few years ago. Within the shoe category, of course, at least for the men's category, the sneakers have a predominant share, and I think it's true across the board. For some smaller brands, of course, the shoe category has expanded more than some other categories.
That probably for the small brands, you have another representation of the shoe category. For Gucci, at the end of the day, it's just a shift within the shoe category from the formal offer to the sneaker category. In terms of product mix, it has not changed materially.
Thank you very much. Great job.
Thank you, Omar.
We will now take our next question from Luca Solca of Exane BNP Paribas. Please go ahead.
Good evening, Jean-Marc. Good evening, Claire. Maybe one question to try and understand a bit better the operating leverage dynamics that you see at Gucci. I appreciate you were indicating that the previous guidance for Bottega Veneta, considering the lower growth, is not relevant anymore. I was just wondering, given that Gucci is growing this fast, what could potentially be the cost segments, in terms of events or in terms of investments dedicated to newness and surprise and excitement to consumers that could hold you back? My naive hypothesis was that one of the most difficult parts of Marco's job would be to keep the operating margin in check, given the brilliant organic growth Gucci is producing. On that point, I wonder about Gucci's initiatives to continue to excite consumers and bring traffic to stores.
I noticed that you launched a capsule collection, or at least I saw one during the Fashion Week in Milan. I wonder if you anticipate more of that or any other initiative that could potentially take consumers by surprise in terms of communication, product newness, and anything that could potentially help also on the retail front. I appreciate that you focus on like-for-like growth, but I wonder, for example, if temporary stores or pop-up stores could be part of your approach going forward. Then lastly, where do you anticipate we are on Bottega Veneta? You say you're expecting to have a patient recovery there. It's probably just the beginning of the new creative director. If you could tell us a bit more on that front, I would really appreciate it. Thank you.
Thank you, Luca. Before answering your three questions, just I will mention the fact that we will take one question after this one. Obviously, Luca, I don't want to elaborate more on the operating leverage dynamic. I think that it's clearly also linked to your second question. We have already mentioned the fact that it's obvious, it's clear, it's demonstrated if you look at the figures, but also the initiative of many competitors to do business today in luxury is more expensive. It's more expensive not on all the lines of expenses, but on some of them. Store expenses have not decreased. They have conversely rather increased because rent have not decreased across the board globally because of scarcity of locations.
You need more cash to animate the brands, to improve the quality of your sales associates, to provide them some tools, to make clienteling, to use CRM data. You have more animations in the store with some drops of special products made for one region. Maybe what you saw in terms of you call capsule collection, but it's true that even if it's not a major part of the business, it's a way also to keep excitement. We have some stores which are obviously not profitable as some other ones. I think that the Wooster concept is very interesting, but it's also a marketing tool. It's a store where we have clearly a very high level of sales and a good sales store productivity.
Overall, it's more also to create or to show what is the universe of the brand and all we can propose in terms of products. You know that in terms of information systems and in terms of communication, we need more to fuel the growth. I think it's something we see in almost all the brands. For sure, where we see some operating leverage, it's more in terms of organization, because a brand like Gucci has already a good setup in almost all regions. That's the reason why we have been always very cautious when it comes to improvement of the EBIT margin. It's very valuable because also facing maybe some more challenging times, it will require more initiatives and more investments to create that excitement.
For sure, as regards the initiative, all the windows animation, store animation, some special drops in terms of products, that will be part of the strategy of Gucci. Nothing new, in a way, compared to what had been presented by Marco during the Capital Market Day. I think that if I come to your question on BV, I think that we mentioned that it should be a long journey for BV in the sense that you have a lot of things to manage today, not only in terms of merchandising and collections, but also in terms of distribution, with the need to add to the store footprint some more flagships or to extend the average size of the stores in order to present the full collection, the full offer.
If we have the product, it's a good start, but we need to have also the stores to show them and to sell them. A lot of different initiatives, also in terms of communication to foster and to push brand awareness in many regions, and especially with the local consumers. So far, the digital communication of Bottega Veneta was clearly, let's say, not the best in class, and we had not allocated so many investments to that area. I think it will be a long journey. We are very encouraged by the dynamic we see within the brand with Daniel Lee working very closely in Italy with the teams. He did already a very good job by editing the last collection, and trying already to make a selection or to try to bring something new. Of course, the collection is not his collection.
The first one will be, or it's not really the collection, but the pre-fall collection will be shown in Japan at the time of the opening of the new flagship. It means that especially if we consider that the first fashion show will be the one of February, we can expect that we should start to see the benefits of this during the second half of 2019. With, as I mentioned before, a lot of investments in terms of stores, in terms of communication, to go along this and to support the introduction of new products. We are very encouraged by what we saw and what has been already achieved by Daniel. Clearly, it will take some time, and 2019 will be another year of investment in the brand.
Thank you so much. Thank you, Jean Marc.
We will now take our next question from Thomas Chauvet of Citi. Please go ahead.
Good evening, Jean-Marc and Claire. I know it's late, I'll try to be quick. I have three questions. The first one, a follow-up on Bottega Veneta. Jean-Marc, you said there's a need to add some stores. I see this is the first time in Q3 that you're actually closing stores on a net basis. It's only -2, but it's the first time ever that we're seeing that at BV. If I extrapolate the -10 of Q3 into Q4, you're going to do about EUR 900 million of retail sales at BV this year, over 272 stores. Is this the right size, you think? And would you consider more significant store closures before maybe rebooting the operating system of the brand under Daniel Lee next year? Secondly, just on Gucci, if you could explain the realignment between wholesale and retail.
Is it effectively wholesale returning to a normalized growth rate? I remember there were some one-offs in Q2, I think travel retail conversions, there were 4 doors, and you had also product shortages or at least deliberate decision to limit deliveries into the wholesale channel. Have these effect basically faded into Q3, that's why we're back to over 30% growth in wholesale? Just finally, a quick word on watches. We've seen through the summer month weaker Swiss watch exports growth into Europe and Hong Kong in particular, and particularly in September. More cautious comments from some of your watch peers. How does your order book look like? What are your key wholesale partners saying on their replenishment plans in the run-up to Christmas and Chinese New Year? Thank you.
Thank you, Thomas. In fact, once again, before answering, we will take last question after that, after your question. BV, I think that I will let you elaborate on the figures and do your math. The plan is not to downsize drastically the store footprint. I think that we have already a quite good footprint. We are quite happy with the locations we have. The point is more about the size of some locations and the need to add some more flagships. You know that Ginza is a very important step. The point is more to reshape and to optimize the store footprint. The plan is not to reduce the store footprint. The fact is that we had -2 in the quarter, but it's not a sort of objective, and it should not be extrapolated in the future.
I would rather anticipate somehow a form of stabilization or slight increase of the store footprint, but with some changes and some relocations. Some refurbishment as well. You can imagine that at Bottega Veneta, it won't be necessarily a question of a new concept short-term, but maybe more to continue what has been started to make the store lighter and so on. When it comes to Gucci, I think that basically, that's the reason why we have been a little bit surprised by the comments and the reaction when we communicated the Q2 figures. There was a question of phasing of deliveries and conversion. In Q3, sorry, it's more aligned with retail. It's exactly what we had mentioned. I think that once again, we are very transparent and very candid about our figures and about the business.
The fact is that going forward, as we already mentioned, the wholesale was the first channel to react very positively to the new aesthetic of Alessandro Michele. It was the first channel to start to accelerate. We should see also here some normalization. You cannot extrapolate here that the wholesale will be completely aligned with retail in Q4. Wholesale figures will be very good, very solid, but not necessarily completely aligned with retail. I think that, obviously, and sorry to disappoint you maybe once again, but Thomas, on the watch business, we are not the best position to comment about the situation on the watch market. You know that we have niche brands on which we are working in order to create and to implement more synergies between the two brands. They perform quite nicely during Q3 thanks to some launches, some innovation, especially at Ulysse Nardin.
Also you know that maybe compared to some other big players, the regional mix is not exactly the same. I'm not sure that the comments I could make would be the most relevant ones. I just remember that several times I've mentioned that there were some maybe phasing in terms of deliveries. After that, some phase of where the market was consolidating, and there was some disconnect between sell in and sell out. I think that there is nothing new here, and my priority as regards the watch business is to focus on our brands and to push and to help Patrick Pruniaux to execute his strategy by creating more collaboration, more synergies between the two brands.
Thank you, Jean-Marc.
We will now take our final question from Flavio Cereda of Jefferies. Please go ahead.
Yes. Hi. Hello, good evening. Very quickly, it's late. I have a very quick question on Gucci to pick up one of the questions that Thomas just asked, actually, specifically on the channel mix at Gucci. Not necessarily how you're seeing it now, but how it's likely to evolve, say, over the next two to three years as the brand so-called normalizes, as it were. I'm assuming that the channel mix doesn't change also because you've got recently been strong performances from multi-brand online retailers as well. Fundamentally, as the brand normalizes in terms of growth, is there a strategy in place here in terms of managing this channel mix in terms of fewer accounts, maybe generating more revenues for you? What are you thinking? Not in the next couple of quarters, but I'm trying to look a couple of years out. Thank you.
Thank you, Flavio. I think that clearly it's not completely reflected yet in the figures, even if there are some trends. The objective, as you know, is to reduce the share of wholesale by being more selective. Wholesale should represent going forward, it was the ambition set by Marco and presented during the Capital Market Day slightly less than 10% of the sales of the brand, considering that within that you have still the watch business of Gucci. Directly operated sales should represent 90%, with some conversion, of course, into concessions, be it on the physical distribution or on the online business. Within this 90%, you should have something like 10%, midterm, let's say, for the online business directly operated by the brand.
I think that the way we are working with our wholesaler, be it in terms of e-commerce or physical distribution, is exactly this one. It's to be more selective, maybe to start to shrink the volume sold to certain wholesalers. Once again, it will be very gradual, and that's the plan, clearly. 90% of exclusive distribution is so far the target.
Okay, that's clear. Thank you very much. If I were you, I'd just ignore the market and go out and celebrate. These are very good results. Thank you.
Thank you very much, Flavio, and thank you all for your attention, and to have spent so much time with us tonight, and for all your questions, always very relevant and inspiring. Once again, we are very pleased with our performance and with the work of all our teams in all our houses. We expect that these efforts will continue to pay off, and we are very confident as we enter the final months of the year. We will see you in Paris in mid-February for our full-year results. In the meantime, as you know, you can rely on Claire and on the IR team. Thank you again, and have a nice evening.
This concludes today's call. Thank you for your participation. You may now disconnect.