Good day, welcome to the Kering's first half 2018 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean-Marc Palus. Please go ahead, sir.
Good evening or good afternoon to all of you. Welcome to Kering's 2018 first half results conference call. I will start with a quick review of the key developments of the past six months, which have been crucial in the transformation of the group. Jean-Marc Duplaix, whom I don't need to introduce to you, will discuss our sales and earnings for the period. I'll be back for a few words of conclusion before we take your questions. Please turn to slide four. The outstanding operating and financial performances in the quarter and six months, that Jean-Marc will analyze in a moment, underscore our focus on profitable organic growth. Beyond these great performances, we will remember this first half for the successful finalization of our mutation into a pure luxury player, along with some partial streamlining of our existing luxury portfolio. The Puma transaction went without a glitch.
Following our shareholders' approval in late April, the distribution of Puma shares became effective on May 16th. The opening price of the Puma share on that day was EUR 429. As of the end of June, the Puma share was worth EUR 501, a jump of 17%. Following the distribution, Puma now enjoys a substantial free float and the shares trading volume has picked up. For our part, we have booked a net gain of EUR 1.2 billion on the distribution of our Puma shares. As you know, we have retained a 16% stake in Puma, worth above EUR 1 billion in our financials. It has been widely acclaimed as such. I would like to thank all who were instrumental in assuring its success.
I point out here that an investment in Kering at January 1st of this year had gained 46% six months later, including appreciation of the Kering and Puma shares and reinvested dividends. Following the Puma spinoff, we are working on completing our exit from sport and lifestyle. We have also announced a number of steps designed to streamline and refocus our ensemble of luxury houses. Our aim is straightforward. We are looking to concentrate on brands over which we exercise full control, brands that are scalable and can fully benefit from integration into our platform, brands in which we can invest to help them achieve their full potential. After a 17-year collaboration, Stella McCartney and Kering decided to part ways and Stella will regain full ownership of the house that bears her name. This separation is friendly. It is going smoothly, and it should be completed by March 2019.
We are also in negotiations with Christopher Kane in order for him to reclaim control of his eponymous brand. Finally, following the departure of Tomas Maier as creative director of Bottega Veneta, we also decided to wind down the business that bears his name. All our houses are fully controlled. We are confident in their strength and totally committed to their future. As you know, we are investing heavily in our jewelry activities, both Boucheron and Pomellato, and our watch brands are back on more favorable trends. We've often told you that Alexander McQueen is the next Kering brand to watch, following in the footsteps of Balenciaga, and its performance in the six months confirms this view. Balenciaga, of course, is doing fantastic, and Brioni is a work in progress, and I underline the word progress. These developments led to a considerable reordering of our operating and financial footprint.
For the first half, Volcom, Stella McCartney, and Christopher Kane are all accounted for under IFRS 5, as is Puma for the period running from January 1st through May 16th. During the balance of the semester and going forward, our remaining stake in Puma is accounted for under the equity method. As a result, the numbers Jean-Marc will now discuss should be compared not to the 2017 data we remember, but to the set of restated metrics that we have summarized here on slide five. We have included the numbers for the 2017 half year and full year so you can familiarize yourself with the new configuration of the group. And now I will let Jean-Marc review our performance in the first half.
Good evening to all of you. Let's start with group highlights on slide seven. Clearly, Kering's new profile is delivering superior performances. Revenue first. Q2 sales were up 31.5% comparable and above 26% in reported terms, resulting in a very strong 34% comparable increase in H1. As you can see, comparable revenue growth in the first half ranged from 25%-45%, depending on the region. H1 group revenue reached EUR 6.4 billion, an impressive additional EUR 1.4 billion in revenue year on year. Second, recurring operating income grew by 53% to EUR 1.8 billion. The operating margin improved sharply, up 470 basis points to 27.5%, a major achievement highlighting how our focus on organic growth is driving substantial operating leverage and margin expansion. Third, our free cash flow also increased significantly, up 65%, to reach EUR 1.4 billion in H1.
Finally, our net debt level is below EUR 3 billion, down both compared to year-end and to one year ago. Switching to slide eight, more detail on our luxury houses as a whole. At the top-line level, we continue to outperform our industry with revenue up 34% comparable and 27% reported in H1. FX headwinds started to ease in Q2, negative five percentage points on revenue, compared to a negative nine points in Q1. Growth was well-balanced across distribution channels, with retail up 37% and wholesale up 28%. E-commerce more than doubled in the period, now accounting for close to 6% of our houses' retail sales. Trends by distribution channel and by region were broadly consistent in both quarters. In Q2, comparable revenue increased 31%, with retail up 34% and wholesale up 24%. In retail, all regions advanced by a strong double digit, with North America leading the increase, up 45%.
Asia-Pacific remained buoyant, up 38%, all countries being up. Among best-performing markets, Hong Kong, Macau, Korea, and Australia stood out. Once again, mainland China was very strong, although comps were high. In addition, until recently, the appreciation of the Chinese yuan against the Hong Kong dollar and Japanese yen favored purchases by Chinese nationals out of their domestic market. Japan maintained a very strong momentum, up 33% in Q2. As you are well aware, Western Europe is facing high comps and softer tourism trends. It grew a healthy 23% in Q2. If we look at the Q2 sales of our top three brands by client nationality, we see that the most significant were all up double digit. The Chinese cluster grew more than 30% worldwide, with no sign of sequential deceleration despite high comps.
Other Asian nationalities, as well as the American cluster, also contributed significantly to worldwide growth, both in their respective domestic markets and when traveling. The European and Japanese clusters were also healthy on their own important domestic markets. Our luxury houses achieved a first half EBIT of EUR 1.9 billion, up 51%. EBIT margin gained 490 basis points to 30.4% as our healthy top-line growth yields significant operating leverage and margin expansion, notably at Gucci, Saint Laurent, and Balenciaga. At the same time, we are continuing to invest in our brands to sustain their growth, especially when it comes to retail networks, customer experience, and engagement through A&P, CRM, and digitalization. We are also pursuing an ambitious investment plan in our jewelry house.
An important side note, the combined FX and hedging impact was negative in absolute terms at the EBIT level, of course, but also marginally dilutive in terms of profitability. The underlying margin expansion was even more remarkable. As you know, we hedge on a 12-month rolling forward basis, and in cases where the volume of activity for certain currencies or brands exceeds our initial expectations, we can be slightly under-hedged, as was the case this semester. CapEx in the period at 3.6% of revenue was in line with the 2017 first half. We are pursuing selective investments and working to enhance the efficiency and productivity of our network. You should, as last year, expect a higher CapEx to sales ratio in H2. I'm not going to comment on the store network brand by brand. You have details in the appendix.
The total store count stands at 1,382 units, with 47 net openings in the first six months. This is in line with the planned expansion of the store network at Saint Laurent and Balenciaga, together with the increased penetration of Gucci in directly operated travel retail. Let's now have a look at Gucci on slide nine. In the first half, Gucci posted once again, a very strong and healthy top-line growth. Comparable revenue was up 44%, with all channels and regions contributing to this performance. At EUR 3.9 billion, Gucci's revenue in the first half was at par with its full-year level as recently as 2015. The trend in Q2 with revenue up 40% comparable was impressive, especially as it comes on top of very high comps. Growth in retail, up 43%, was once again fueled by like-for-like, with further sales density improvement.
All regions were up high double digits, led by North America up 52%, a powerful signal of how much the authenticity of the brand resonates across a diversified region and customer base. Asia Pacific achieved 47% growth, sustained by all markets. Japan confirmed the full appreciation of Gucci's aesthetic. It had another brilliant quarter up 46%, supported by both locals and tourists, especially from China and Australia. Western Europe grew 32%, evenly boosted by locals and visitors. E-commerce grew again sharply in the quarter, up 88%, thanks to its seamless blend with rich storytelling and a continued focus on delivering a best-in-class experience. The successful site launches in China and Saudi Arabia in 2017 and Qatar and Kuwait in April 2018 also contributed to the performance. Wholesale posted a 23% increase, confirming the appreciation for the collections.
This growth, achieved on a stable network of doors, is slightly more moderate than in previous quarters. It reflects some prioritization in product allocation to the doors network, as well as a marginal impact from the conversion of four travel retail doors in Japan. Royalty stream turned positive in Q2, driven by eyewear. All product categories posted very healthy growth thanks to a strong carryover base and the success of newness, including pure novelties and new options or functions in bestseller lines. This is true in leather goods, but also in shoes, both for women and men. Ready-to-wear performed solidly again with a special mention for men, which posted very high growth across all markets. Gucci continued with its unique and distinctive approach to building brand engagement through its ongoing authentic narrative.
The Cruise 2019 fashion show in late May represented a unique experience, recognized as such by the media and buyers. Coming to profitability, healthy top-line growth translated into all-time high operating margin. Recurring operating income increased by 62%, reaching EUR 1.5 billion, and the margin expanded more than 600 basis points to 38.2%. This remarkable achievement was first fueled at gross margin level by production efficiencies and channel mix, and not by any positive FX hedging impact. Substantial operating leverage was driven by higher store productivity, while the brand maintained a very consistent approach to support long-term growth, dedicating additional resources to its store network, communications, omnichannel, and customer engagement initiatives. CapEx was skewed towards the rollout of the new store concept, with another 30 stores converted in H1. Stores under the new concept now represent 34% of the total, and the ambition is to accelerate in H2.
On slide 10, some highlights regarding Saint Laurent. The brand continues to execute successfully on its ambitious strategic plan. In H1, it delivered well-balanced, consistent revenue growth, up 20% comparable. At plus 20%, Q2 was another solid quarter. Retail was up 19%, accelerating from Q1, with further strength, notably in North America and Japan, Asia Pacific still growing rapidly. Western Europe bounced back following the implementation of initiatives to improve store experience and clienteling. By product, all key categories are contributing to growth, leather goods being the main engine. Ready-to-wear was supported by the women's offer. The Spring 2019 show in June in New York was a perfect scene to highlight the men's collection designed by Anthony Vaccarello, and it enjoyed great success. Wholesale revenue was up 25% in Q2, with particular strength in North America.
In the first half, Saint Laurent posted another strong jump in operating profit, up 21%, resulting in a 150 basis point margin expansion. Operating margin reached 24.5%, and its trajectory is perfectly on track with plan. Saint Laurent has now reached critical size and can deliver profitable growth while financing key investments for its short- and medium-term development, notably throughout enhanced communications. At 4% of sales, CapEx was up marginally in H1. This is mainly dedicated to the brand DOS expansion plans with a combination of store openings and relocations to increase market penetration. Moving to slide 11. In the first half, Bottega Veneta took decisive steps to intensify its brand rejuvenation efforts, but had a lackluster top-line performance, with six-month comparable revenue nearly stable and down 2% in the second quarter.
The setback is largely due to the weaker Asian tourism in Western Europe, particularly harsh for a brand like Bottega Veneta, which was not able to make up the shortfall elsewhere. North America had a positive Q2 and a good first half as clients respond well to the efforts underway. From a collection standpoint, we are encouraged by the ongoing success of newness, confirming the brand's appeal when supported by new products. Wholesale was up double digits in Q2 now that the rationalization of the footprint has been completed. Thanks to good cost discipline and focused spend on the most critical initiatives, Bottega was able to keep margin dilution under control, down 100 basis points at 24%. Last month, we announced the appointment of Daniel Lee as the house's new creative director.
He's at work applying his touch to the spring-summer 2019 collection, which will be presented in the brand showroom this fall. His first full-fledged fashion show will take place next February for the fall-winter 2019 collection. With a change in creative director, Claus-Dietrich Lahrs is concentrating his team in Europe and making his organization leaner and more efficient, notably around communications and merchandising. On slide 12, you have our other luxury houses. In his introduction, Jean-François noted the changes in this segment. In H1, our other luxury houses demonstrated their enhanced growth features with a remarkable 36.5% increase in comparable revenue and higher profitability. In Q2, revenue was up 35%, largely driven by retail up 44%. All regions were up high double digits, led by Balenciaga, thanks to the unfading enthusiasm for Demna Gvasalia collections, and by further acceleration at Alexander McQueen. Wholesale was up 29% in Q2.
We are making further progress with our watches and jewelry brands, thanks to a strong pipeline of product innovation and launches. At Girard-Perregaux, the new Laureato Chronograph has seen a strong start, and the whole collection is developing nicely. Ulysse Nardin is performing well. The Freak, from a single timepiece, has become an entire collection, while Marine Torpilleur is now a genuine bestseller. In jewelry, Boucheron is pushing creative boundaries further with its new high jewelry collection, Nature Triomphante. Pomellato is capitalizing on the success of its bestsellers and new lines, notably the Ritratto. Qeelin's outstanding trend is continuing due to the brand's well-managed development, chiefly in Greater China, and strong consumer response to its iconic lines. In the first half, the operating profit of our other luxury portfolio more than tripled, and margin rose 480 basis points. Balenciaga delivered significant incremental profits and margin expansion.
The contribution from our watch brand and Qeelin also improved. The elevated margin of the division is all the more impressive that we continue to invest in the development of our high-potential brands, Alexander McQueen, Boucheron, and Pomellato. Brioni's top line is on track to gradually better absorb its fixed costs. CapEx was down year-over-year, largely due to phasing. It should increase in the full year as our brands pursue their expansion projects, notably at Balenciaga, Alexander McQueen, and in jewelry. On slide 13, you will find the main features of our corporate and other segments. On the revenue side, Kering Eyewear is a major contributor, with external revenue of EUR 262 million in H1, translating into consolidated sales of EUR 208 million, up 35% comparable.
The first half was filled with events and successes, from the launch of Cartier Eyewear to the dynamic development of Gucci and Saint Laurent in this category. Kering Eyewear innovates on all fronts, rolling out new customized marketing tools, including a dedicated shop-in-shop concept, and strengthening its digital presence with the opening of an online store on jd.com in China. Kering Eyewear also continues to broaden its portfolio with a highly anticipated Balenciaga collection to be presented in H2 and available in stores from January 2019. It just announced a new partnership with Montblanc along a similar timeline. The negative EBIT contribution of corporate and other is to be analyzed through two separate components. Underlying corporate costs are unchanged thanks to disciplined expense management as we undertake further cross-group initiatives.
Kering Eyewear contribution is positive. Higher costs are incurred in relation to corporate long-term incentive plans, which reflect Kering share price outperformance versus a basket of peers. On the CapEx side, the increase is due to the platform and infrastructure build-up to strengthen our operations, both in eyewear with a new automated logistics center and at group level to enhance our IT, CRM, and omni-channel capabilities. Moving on to the remaining lines of the P&L summarized on slide 14. Other non-recurring operating income and expenses were EUR 40 million negative, slightly down compared to last year. Net financial charges amounted to EUR 97 million, also down year-over-year. Within this, the cost of net financial debt was down EUR 16 million to EUR 43 million, driven by the reduction in the average amount of outstanding bonds and the lower related coupon rates.
This reflects our active liquidity management and debt optimization strategy. Other financial charges amounted to EUR 54 million, including the one-off cost of early bond redemption and, as usual, the ineffective portion of hedging. Corporate tax amounted to EUR 385 million, an effective rate of 23.5% and a recurring rate of 23.4%. It is up compared to last year. As you know, we expect our tax rate to gradually increase towards 25% over the medium term. Net income from discontinued operations amounted to EUR 1.1 billion, chiefly from the non-cash accounting net capital gain on Puma following the change in control. Group net income from continuing operations, adjusted for non-recurring items, reached EUR 1.3 billion, up 55% compared to EUR 815 million last year. A few comments on free cash flow and net financial position on slide 15 and 16.
Our free cash flow rose 65% year-on-year at EUR 1.4 billion. It mainly reflects the strong increase in our brand's profits, coupled with disciplined working capital management and selective CapEx, along with favorable phasing. We had a ratio of CapEx to sales of 4.8% in the first half, which compares to 4.5% restated for H1 last year, but 5.6% on a full year basis. Over the first half, net financial debt decreased by EUR 256 million compared to December last year to EUR 2.8 billion. This is despite the usual seasonality pattern, including higher dividend payments in the first half, which this year represented a cash outflow of EUR 776 million. This was also impacted by changes related to discontinued operations for EUR 251 million, since Puma was cash positive, as you remember.
Lastly, I would like to stress that compared to June a year ago, we reduced our net debt level by EUR 1.8 billion, an additional deleveraging step. This ends my remarks. Let me now pass on to Jean-François for his conclusion.
Thank you, Jean-Marc Duplaix. Our resounding performance in the first half clearly validates both our long-established multi-brand organic growth model and our more recent refocusing on the ensemble of luxury houses we have brought together and nurtured. Our transformation has created value in the short term, as I underlined in my introduction, but it has also built the conditions for sustained value creation over the long term. The growth in top-line and profitability achieved by nearly all our houses in the first half of the year is solidly grounded in their respective strategies, in their market positions, in their brand visibility, in their authority over their respective territories. The ambitions Gucci's management revealed during its Investors Day last month will be achieved, as they are compatible with the strengthening and broadening of the incredible aura of that brand, as testified by its outperformance in the first half.
It's not just about Gucci. Saint Laurent's top-line growth is unleashing its great earnings potential. At Bottega Veneta, we have taken decisive steps to address the issues that were hindering its return to growth. With the arrival of Daniel Lee as artistic director and a concentrated management team, the brand rejuvenation is in good hands to move to the next level. Our other luxury houses, centered around a smaller number of brands with strong individual positions, will benefit from the investments we are making to assure their future growth and profitability. All in all, the right conditions for market outperformance and continued sustainable growth are well in place for all our brands. You are all familiar with everything we put together at group level to foster and cross-fertilize the development of our houses, and I won't list them again today.
I can tell you that when we look at our performances, we can easily read into them the positive impact of these boosters that are managed centrally. While pursuing the implementation of all these initiatives, we are putting particular emphasis on enhancing our omni-channel competencies, and more generally, developing our digital presence. Where do we go from here? We are confident that we have built the right vehicle to stay ahead in the medium to long term, and to continue outperforming in the short term. We are also confident that our profitability will continue to grow faster than our top line, taking full advantage of our brand's operating leverage. In the coming quarters, however, as you well know, we are facing increasingly demanding comparisons, which should impact the rate of our growth, though not our growth itself.
In addition, it would be unwise not to make some allowances for the uncertain political and macro environment. We are ready, and our determination and financial discipline are as strong as ever, we look at the future with confidence. Jean Marc and I are now ready to take your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please signal by pressing star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star and then one to ask a question. We will now take our first question from Helen Brand of UBS. Please go ahead.
Hi, good evening, everyone. Three questions from me. Firstly, just on Gucci. At the CMD at the start of June, Marco said there'd been no real slowdown at Gucci in Q2 to date versus Q1. Should we therefore interpret the 43% at retail for Q2 overall to mean retail slowed to 30% in June after 50% in April, May? Or was the CMD comment perhaps a little bit misinterpreted and trends across April to June weren't that different overall? Secondly, clearly a fantastic EBIT margin development at Gucci in H1. H2 EBIT margins are normally higher than H1, should we even be assuming close to, say, 38.5%-39% margins for the full year? And how should we think about the FX hedging impacts on margins into the second half? Finally, can you just talk a bit about Chinese growth Q2 versus Q1?
On the wires, you said no signs of slowdown in Chinese demand. Can you confirm if that was in Q2 or in Q3 to date? Have you seen anything over the last few weeks? Or any comments to make on reactions to price cuts in mainland China?
Good evening, Helen, and thank you for your questions. I will come back as to the point you made on the evolution of the retail sales. I think the comment made by Marco. First of all, I won't comment on the monthly performance. Just to remind that, as we already stressed several times, the rebound of Gucci started at the end of Q2 2016. Just maybe to precise that in June 2016, we had already a double-digit growth of the sales in retail. That said, I think that the comment made by Marco was to say, first, that the patterns of the consumption and the retail sales region by region, store by store, was quite similar between Q2 and Q1. Obviously, when you look at the performance, we were still above 40%. This is, in any case, an amazing performance.
If you look at the retail performance, it's obviously quite close to the one delivered in Q1. The difference, if you look at the overall growth for the quarter, is clearly made also due to the wholesale, which was below. For some reasons, we will have the occasion to comment probably later. As regards the EBIT margin, it's true that you may remember that we had already a jump in terms of profitability in H2 2016. Plus the fact that we will have a tougher comp base for the top line, we can expect further improvement of the EBIT margin in H2 compared to H2 2016, but not to the same extent and not with the same percentage points as in H1. I think that the operating leverage was particularly strong in H1.
I would also add the fact that we have, considering now the size of Gucci, less seasonality in terms of EBIT margin compared to the back. We have more linearization of the expenses throughout the year. Regarding the Chinese consumption, as you perfectly know, we never comment on the current trading. I think that overall, the trends with the Chinese cluster in Q2 were still very positive, we didn't see any deceleration compared to Q1. Even if there was some reallocation in terms of expenditures from one country to another, with softer trends in Europe, acceleration in some Asian countries, and still a very sustained performance in mainland China for Gucci. So far, we can't say that there was a negative impact of the overall environment on the Chinese demand.
Of course, it's too early to comment on the impact of the price decrease that was just passed at the beginning of July.
Thanks, Jean-Marc. Just to come back on my first question, in terms of the Gucci trends across the quarter. You're saying you didn't really see too much difference between the three months, or did we see a slight slowdown at the end of the quarter given the toughening comp base?
We try to comment on quarterly performance. I think that if we start to comment on monthly or weekly performances, it will start to be complicated. I reiterate the fact that we didn't notice a strong or significant deceleration between the different months of the second quarter. The trends were very sustained along the quarter, with no major differences between months, despite the stronger comp base, as I mentioned, because of the recovery which started in June 2016.
That's perfect. Thanks very much.
Thank you, Helen.
Thank you. As a reminder, if you find that your question has been asked, please press star two to remove yourself from the queue. We will now take our next question from Omar Saad of Evercore. Please go ahead.
Thanks for taking my question. Congratulations on another great quarter and first half. I wanted to follow up on some of the interesting conversations you guys began at the Gucci investor meeting around the difference and the evolution towards inclusive luxury versus the history of exclusive luxury. Not just with specific respect to the Gucci brand, how do you think about those concepts across your brand portfolio? I'd also love for you, if possible, to help us think about the stratospheric growth within the Gucci franchise, how we should think about the cadence of normalization over time, if that's something you're ready to discuss. Thanks.
Again, what we have said during the investor day is that our brands have established new codes, new habits, and new common wisdom pertaining to luxury. What we think is that this disruption, this new approach to luxury, has enhanced the desirability of these brands, of our maison. The fact is that we think that the growth in the semester has never been more sound than it is. We have constantly reinforced the exclusivity in terms of price positioning, store network excellence, and client experience, which does not mean that we exclude any customers from this journey to a new type of luxury.
Jean-Marc Duplaix speaking. Regarding normalization, you are referring to, of course, and it's not a politically correct answer, but it's very difficult to predict because you know that Gucci so far has constantly delivered over our own expectations. Now, if we look, as you probably do at the figures, if I look at the stack growth for H1 or since 2016, it was a stack growth of approximately 120%, something like that, around that. I let you do your math regarding what could be the next growth rate for the coming quarters. I can say that, in a way, Gucci is executing this plan, not focusing only on growth, but also about the customer experience and/or the journey that has been mentioned by Jean-François.
We are really convinced, and I think that it was brilliantly demonstrated during the investor day, that we have a lot of reservoir for additional growth, some categories on which we can continue to grow. When I look at the performances we have across categories, across nationalities, across the different clusters of age, we are very confident that this normalization will be very gradual and that we should deliver very strong performance in H2.
Excellent. Thank you very much.
Thank you. We will now take our next question from Zuzanna Pusz of Berenberg.
Good evening. I have two questions actually just left. On Bottega Veneta, is there any chance you could share with us any update on Bottega Veneta following the appointment of Daniel Lee? I think it's been reported that the brand will be skipping the upcoming fashion show. In terms of the margin, I remember 25% used to be sort of the level you saw as the one you wanted to maintain, now it has come off a little bit. How should we think of it in the future? Given that the transition happening right now, is there any additional risk to the profitability at Bottega? That would be very helpful. Secondly, I'll take the risk, but once again, you delivered very impressive free cash flow. I know that part of it is driven by the phasing of CapEx, but clearly this continues.
You'll be very soon in a net cash position. Can you share with us any thoughts on the potential use of your balance sheet? I understand that you don't necessarily like to discuss it, but if let's say there are no interesting opportunities, would there be maybe a buyback or some return of cash to shareholders on the cards just to avoid going to a net cash position? That would be very helpful. Thank you.
Good evening, Zuzanna. Regarding the onboarding of Daniel, he's been there already for a few weeks, and I can assure you that we can feel the difference in terms of energy, in terms of fluidity of communication, in terms of working together with merchandising, with communication, facilitating the coordination with a full presence in Milan. There is already some new things happening at Bottega. They will not concretize in a full show in autumn. Daniel will bring his touch to the current collection that has been designed already with a few adjustments and a few refreshments. His first genuine show will be in February in Milan. Knowing that the collection that he has been adjusting and he's working on now with a slight touch will be shown in Japan in the autumn.
As explained by Jean-François, we will have, and we had already, but we will have even more strategic initiatives that will take place in the coming months. It will take time, and of course, we can't expect that all of them will be completed and bear fruits by the end of the year. We need to invest in that brand. We already mentioned that we wanted to maintain the EBIT margin around 25%. It does not mean that it's spot on on 25%. We are convinced that we need to invest with very targeted and selected investments.
The reason why we have decided to push some investments both in terms of OpEx and in CapEx this semester, and we will continue to do so in the coming months, where the objective, and we are quite convinced that it could be the case, to keep this margin around what we have delivered for the first half, depending, of course, on some FX moves that could happen during the second half. As regard your second question, and you're right to ask for this, but I think that we have been very consistent in terms of cash generation. I would like to stress that the cash generation for the first half is not only due to CapEx savings. I think that if you restate from the CapEx, you will see that the cash conversion is absolutely good and outstanding.
I think that we have been very disciplined in terms of cash generation. We have been also quite shareholder-friendly. We have increased massively the return to our shareholders this year, which is equivalent, if I remember well, of something like EUR 42 per share, which is an absolutely outstanding return also to our shareholders. By the end of the year, we can expect that the leverage should decrease, and surely below the range of one to two times the EBITDA. So far, we should keep or maintain the same dividend policy. With an increase of the net results, we could expect an increase of the dividend. Short-term, we don't plan to change the cash allocation.
As regard the M&A you have mentioned, short-term, the M&A is not on the agenda. We continue to focus on the expansion of our brands and the execution of the strategic plans of each brand.
Perfect. Thank you so much.
We will now take our next question from Aurélie Husson of Kepler Cheuvreux. Please go ahead. Your line is now open.
Good evening, everyone. I have actually three questions. The first one is more clarification, but I think it's so important that I wanted to make that very clear. Did you say that you have had a negative impact of environment on Chinese demand as an answer to a prior question? If it's the case, was it in Q2? Are you referring to July? Just wanted you to clear that out. I have another question regarding wholesale at Gucci. The +23% that you said was because deliveries were prioritized toward the U.S., is it a sign that execution at Gucci is not following the commercial success of the brand and that you have to invest more in production? The final one is on jewelry. This is a buoyant market. We have seen that also with one of your competitor's brand, Bulgari.
Do you benefit from this trend also at your brands? Thank you very much.
Good evening, Aurélie. Sorry if we have not been clear enough regarding the Chinese demand. The Chinese demand has been very supportive along the Q1 to Q2, it's still supporting the business. What we mentioned is that there was a constant reallocation of the spending from one region to another one, if we consider the whole luxury market, impacted Europe to a certain extent, which is not so visible for our brands, considering that in Europe we have also some other nationalities. In any case, the Chinese demand was very supporting also for our brands in Europe, we have also a strong local clientele. It's not negative at all. It just explain why Europe, which was the region which grew the most at the beginning of the recovery of Gucci and still in 2017, is now below the other regions.
There is no negative side on the Chinese demand so far. Regarding the wholesale, I think that we have a different situation regarding the wholesale. First of all, it is just a demonstration, or it is completely logical with what has been presented by Marco during Investor Day. Wholesale is a very important channel for the brand, for Gucci. Going forward, and if you remember well what has been said by Marco, in the coming years, wholesale should be slightly less than 10% of the business. We are even more selective as regard the partners we have. It is also about the exclusivity of the brand to be very selective and to target what are the good distributors. We had also a slight effect due to the conversion of some travel retail door still so far operated under the wholesale model and which moved to the retail model.
It is true that in some categories or for some SKUs, we decided to allocate first to the retail network. In fact, it is not demonstration at all that we have an issue with the production. We may have, on some references, as we had in the past months, some shortage sometimes, from time to time, but on a very limited number of SKUs, and that is the main explanation for this figure of wholesale. We are very confident looking at the order books that next quarter should be still very good in terms of growth. I would also add that this figure is delivered based on a stable number of doors, and with, let's say, a more stringent allocation of products to the door. Last question about jewelry.
I think that, as you may know, we have a maison, we have jewelry houses which are smaller than the brand you are referring to, where it is not exactly the same geographical exposure. Our brands are just starting to penetrate the Chinese market. They are so far, in terms of brand awareness, quite low with the Chinese clientele, even if we are making rapid progress. If I look at the growth rate with the Chinese clientele for Boucheron and Panerai, it is a very solid performance, very encouraging, but we are just at the beginning. Conversely, our brands have a higher exposure to Middle East and to Japan, which as regard the jewelry, have not been the best performing markets. Especially for Europe with these clusters, because in the Middle East per se, the performance has been quite good.
In Europe, our brands have a little bit suffered from the lack of traffic. We have a brand which now is doing very well, which is Qeelin, which is, as you know, a Hong Kong-based brand, but with a very, very rapid and encouraging development in China. We feel that here, the momentum is there, and we will continue to fuel the engine so that Qeelin can develop even more rapidly in mainland China.
Okay. Thank you very much.
Thank you, Aurélie.
Thank you. We will now take our next question from Antoine Belge of HSBC. Go ahead. Your line is up.
Good evening. It is Antoine speaking. Three questions. First of all, a bit of a theoretical one. I think, over the last three years, I think you have mentioned several times that the Gucci consumer was becoming much younger. Have you any views on what would be the resilience of that younger consumer, especially if we continue to see some kind of volatility in the Chinese equity market and CNY? Do you think that it would be quite the opposite, that maybe that consumer would be less focusing on financial markets, and you could prove more resilient? I know it is a bit theoretical, but in other words, are you really looking at certain leading indicators when you look at the future?
Second question, I think you probably noticed that for the first time in many quarters, we sell-side analysts have been able to accurately predict the Gucci top line. I think you mentioned three-year stack. I think maybe including 2015 is also relevant because you had quite a high volatility in quarterly growth rate. If we do that four-year stack analysis, then H2 should be up around 20%, and that's I think what consensus is more or less expecting. Do you think that it's a reasonable number? Finally, moving on to the other luxury brands, a big, quite impressive margin improvement. Could you maybe tell us where the margin of Balenciaga is standing now, and maybe which brands which were, I think, loss-making last year, have either reduced their losses or maybe come back into the positive territory? Thank you.
Difficult to answer to a theoretical question, except if I provide to you a theoretical answer. I think that first of all, I would like to remind some figures. Again, the growth of Gucci, as we have very transparently explained several times, is driven by the growth with the millennial segment, but not only. The second quarter and the full H1 demonstrated that once again, we have been able to grow in all the different clusters with still double-digit growth with all the clusters. After that, millennials are becoming older and older. Some millennials now are above 35, so they have a different profile. Whatever the way we are looking at this, millennials are below 35, we see, compared to last year, a form of stabilization in terms of breakdown of the sales per cluster.
We have now something quite stable in terms of percentage of sales made with the millennials. You can refer to the figures we provided at the end of 2017. Now to say if there is more volatility, there are cycles, this is a big theme of the industry for now several quarters. Once again, what we can see is that we have an increase of the retention rate, and this increase is the same in all the different clusters, including with the millennials. After that, you're right to mention that the bulk of the millennials buying at Gucci are Chinese. It's about less than a half, but it's a significant share of the millennials, as Marco had explained during the Capital Markets Day.
I think that your question is about the Chinese market overall, concerning that at the same time, we have still an extension of the middle and upper class in China. It's very difficult to say. I think that we have now a sound base of business in China with the good coverage in terms of store network, with very solid online operations, which grew above expectations during H1 and more rapidly than we were expecting. I think that we have a very solid base, and we will see how the macro will impact the demand. Your second question was about some calculation or some projections we could do on H2 and if we are comfortable with the consensus or not. I think that it's a different way to ask a question about current trading. Of course, I won't answer to that.
Once again, you know that Growth is not a goal per se. It's the outcome of the right strategy, a relevant vision of luxury, and as a consequence, the desirability of our brands. We believe that today, the desirability of Gucci has not faded at all. We are quite confident that second semester should be very solid in terms of sales growth. As regard the profitability of the other brands, you will have noticed that they have improved their profitability by 480 basis points. Considering that last year H2 also was stronger in terms of profitability for the other brands. I think that we have been able to grow and to improve the situation of many of our brands. Overall, we can say that I was mentioning Qeelin, which is still a very young brand, is not very far to be profitable. It's an amazing achievement.
I think that Brioni is the only one brand where we have still some issues as regard the profitability, but with some progresses we have mentioned in terms of utilization of the industrial organization. The top line also, where we see very positive signs and some encouraging signs in some regions. Overall, I think that all the brands have improved in terms of profitability despite the combination of FX and hedging impact that didn't help our brands for the semester. Overall, I think that things are improving with, as you will have noticed and as we said, also the watch brand and jewelry brand, which have also improved their profitability. I won't comment on the profitability of Balenciaga. We already said that Balenciaga is for a while a quite profitable brand. Now for one year and a half, two years, we have a significant operating leverage.
The profitability of Balenciaga has increased dramatically during the semester.
Many thanks.
Thank you. We will now take our next question from John Guy of MainFirst. Please go ahead.
Good evening, Jean-Marc and Jean-François. I've got three questions, please. The first is with regards to Gucci wholesale. Jean-Marc, are you able to quantify the impact on the second quarter wholesale growth rate given the selective distribution and the smaller SKU offering? That's my first question. My second question is on Saint Laurent. You mentioned that the margins were very solid and on track. I think, in previous Capital Markets Day, we were talking about potentially seeing margins reach around the 27% level. I'm just wondering how you still think about midterm margin aspirations for the brand. Where do you see the best operating leverage drivers for Saint Laurent going forward? My final question, just on Alexander McQueen, you flagged that this was the next brand to watch.
Could you maybe give us an indication as to maybe where you see the midterm revenues and margins? What are your aspirations for this brand? Will 2018 comfortably exceed EUR 300 million in revenue? Thanks.
Thank you, John, and I will take the risk to disappoint you because you have asked three questions, which I'm not sure to answer fully. As regard the wholesale, I think that we should not focus too much on the wholesale figures. Of course, I won't quantify what has been the impact of the decision to allocate first some deliveries to retail. Again, it's important to remind that wholesale has been very instrumental, especially in 2016, when it came to transform and grow Gucci. We had a lot of early adopters among our partners in wholesale distribution, early adopters of the new aesthetic of Gucci. We have also here a very tough comp base in terms of wholesale. What we can say is that we have a very sound distribution now in wholesale. Again, we have continued to decrease some quantities to be more selective.
I think that when it comes to exclusivity, it has been part of the journey to work on the wholesale distribution channel. Overall, I think that we should not focus too much on that. You know also that in wholesale, you have also always some issues in terms of phasing of deliveries that have already impacted, for example, the wholesale performance of Saint Laurent in the past. I think that the wholesale trends should be rather analyzed over the year. Regarding your question on Saint Laurent, I think that there is no reason today to change our views on the potential of the brand. The full potential of the brand is 2027 midterm, as presented by Francesca Bellettini in June 2017.
Today, as we mentioned, we believe that we have a lot of elements, KPIs, making us confident in the ability of the brand to deliver this performance. To have another improvement of the EBIT margin of 150 basis points is a major achievement, considering that here again, as regards Saint Laurent, we have a slightly negative impact of FX and hedging. It's a very solid improvement of the EBIT margin. As we mentioned, in the future, there are some regions in which we will continue to invest, some regions where Saint Laurent is under-penetrated. That's the reason why we mentioned that the improvement of EBIT margin would be more gradual, because we need to open some stores with some dilution at the beginning. An important leverage today is also the ready-to-wear, where Anthony Vaccarello has rebuilt an offer.
The last show in New York was very impressive and very well-received, I think it make us confident also to capitalize on these levers. Also, Saint Laurent is developing rapidly in online business, with very good reception of some new initiatives to be more targeted in terms of offer and clienteling. We are very satisfied with some tests we have made in terms of using data to be more relevant, smarter in the way we are proposing products to our clients online. As regard Alexander McQueen, I think that we will have one day the opportunity to have a capital market day at McQueen, then we will have the occasion probably to give more colors to what is the potential of McQueen. We are working to develop McQueen, which is amazing brand with a very strong content in terms of creativity, with a very strong DNA.
It's too soon to disclose any figures on McQueen. Here again, we believe deeply that this brand has a very strong potential. We are building the foundations to grow the brand, as we did for Saint Laurent, as we did for Balenciaga. We are first putting these foundations, then we will invest, we will accelerate the development of the brand, we are not yet at this stage.
Thanks, Jean-Marc. Maybe just one very quick follow-up on Gucci wholesale, because you rightly mentioned that in the first half of 2016, I think Gucci wholesale was outpacing retail. By the end of the year, there was quite a sharp rebound, an acceleration of retail over wholesale, which has continued basically through the 2017 year. I understand that on a sort of two-year stack basis, if you include 1H 2016 then wholesale was running a little bit faster. I'm just trying to understand if there is any sort of major impact here just on your deliberate phasing, if you like, of the wholesale in favor of retail. Can you give us any kind of numbers for that?
First of all, I would like to mention that we are running out of time, unfortunately, and that we can only take two other questions, two questions more. Just to reply rapidly to you on that, let's say that we consider that in H2, the growth of wholesale should be more or less aligned with the growth of retail.
That's very kind. Thank you very much.
Thank you. We will now take our next question from Thomas Chauvet of Citigroup. Please go ahead.
Good evening, Jean-Marc and Jean-François Palus. I'll be quick. Three question. The first one on Gucci margin. When you say you're not expecting the same margin expansion as in the first half in H2, I guess you're talking at reported FX, but you also said that FX and hedging had a slightly dilutive impact on the EBIT margin. Are you expecting greater dilution in the second half as your anniversary? Probably a lot more hedging gains in H2 2017, I think versus H1 2017. If you could just explain the swing in hedging gains for last year, that will help. On the luxury portfolio rationalization, you've recently announced the sale or the upcoming exit of Stella, Christopher Kane, Tomas Maier. In the past, you also sold a struggling brand. I remember Sergio Rossi or O'Beda.
What are the main criteria and KPIs you're now looking at to decide of a potential exit, and could Brioni and watches follow at some point if the turnaround doesn't materialize, or maybe if these brands are not scalable? Finally, the lockup on the 16% residual stake in Puma expires, I think around mid-November. What do you think would be a good use of the associated cash? I think that's about EUR 1 billion, a bit more than EUR 1 billion, as Jean-François Palus mentioned, after the strong share price performance of Puma year-to-date. Thank you.
Okay. I will try to answer rapidly on the first question, which is not an easy one. Yes, of course, I was mentioning an improvement in reported, or looking at the reported figures, reported EBIT margin. I think that we have been very candid and transparent about the fact that the objective for this year was, in any case, to deliver an improvement of the EBIT margin, whatever the impact of FX and hedging. I think that I mentioned this during the full year results. I will reiterate that point. Obviously, considering the growth of the EBIT margin last year during the second semester, it's quite logical to say that we cannot expect an improvement of the magnitude we have posted during H1. Regarding the hedging impact, once again, I would love to know what it could be overall.
It would depend, of course, on the evolution of the currencies. If I would know, I would be richer, probably. The point is that clearly we can expect that concerning the hedging rate we have, and also concerning the recent evolution of the currencies, we could assume that during the second half, the combination of FX and hedging should not be as material as it was during H1 if the things remain as they are today.
Good evening, Thomas. Regarding the brands that we are about to dispose, the main pattern and the common pattern of those brands is that we did not fully control them. That's why we prefer to part ways because we are more comfortable to implement what we think that needs to be implemented, that needs to be evolved or changed. It's easier for us when we do fully control our maison. That's why we decided to part ways, knowing that for Stella McCartney, as you know, she exercised her option to call our shares. This means that we do not intend to dispose of any other brands of our current portfolio. Regarding our residual stake in Puma, and notwithstanding the end of the lockup period, here again, we do not intend to dispose of those shares.
Thank you, Jean-François Palus.
Thank you. We will now take our next question from Louise Singlehurst of Goldman Sachs. Please go ahead.
Hi, good evening. Hi, Jean-François, Jean-Marc. Two quick ones from me, please. Just following up on Thomas's question on the Gucci brand margin. Obviously strong margin is a nice theme for the sector so far this week. All else equal, put another way, given the second half weighting of the margin, typically, is it sensible to assume we can see a full-year margin of around 38% for Gucci brand for the full year? Separately, my next question. At the Capital Markets Day, there was a reference towards virtual concessions. I wondered if you could just quickly update us where you are year to date. You obviously spotted Balenciaga on JD.com's Toplife quite recently, and that obviously follows Saint Laurent earlier on in the year. Thank you.
As mentioned before, this was the last question. Thank you for adding this question on the Gucci EBIT margin. In other words, I think that overall, if we have been able to deliver this 38.2% EBIT margin for the first semester, for the full year, we can assume that for the full year, it should be at least on par or even higher, and we are confident that we should be slightly higher. Despite the fact that there is less seasonality compared to the past, there is still a seasonality when we consider the profile of the sales over the year, plus the fact that we have more linearization of investment and OpEx during the year.
Overall, EBIT margin for the second half should be higher than the one in H1, as I mentioned before, not with the same acceleration we noticed during H1.
Regarding the Chinese e-distributors, several of our brands have discussions with them, knowing that some are already active and operating on those vertical e-distributors. I would particularly mention Kering Eyewear, who's very active and whose performance is quite satisfactory. Of course, the most recent brand joining JD.com's Topl ife was Balenciaga, with a common approach to contract agreements that we've been engineering at group level since Alexander McQueen and Saint Laurent are already on Topl ife. Some other will join, particularly some jewelry brands.
Thank you very much for being on the call, thank you for your questions. We hope that the information we provided you has met your needs. Of course, we will get back to those of you with questions we couldn't get to, we apologize for this. We are very pleased with our achievements during the first half, our completed transformation, as well as the strong performances of our brands, we are looking forward to the second half and beyond. In the meantime, we hope you will have a peaceful summer, we will talk to you again in the fall. Have a nice evening, thank you again for your interest in Kering.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.