Good day, everyone, welcome to the 2018 first 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, CFO. Please go ahead, sir.
Good evening to all of you, welcome to this call to review Kering sales in the first quarter. Slide four provides a group summary. This quarter, under our pure-player profile, Kering delivered superior growth. Revenue was up 27% reported and 36.5% comparable to EUR 3.1 billion. FX represented a significant drag above nine percentage points. Let me start by diving into the scope of consolidation. As announced this quarter, Puma, Volcom, and Stella McCartney are treated as discontinued operations in accordance with IFRS 5. It means that they are no longer included in our reported revenue from continuing activities. To make comparisons easier, we have posted on our website since last week a full pro forma revenue table for all 2017 quarters. The EUR 3.1 billion in revenue we report for Q1 2018 must be compared to EUR 2.4 billion pro forma in Q1 2017.
You can see on the chart, the 36.5% comparable growth we posted in the first quarter this year is all the more outstanding that it has been achieved on top of a very challenging comp base of plus 37% in Q1 last year. For reference, you can see here the amount of revenue from discontinued activities. On slide five, our luxury houses delivered a remarkable Q1 across all regions and channels. Revenue was EUR 3 billion, up 37% comparable and 27.5% reported with an FX drag of EUR 160 million. Retail, accounting for 76% of revenue, was up an impressive 40%, all regions being up high double digit on tough comps. Performance was led by North America and Asia-Pacific, up 54% and 42% respectively. In North America, predominantly a market for locals, trends were very good across virtually all our brands.
In Asia-Pacific, the highly positive dynamic was further confirmed, with all countries up solid double digit. The most notable feature is the acceleration in Hong Kong and, to a lesser extent, Macau, while mainland China remained sustained, as were Korea and Singapore. Japan improved again sequentially with a substantial 33% increase, fueled by strong momentum in tourist purchases, especially from mainland China, as well as good local consumption. Western Europe advanced by a healthy 30%, despite high comps, the strength of the euro, and the resulting softness in tourism, with contrasted impacts depending on each brand's exposure. Local consumption remained robust overall. Regard to combined spending in our three main brands by the Chinese cluster, if you compare it to last year's Q1, it was directed more towards APAC and Japan than at Western Europe and their home market.
Retail performance was also supported by online, with buoyant revenues more than double last year's level. Wholesales rose a solid 30%, reflecting broad-based appreciation of the collections by our partners and clients, as well as a good quarter in watches. The other revenue stream, which includes royalties, was up 2% with a different phasing of Kering Eyewear deliveries compared to Q1 last year, which marked the beginning of Gucci's internalization. The remarkable performance of our luxury houses was carried out on a virtually unchanged footprint. We continued to enjoy a supportive demand environment. Once again, it's our model and grounded in creativity and innovation at all levels that really make the difference and bolsters organic growth. Creativity and innovation are at the core of our brands. They build and nurture emotion and attractiveness.
Spread across all touch points, they are even more powerful in fueling engagement with new and existing customers. Our houses are delivering healthy organic growth, well-balanced across regions and nationalities, driven by strong like-for-like and a few selective store openings. At the end of March, our directly operated network comprised 1,347 stores. That's a net increase of just 11 units compared to December, focused exclusively on those brands like Saint Laurent that continue developing market penetration. Let's turn to Gucci on slide six. Gucci delivered another outstanding performance. Revenue rose 49% comparable, the fifth consecutive quarter above 35%. This healthy growth was driven by an impressive 50% increase in retail, achieved on the basis of like-for-like full price sales. Gucci's unique positioning enables it to ally rising exclusivity with superior sales growth. Equally important, this performance was particularly well-balanced across the board.
Whether you look at it by region, nationality, or product category, all were up double digit. The unabated success in all product categories, both men's and women's, reflects Alessandro Michele's powerful creative narrative, consistent collection after collection. In leather goods, growth is driven by the continuing success of iconic carryover lines, as well as by newness. Similarly, in ready-to-wear and shoes, both new collections and styles launched in earlier seasons fuel the house's outstanding and unwavering momentum. Regarding regional trends in retail, the first quarter faced a materially higher base of comparison. Nonetheless, North America reached an exceptional 64% growth. APAC was also particularly strong, with high double-digit growth in all countries and a marked acceleration in Hong Kong and Macau. Trends in Japan further accelerated.
Western Europe remained solid, thanks to both locals and tourists, despite facing the most challenging comparison base in Q1 last year, when sales were up 66%. Online revenue grew triple digit in the quarter, driven by the U.S., confirming the strength and the consistency of the brand's proposition across all touch points. Wholesales grew 44%. Considering that it has been achieved on a slightly lower number of doors compared to the previous year, this is truly remarkable. Gucci continues to drive healthy and consistent growth across product categories and customer age groups. The brand is investing in marketing, communications, and in the continuing rollout of its new store concept to realize its full potential. The house has regained its leadership, leveraging a unique blend of art and science.
This is evidenced by its unrivaled product proposition, as shown again by the acclaimed fall/winter 2018/2019 fashion show, while its carryover base also continues to gain strength. Gucci's commitment to continuous transformation and innovation spread across the whole organization. The brand recently introduced a new organizational model to reinforce and deepen customer relationships and embrace advanced technologies. This commitment is also at work in the ongoing development of its supply chain. Gucci recently inaugurated its ArtLab, a new center of excellence for leather goods and shoes located in Florence. Moving to slide seven. Yves Saint Laurent posted further solid growth with comparable revenue up 20%. Retail was up 15%, with increases of more than 20% in North America, Asia Pacific, and Japan. Western Europe was hampered by slower tourism spending from the brand's key nationalities, in addition to a particularly demanding comp base.
In wholesale, Saint Laurent posted a strong 32% growth driven by Western Europe, with further sound performance in the U.S. The brand continues to deliver on its strategy. Its fashion leadership and Parisian aura are firmly rooted. They were brilliantly displayed at the winter fashion show Saint Laurent staged at the Trocadéro in late February. The launch of new hand bag lines, such as the Niki, was particularly well-received, while carryovers continue to show strong performance. In line with its selective retail growth strategy, Saint Laurent opened six stores in the quarter, mainly in North America and Asia. On slide eight, you see the highlights for Bottega Veneta. Revenue was up 1% comparable, with retail up 2% on a tougher sequential comparison base. Trends in North America were well-oriented, thanks mostly to locals.
Asia Pacific improved, driven by Hong Kong, Macau, and Korea, on the back of increasing tourism flows, which also benefited Japan. Western Europe faced a difficult base of comparison and suffered from the deceleration in Asian tourism. With wholesale rationalization behind us, the brand starts from a lower base but should benefit from a healthier environment in the coming quarters. Sellout trends are also gradually improving. Bottega Veneta has achieved a number of important milestones in terms of store network, new product launches, and visual merchandising. This is supported by a more impactful communication strategy, including increased digital presence and by hallmark openings in New York's Madison Avenue and the Dubai Mall. The journey continues with new initiatives planned throughout the year. The brand is deepening its newness proposition and rebalancing the architecture of certain collections in selected categories to raise its appeal with a broader customer base.
On slide nine, you will find details on our other brands, which altogether were up nearly 38% comparable. As a reminder, the 2017 figures have been restated to exclude the contribution of Stella McCartney. Retail sales, which account for precisely half of the total, were up an impressive 57%. High double-digit growth was achieved in all regions, led by Asia Pacific, with a very strong performance in North America in the quarter. Wholesale also rose significantly, up 24% comparable. In couture and leather goods, the sharp increase in revenues was fueled by the outstanding performance of Balenciaga. In retail, Balenciaga sales were buoyant in all regions, with e-commerce experiencing an amazing quarter. Replicating its success in women's lines, Balenciaga is expanding its men business, which should act as an additional pillar of growth in 2018 and beyond.
To support this, the brand converted four points of sale in Paris and London department stores into directly operated stores. Growth was strong across product categories, notably shoes and ready-to-wear for both men and women. Alexander McQueen sales accelerated in the quarter with solid double-digit growth. This was largely driven by retail, including a near doubling of e-commerce revenues. All product categories were up, with shoes in the lead, while the rebalancing of ready-to-wear collections is making rapid progress in women and starting to gain traction in men. As a result, the share of full-price sales was up significantly. Brioni retail sales were impacted by lower tourism spending from Russian and Middle Eastern clients, but recorded good trends in North America and Japan. The brand is actively adapting its retail footprint with five closures in the quarter. Also started to recover this quarter.
With regards to Brioni's production facilities, we are seeing some encouraging signs in terms of capacity utilization. In hard luxury, our investments in the positioning of our major jewelry houses are yielding very positive results. Boucheron's iconic lines, Quatre and Serpent Bohème led the charge. Retail sales in Western Europe were impacted by certain store refurbishments, primarily the Paris flagship on Place Vendôme. This was mitigated by a very robust jewelry performance in Asia Pacific. The Pomellato brand also posted good growth, notably in retail, while Qeelin's momentum intensified in Q1. Watches showed solid trend in the quarter, benefiting from impactful presence at SIHH 2018 in Geneva in January, and effective communications aimed at sharpening their brand image. Girard-Perregaux expanded its Laureato collection, now the main pillar of the brand, and Ulysse Nardin presented a new flagship product, Freak Vision, which was well-received.
Let me give you a few words of update on Kering Eyewear summarized on slide 10. As you know, Kering Eyewear is accounted for under corporate and others and accounts for the bulk of that line. In the first quarter, total sales of Kering Eyewear amounted to EUR 127 million. After elimination of intragroup sales on royalties earned by the brands, net consolidated revenue of Kering Eyewear was EUR 101 million. For the first time, sales include the contribution from Cartier, whose launch under the new umbrella was very successful. The business is now fully operational in terms of organization, and it has continued reinforcing its global infrastructure. It is well regarded in the industry and has rapidly established itself as a reliable partner with retailers and consumers in terms of distribution, service quality, and after-sales.
With the addition of Cartier, Kering Eyewear has reached a nice scale to fully activate the potential of the brands in its portfolio. This will be further boosted by the future partnership with Balenciaga announced earlier today. A few words of conclusion on slide 11. Our outperformance in the quarter reflects the heightened intensity and clarity of our strategy and execution now that we have completed our transition to luxury pure-play. This transformation should become fully effective after our annual general meeting. We are confident in the success of the Puma spin-off transaction. As you saw from the first quarter numbers, Puma's operational and financial metrics are definitely on the right track. Momentum remains positive in the world luxury market in the early part of the year. We are facing increasingly high comps in addition to foreign currency headwinds.
We are confident that creativity and innovativeness will continue to set our houses apart and fuel Kering healthy, consistent organic growth. We will maintain a strict financial discipline to drive value creation. We are now ready to take your questions.
Thank you. The question and answer session will be conducted electronically. To ask a question, please press star one on your phone at this time. If you're on a speaker phone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, that's star one if you would like to ask a question. We'll go first to John Guy with MainFirst. Please go ahead.
Thanks very much. Good evening, Jean-Marc. Thanks very much for taking my questions. I've got three. If I just start with overall sales retail for the group running at 40% and e-com more than doubling. Irrespective of a negative FX translation impact, clearly the scope for positive operating leverage looks high relative to where consensus sits today. I appreciate this is just a trading update, but could you maybe comment about where you might see relatively healthy operating leverage opportunities? Secondly, on Gucci, clearly we've seen a phenomenal performance in the first quarter and acceleration. Do you think, looking forward, a starting point now for 2018 should be around EUR 8 billion in revenue or maybe even slightly higher? I appreciate again, that's a forward-looking comment, but the start that you've had and the acceleration quarter-on-quarter or year-on-year is actually quite impressive.
Finally, within the other brands, obviously stripping out Stella, which was, I think, around EUR 65 million of revenue for the quarter last year. The Balenciaga weighting has clearly increased. Where does that weighting for other luxury brands now stand? It looks like Balenciaga clearly outperformed the 57% or so growth in retail that you've just flagged within the other brands as well. Just wanted to get a sense of where Balenciaga stands. Thanks.
Good evening, John, and thank you for your questions. I think that regarding your first question, it's not so easy to answer because you know that we have different situations, depending on the different stages of maturity of the different brands. For sure, in the case of Balenciaga, because of the rapid acceleration in terms of growth, there will be some operating leverage, quite substantial, but at the same time, we will take this opportunity to reinforce the structure at Balenciaga to sustain growth in the coming quarters, because we are still an organization, which is the one we had still a few years ago, so we will have to make some investments, but for sure, there will be some operating leverage.
As regard Saint Laurent, you know that we have already mentioned that in terms of EBIT margin improvement, there will be of course, some improvement because the like-for-like growth is still very solid. We have also some store openings because you know that we have some holes in the store network we need to fulfill. We have also some refurbishments to be made, with some dilution. At the end of the day, we should see some operating leverage also, but to a lesser extent compared to the past years.
As regards Gucci, of course, you can imagine that considering the pace of growth we have, despite the fact that we want to reinvest part of the gains of gross margin we have in absolute terms, because we have already commented on the fact that we need to sustain the growth for the long run, and we have some investment to make, and I mentioned some of them during my speech. Of course, we can assume that there will be significant operating leverage at Gucci, but maybe I will come back to that during the Q&A. Regarding maybe the last big brand, which is BV, it's clear that the drag of FX, that will have an impact on the top line, will weigh on the overall profitability.
You know that we have a strict financial discipline in order to protect the EBIT margin at BV, but for sure, it will be more challenging, considering the trajectory of the top line. Concerning your question about Gucci and the outlook for the year, because it's a question about the outlook. As you can imagine, we won't provide any guidance, but it will give me the occasion to remind that Gucci started to accelerate at the end of Q2 2016, and more specifically, in H2 2016. The comp base will start to be more challenging from the end of Q2. For sure, concerning the trends we see and how healthy is the development of the Gucci business across the region, the categories, and the different clusters of clientele, we are confident for the remaining of the year.
We are also very positive signs when we look at the wholesale orders. Overall, the performance should be very strong, probably above our initial expectations. Of course, the comp base will start to be tougher starting with H2. It's true that once again, as it was the case in Q4, in Q1 2018, Balenciaga delivered the strongest performance across the portfolio, across the brands. If we look at the overall performance of the other brands, as I mentioned before, McQueen is improving and is delivering a very solid performance, very healthy in the sense that we have an increase of the full price sales, and it's quite well-balanced across the different categories with a very interesting development in the ready-to-wear. It does not grow at the same pace as Balenciaga, but it's very encouraging.
We mentioned that jewelry brands and watches brand have delivered also a quite solid performance in the quarter. Here again, not exactly at the same pace, because we are not at the same stage of maturity as Balenciaga. We have also a major refurbishment ongoing at Boucheron with the flagship store in Paris, in Place Vendôme. The overall performance, there is a little drag coming from Brioni. Brioni suffered in retail from the lack of Russian and Middle Eastern tourism in Europe. The fact that we have closed some doors also, directly operated. Wholesale was okay, overall, it does contribute to the drag to the overall performance of other brands.
That's great. Thanks very much. Maybe just on Gucci. I think last year you had 517 stores open, and you've moved to 533. Sales contribution on space would be around mid-single-digit level. Is that fair when you're looking at the organic number?
Hi, John, it's Claire. I think that you can assume that all growth of Gucci is purely like-for-like, more or less.
Thanks very much, Claire.
It's a good question.
Thank you very much. Thank you.
Thank you, John.
Our next question will come from Antoine Belge with HSBC. Please go ahead.
Yes. Hi, it's Antoine at HSBC. Three questions, if I may. First of all, regarding Western Europe, you had quite a contrasting performance, especially the -1% at Saint Laurent compares with 44% at Gucci. That's why I'm leaving Bottega side intentionally, could you maybe explain that substantial gap in Western Europe? Second question relates to what you mentioned about the margins. There are a lot of factors at play, a lot of operating leverage, intention on your part to reinvest part of that, also FX impacts and I think you were quoted on Reuters as saying that prices had been increased by 5% on average, except the Eurozone. Maybe at least some qualitative comment about all these factors. Finally, maybe an update on the current tax investigation.
I think at the most recent analyst meeting you commented about the Italian investigation, there's been also some comments that the French authorities were also looking into your tax organization, could you elaborate on this as well? Thank you.
Thank you, Antoine, for your three questions. Starting with Western Europe, as you will have noticed, looking at global data from Global Blue or some other indicators, the tourism flows have been softer for overall in Europe in Q1. It was already the case at the end of Q4, by the way. It started a little bit from November, let's say. It was obvious in the Eurozone, also in the U.K. The U.K. has been severely impacted, it's true that also we have to look at the comp base. If we look more specifically at Saint Laurent, because it was principally your questions, I remind that we have behind us several quarters of very strong growth in Europe for Saint Laurent. Between 29% and 46%, if I look back at the three past years.
The combination of very high comps plus the impact of tourism clearly explain the performance of Saint Laurent. The performance has been very solid and encouraging with local clientele still, but it's true that we saw, let's say, a shift of the purchases by Chinese tourists in some of the destinations. If I look now more specifically at the Chinese cluster for Saint Laurent, and even if now we are looking at the Japanese cluster or the other clusters, it's overall very positive, and that is the reason why the performance of Saint Laurent is still very solid overall in retail, +15%, after several years of strong growth, I think it's quite still remarkable. I think that we should not focus too much on the European performance.
It's true that it does raise the flag on the situation in Europe with clearly some shift in tourism flows. As regard the margin, it's true that I will come back on the price increase to clarify. You know that the price increase had been posted on the cruise and, let's say, the spring-summer collection across the board, meaning on almost all the categories, with an average increase of 5%, excluding Eurozone. If we combine now with the Eurozone, it's an average increase of approximately 4%, let's say. This increase has been posted on the collection, it means that it had an impact in Q4 and still in Q1. In fact, in terms of explanation for the growth of Q1 for Gucci, the contribution of the price increase is very marginal compared to the impact deriving from the traffic.
Regarding the gross margin, of course, it had a positive impact, but also, clearly, if we look at the gross margin in percentage points, there will be also some benefits coming from the hedging. All in all, you know that it's always very difficult to make the math on that. It will contribute clearly to help in terms of improvement of the EBIT margin of Gucci. I think that clearly, again, with the leverage we are benefiting from the dynamic of the top line, plus the impact on gross margin, we can expect that we should deliver EBIT margin, let's say, above what is the consensus today. Regarding your question about the tax investigations I wish to reiterate very simply what I said during the presentation of fiscal year 2017 results.
Since, according to us, nothing happened since then that does change materially the tax situation of the group. You are aware of the audit by the local tax police that has been conducted in November in Milan and Florence. We had the occasion to comment on that. I will repeat that the inquiry by the Italian authorities is still at a quite early stage, and we have not received any notification of tax adjustment so far. We are collaborating with the authorities. It's true that more recently, a French online media, Mediapart, has relayed some information regarding the tax situation of the group. The figures mentioned in the article are not supported. I won't comment on that. To be very clear, we are not aware, and there is no further criminal investigation in other jurisdiction, be it France or Switzerland, or concerning other brands of the group.
Of course, like other groups of its size, Kering is regularly audited. I want to be very accurate. I am talking about tax audits by the tax authorities. But again, there is no criminal complaint filed against the group in France or in any other country. If you are well aware of the day-to-day life of a big group, almost all the fiscal years in Europe or in the European countries, probably in the U.S. as well, are audited by the tax authorities. It will be the case for the Kering brands. We will be transparent in our communication as we have always been. And we will communicate in due time, if there is something to mention. Obviously, I have nothing to add on that.
What we said about the gradual increase of the tax rate, is still valid in terms of comment and short-term, let's say, we mentioned that we should reach something around 25% of recurring tax rate, and we are maintaining this form of guidance.
Thank you. Maybe just two clarification. One, what is the consensus for 2018 margin at Gucci? Is it 36%? Then, maybe you mentioned the Chinese cluster for Saint Laurent being still quite healthy. What was the growth with the Chinese cluster overall for Saint Laurent in Q1? Thank you.
Hello, Antoine. This is Claire. For the Chinese cluster, we don't disclose it by brand. I am not going to be answering directly your question. Then, the first question you had was on the consensus margin for Gucci. No, it's not 36% currently, it's 35.4%.
Thank you.
Welcome.
Our next question will come from Thomas Chauvet of Citi. Please go ahead.
Good evening, Jean-Marc, Claire. I have three questions. The first one, follow up on pricing for Gucci. Could you just explain why you didn't increase prices in the Eurozone, but only in the other regions? What are you thinking in terms of the autumn-winter collection? I vaguely remember comments at the full-year results that you were not decided yet whether you would pass on price increases. Has it been already confirmed, decided, at Gucci or at any other brand given the evolution of FX? On Saint Laurent. Looking at the significant number of openings or acceleration in openings you've had over the last 12 months, and the slowdown in retail growth, it seems your retail same-store sales growth slowed down significantly in the period, maybe to low-mid single digit. Can you please explain this beyond the slowdown in Chinese tourism in Europe?
I guess that tourism slowdown has been partly compensated by repatriation of demand into Asia. I also see your wholesale business for Saint Laurent is still very strong. What is exactly the same-store sales growth at Saint Laurent? Is it slowing down a lot, and why? Finally, just clarification on the tax, and your P&L. Can you confirm at the end of 2017 that there is no financial impact provision for tax litigation, or at least no material amount? I think that's what you had said back in February. Are you still, secondly, comfortable with 25% tax rate for the group? I don't know if it's this or next year. Still on that topic, what is the progress you've made on the adaptation of your supply chain and logistics organization? Thank you.
You know that in the last year, to come back to the overall architecture of pricing at Gucci. In the past years, Gucci had leveled the price differential across the various countries of Western Europe so that they are quite consistent from one country to another. It's true that, regarding the desirability of the brand and considering also there were some price gaps between regions where we were not completely happy, it had been decided to increase the prices for the spring, summer collections. It was again an average of 5%, recovering different realities country by country, category by category. Because of the evolution also of the currencies, it's true that in some cases, not on all the products, but it's true that we may have reached, in some cases, a gap which was too significant.
We were rather in the high range of the gap, especially in mainland China for some products, and especially in bags. With a very marginal impact, I would say, on the business. Still, it is considered for the fall-winter 2018, that is currently introduced in stores, and moreover, in Q2, we plan some actions depending on regions and products with a low single-digit increase on selected items in Europe to slightly reduce the pricing gap between Europe and China. Of course, the pricing of the new collections of the seasonal items will aim at reducing further the gap between the regions. Indeed, there will be some selective actions and initiatives to increase the prices principally in the Eurozone. Again, with, let's say, a low single digit.
Only at Gucci.
Saint Laurent. Only at Gucci. I'm talking about Gucci.
Thank you.
Concerning Saint Laurent, I think that it's fair also to recognize the fact that we always say that there would be somehow a sort of normalization of the growth after years of growth, which has been driven principally or for large parts by a like-for-like growth. Overall, again, I think that if you consider the growth for the quarter, it's quite well-balanced between retail extension and like-for-like growth. Again, it's true that you have to consider it at a global level. It's true and it's fair that it was somehow a repatriation of Chinese consumption in other countries and principally in APAC, to a certain extent in China. Principally in several APAC region, you have to look at the Global Blue data, for example, in Japan, it's huge. Again, I think it's very well-balanced between like-for-like growth and retail expansion.
Francesca Bellettini had been very clear and transparent during the Investor Day that the growth of Saint Laurent in the future would be also driven by store expansion, considering that there are some areas, some regions where the penetration of Saint Laurent is not at the level we expect. You can count on Francesca and her team to be very careful about what's going on in the different regions and to take action to sustain the like-for-like growth by animating the stores, by working on the visual display, on the product, the assortment, also by sometimes reorganizing the team. We are not really concerned by the situation, and I think it's a very normal evolution. Yes, to clarify about the tax. Let's say that last year, we ended 2017 with a tax rate, which does correspond to the tax to be paid.
Also, of course, this amount does include some provisions. No provision has been directly accounted for the risk we have in Italy, because as we mentioned during the fiscal year 2017 presentation, we have not sufficient elements today to accrue accurately and precisely an amount for that risk. We say that we had accounted for cautiously all the tax liabilities we have. The 23% that has been relieved for 2017 is a combination of the normal tax rate plus some cautious accruals regarding the tax liabilities. To predict what could be the evolution of the tax rate is not something easy. We believe firmly today that short-term, let's say, in the two coming years, we could be at around 25% of current tax rate. I think that we are making good progresses regarding the reorganization of the supply chain and the logistic organization.
As you know, because I think that you visited the facilities a few years ago, we have a very large organization today in Switzerland. A very big platform performing not only logistic tasks, but also a lot of various functions. It is not something that can be deployed very rapidly. We have to rethink the full organization. It will take several years, and we are working on that, but we are quite happy with the pace of progress we do.
Thank you, Jean-Marc.
Thank you, Thomas.
Our next question comes from Omar Saad with Evercore ISI. Please go ahead.
Thank you for taking my question. Great job as always. You guys continue to really perform excellently. I wanted to ask about the Gucci store productivity. It's obviously you're comping the comp, and it looks to us that the productivity has essentially doubled in the last couple of years. How do you think about, and you made some comments around low single-digit 5% pricing, how do you think about that price unit volume mix for that brand? From the outside looking in, it almost looks like you're not raising prices enough and driving unit volume more than driving the total revenue growth rather than the pricing. Have you thought about that? Is there a way, maybe you can share with your thought process around how you should be pricing Gucci given the demand for it?
It's a very interesting question, Omar, I must say, because you know that we have been quite cautious in the past when it comes to price increases. I think that we have to be very smart when it comes to pricing, just to have the right pricing to maintain also the attractiveness. In the sense that, you know that there was, in the past years, a dramatic price elevation for Gucci. I think that now overall, if you look category by category, product by product, I think that we have prices which are quite comparable to the competition, or I think that it's very consistent. I think that it's first of all, what is important is to have a relevant offer in all the price clusters, in all the category. We have recently launched some new products with some pricing around EUR 1,500 for some handbags, some others above EUR 2,000.
We have a big success with some entry price products. The first priority is to have a relevant offer in all the different price clusters and also to have a relevant offer in the different categories. It has been clearly the recipe to attract new clients, and especially the millennials. You know that the average basket of millennials is not exactly the same as the average or the older clients. I'm not sure that It's probably the easiest way to increase the productivity or the sales density is to increase the prices, but you never know what is the reaction of the client. I think that our clients are quite happy now with the price architecture. We had some complaints, to be fair, about the pricing of some ready-to-wear products. We have not decreased the ready-to-wear average price.
We have rather played with, again, the assortment in order to be sure that we have a relevant offer for all our clients. I think that we have still work to do in order to increase the sales density. It's true that we have made rapid progresses. We are now working with the Gucci team to update what could be the next milestone in terms of sales density. We need to make work in depth in order and a very bottom-up approach to see what is the real potential of each store. I think that we have still levers to activate regarding clienteling, store animation, and I think that we would rather play on that.
I think the attractivity of Gucci, the desirability Gucci, is more linked to all the animation we have around the brand, all the innovation we are bringing in the products, all the new ways of communicating and engaging with the different touchpoints. I think it's more the way we are working with our clients, pricing is clearly an easy way, but not the smartest one.
Thank you, Jean-Marc. If I could ask one more question. On your conclusion slide-
Sure
on page 11, you mentioned with the Puma spin-off coming, the pure player kind of new profile of the company, you think will enable significant outperformance. Maybe you could elaborate there, what you see ahead for the company ex Puma, and why it's a leaner or more effective operating platform for the luxury brands. Thanks.
I think that we have set up an organization at group level and a way of collaborating and working with the brands and with the CEOs of the brand and the management team of the brands, which is particularly efficient with the luxury brands. Probably because of the lack of synergies we have not been able to have the same dynamic with the Sport & Lifestyle division. I think to refocus all the energies of the group and also to share all the best practices, to invest at group level for the benefit of our brands when it comes to new technologies, new ways of buying, new ways of selling our products, I think that clearly it will be very beneficial to our brands.
That the reason why I think that to refocus on luxury, besides what could be the reaction of the market to have a pure player in this industry, I have not to comment on that. It's not my role. My role is to be sure that we are empowering our management and our people through a very efficient and lean organization at Kering level. I think that was clearly the purpose of this move, besides the fact that strategically, Sport & Lifestyle was no more core concerning the growth of the luxury division as a scale and the profitability.
Perfect. Thank you. Best wishes.
Thank you.
Our next question comes from Mélanie Flouquet with J.P. Morgan.
Yes, good evening. Thank you for taking my questions. I have several, sorry. The first one is on North America. Clearly, you've had an amazing performance pretty much in every single brand in North America. Even Bottega Veneta that had a tougher quarter was up 11% in North America. I was wondering whether you could share with us what Kering is doing, that's really hitting with the U.S. consumer particularly strongly. It seems to have been better overall for North America in luxury, but you seem to be outperforming. I wanted to understand maybe this a bit better across all brands. The second thing is on Gucci. I wondered whether you could share with us whether the product mix has changed at all. I think historically there was around 57% of sales in handbags. Has this mix changed?
My third question, I'm sure this is more of the object of your capital markets day, but I'll try it anyway. Is there a reason why Gucci wouldn't be able to reach sales density of EUR 40,000 per sq m? My last question, sorry. How long does it take for you to commit to your supply at Gucci? How did you manage to commit to this sort of growth, and to deliver this sort of growth from a supply perspective? Thank you.
Thank you, Mélanie, for your questions, especially the first one, which is not an easy one, I must say. You're right. I think that overall, the environment or the consumer sentiment in the U.S. improved. I would say that even if you know perfectly that in North America, it's principally a market of locals. It's true that we had some improvement with tourism, sales to tourists were up again, maybe with some shift from Chinese customers to the U.S. Overall, the environment was more favorable. I think that also what we see, which is maybe more relevant for the U.S., is a sort of polarization of the market. I think that the brands which are the most attractive and most desirable are performing better in the U.S., be it in retail or in wholesale.
It's even more obvious in wholesale, how wholesale distribution in the U.S. is conservative considering the difficulty they are going through. They are more selective. Overall, I think it does help. It's true also that after years of soft consumption, I think there was clearly all the more fashion-forward brands gained some traction with the more sophisticated U.S. customers. The adoption of the Alessandro Michele style when it comes to Gucci, came later compared to Asia-Pac and Europe. That's normal also to see somehow an acceleration. I think also that we had at Gucci, a more relevant offer for the men's category, you know how it's important in the U.S. to have the right offer.
For BV, I think that many actions in terms of communication in Q4, had targeted the U.S. in order to anticipate the opening of the new maison, the new flagship in Madison Avenue. We see here also the benefits of these actions seen in Q1. What is encouraging regarding Saint Laurent and to rebound on the question of Thomas, it's also that we had some soft trends in 2017, and especially in H1 2017 in the U.S. Francesca decided to tackle this by taking some decisions in terms of organization in the U.S., and we see now the benefits of having taken some tough decisions sometimes in order to put more under pressure, the network and the teams. That's the reason why also encouraging for Europe. I'm sure that we can regain some growth on a like-for-like basis in Europe at Saint Laurent.
I think that the combination of all these factors may explain why the performance of the group has been buoyant in the U.S.
Yes, Mélanie regarding your question about the mix at Gucci, I think compared to Q1 2017, where we have disclosed the figures and leather goods were 55%, shoes around 19%, ready-to-wear 13% for the three key categories. I mean, Q1 is not very different. There is a bit of seasonality in some categories. Maybe the weight of leather goods is slightly higher in Q1, the one in shoes slightly lower, but all in all, the mix is quite stable overall.
Yes. I think that you tried with your third question, and it was really a try because, it's clear that it's totally obvious, and we mentioned this, that we have exceeded the initial ambition to increase the store productivity or the sales density according to our definition. We are now above the initial target. As I told you, we are working hard to redefine what could be the next milestone. I will let the Gucci management elaborate on that during the next capital market day in June.
It's about supply more or less.
Yeah. Regarding the supply, I think that we have mentioned, we have explained what has been the progress made by Gucci in terms of organization of the supply chain and logistic. You know that we had doubled in 2017 compared to 2016, the capacity. Production, by adding some new suppliers, but also selecting a first row of preferred suppliers. We have also added, in 2017 and 2018, some additional lines of productions. We are increasing the share of internalization. It's a continuing journey. I think as regards the ambitions for the midterm and the long term, I will let also Gucci elaborate on that in June.
Thank you.
Thank you, Mélanie.
Our next question comes from Erik Karlsson with Industrial Equity Partners. Please go ahead.
Yes, hello. Thanks for taking my question. It's Erik from Industrial Equity Partners. I had a question specifically on Gucci. A truly phenomenal performance across regions and product categories. I would love to hear a little bit how your newest bag model, Ophidia, is doing so far.
Hello, Erik, this is Claire. About the lines, we don't communicate performance line by line. What we can say is that the recent introduction has been successful. One of the line you mentioned is more about, I would say, rather vintage shapes. They are all performing very well. We had also recently an introduction of a soft bag, which was probably less existing in the offer so far at Gucci. This line also is performing very well. I think the performance of Gucci is strong still in leather goods and, to be fair, in all the sub-segments of the leather goods. It's driven clearly by the strong base of carryover and successful introduction of some key lines, including the one you mentioned.
Thank you very much.
I think-
Our next question comes from-
Just for you to know, we are running a bit out of time, maybe we're going to take one or two additional question, I think we'll have to end the call.
Thank you. That next question will come from Zuzanna Pusz with Berenberg. Excuse me. Please go ahead.
Good afternoon, Claire and Jean-Marc. I'll be hopefully quick. I just have two questions. First of all, on Gucci and the drivers of growth. I remember you were mentioning at the end of last year that there was still many areas of growth where you could improve Gucci's business. I think some of them were menswear, improving luggage business, also improving sales of eyewear and own stores. Can you tell us a little bit more about what has been implemented so far this quarter? What can we expect for the remainder of the year? Second question, a little bit more general on the capital structure. Now, given your financial discipline and also assuming that maybe not necessarily the Q1 level of growth continues, but something still healthy, I think it's reasonable that we'll probably see another year of really impressive free cash generation.
This combined with the 16% stake you have in Puma, at least until the end of the year, I guess the questions about the potential use of your balance sheet will be difficult to avoid. I'll just give it a go. If you were at any point looking maybe for some brands to add to your portfolio, given the impressive job you've done with Gucci, do you think you'll be maybe looking at other brands that you could turn around? Or maybe some smaller brands you could help to grow? Any ideas about that would be very helpful.
Okay. Thank you, Zuzanna. It's difficult to answer your first question because I think that now we are more or less at full speed at Gucci in terms of organization, in terms of resenting or reshuffling of the offer. Almost all categories, even if we are not commenting in details, category by category, are performing very well. That's the reason why we are insisting on the fact that the growth at Gucci so far, very sound, very healthy, because it's across categories, across the different clusters of clientele, nationalities, origins, and it's principally driven by full price sales. Overall, it's very difficult to say if there is something now contributing more or less, more than another one to the growth. I think that the merchandising is still doing its job to be sure that we have the right offer corresponding to the different clusters of clientele we have.
Claire mentioned the fact that the recent launches in handbags received a very good response from the market. I think that we saw, for example, just to illustrate that, an acceleration in small leather goods and luggage, which is very positive because you know that these were two categories where we needed to improve. Clearly, they are now outperforming handbag, but on an easier comparison base, because it took off later compared to the handbag. Ready-to-wear and shoes are still posting very strong double-digit growth. You know that we have, of course, some potential here because you know that Gucci is leveraging more and more on some products that have become somehow carryovers in order to propose to its client a wardrobe with some consistency throughout the collections. We have also traffic builders on which we are continuing to improve. It can be watches, jewelry, or fragrances.
As we guide the organization, you know that we have announced recently a new organization. It's a way also to continue to have a very sound and healthy pressure within the organization to stay awake to react very rapidly, to be agile. I think that the management of Marco and the work done by the team clearly is contributing to that. Of course, we already mentioned this, we are in a phase where we are continuing to gain clients. The retention of the client is improving, which is very positive in all the different clusters still. I think that we start also to activate the levers of clienteling and working on the different cluster of clientele we are getting. I think now we are at full speed. The organization is there, the merchandising is efficient, it's very difficult to highlight something specific.
I'm not surprised by your question about the capital structure. You won't be surprised if I don't answer you directly on that. We said during the presentation of 2017 results that we are not obsessed by the bracket we gave in the past years as regard the leverage. We said in the past years that we wanted to stick to one to two times EBITDA in terms of debt. We can be above certain years, we can be below also. If I look at the short term, I think that at the end of 2018, we should be slightly below one times EBITDA. Below the one times EBITDA, we won't be cash rich. I think that it would be a question for the next years.
Okay, perfect. Thank you very much.
Thank you. I think we will take the last question.
Thank you. Our final question will come from Helen Brand of UBS. Please go ahead.
Hi. Good evening, Claire and Jean-Marc. Two couple of questions from me actually. The first one just around the Gucci margin again, sorry. I was wondering if you could break down how you're thinking about your OpEx base this year, and perhaps split the percentage that you're thinking about that's running on a more inflationary basis versus the amount that you're probably growing and investing to drive Gucci further. Second question, just around the outperformance in the U.S. and just to come back to Mélanie's point. I think you obviously flagged that online sales for Gucci growing very nicely in that market. Is that perhaps that increased online penetration perhaps driving some of that outperformance? How should we think about the margin accretion of that online growth as well? Thanks.
You can imagine that I won't develop further the point on the EBIT margin at Gucci. I think that I said that we should benefit from a positive impact deriving from hedging. I think that we keep the discipline at Gucci in terms of investments to make some investments with quite high return. It's true that at the end of the day, the drop-through of incremental gross profit should be at least at the same level as last year. You will make your math, and it should be something quite consistent with last year. The objective is still to be ready and to keep the agility at Gucci by investing in the areas where we believe it's important to invest. I would just take one example, the continuous increase of investments in digital media.
It has increased dramatically in the past years, and if we add also the cost of production of content, it becomes something which is quite significant in the communication expenses. We know that the success is also driven by the old initiative taken by Gucci, and we need to fuel the growth with such investments. My only comment will be about the drop-through that should remain consistent. You're right to point out that online sales are contributing, of course, to the growth in the U.S. It's not the only one driver, but it's clear that this is a market where the penetration of online is the highest, probably with the U.K. It's true that during the quarter, Gucci continued to deliver an amazing performance online. Again, I think that online performance is generally a good proxy or a good indication of the success of a brand.
Generally, there is a multiple compared to the offline growth. It's true that Gucci is doing very well in the U.S. with a lot of initiatives. I think also the fact that the site is very efficient with a very good earning in terms of design, with a lot of animation, does contribute. It's also clear that today, considering the scale of Gucci online and the scale of Gucci overall, it's a channel which is definitely very accretive. After that, you have to consider what is the share of sales made online overall. Clearly, it's a tailwind in terms of improvement of profitability, but it's not yet completely substantial for the improvement of the EBIT margin. Overall, it's clear that it's accretive at Gucci level.
Great. Thanks very much. If I could just squeeze in just one final question, just to understand, as we're almost at the end of April, if you'd seen any material changes to trading, then I'm done.
Yes. Okay. You know perfectly that we don't comment on current trading, so I won't answer your question.
Okay. Thanks very much. Worth a try.
I want to thank you all for attending this call and for your questions, for your good questions. We've had another very strong performance this quarter. I hope our answers will help you better understand why we remain confident that our houses will continue outperforming the markets. Please mark Thursday, July 26 on your calendars. That's when we will announce our actual results. Once again, thank you for your interest in Kering. Have a nice evening.
That does conclude our conference for today. Thank you for your participation. You may now disconnect.