Good day, ladies and gentlemen, and welcome to Kering's 2016 First Half Results Conference Call. Today's conference is being recorded. Your host today is Mr. Jean Marc Duplex, Chief Financial Officer. Please go ahead, sir.
Good evening to all of you, and welcome to Kering's 2016 half year results call. I will first review our sales and earnings and then Jean Francois Palouse, the Group Managing Director, will share a few words of conclusion. And after that, we will be available to answer your questions. On Slides 67, we have summarized the performance of the group in the period. Starting with highlights, you see that we have improved all our financial KPIs in the first half despite the challenging environment and the high comp base you all remember.
At group level, comparable H1 revenue was up 5 point 5% with a notable acceleration in Q2, up almost 7%. The gross profit margin increased 160 basis points, supported by the absence of hedging losses unlike last year. Combined with tight OpEx management and some operating leverage, this allowed us to continue investing selectively in growth and post a 5% increase in recurring operating income reaching €811,000,000 The recurring operating margin stands at 14.2%, up 20 basis points with profitability up in both Luxury and Sport and Lifestyle. As anticipated, we are gradually entering a phase of lower CapEx and enhancing its allocation. This is particularly true in the first half with CapEx to sales below 4% at group level and CapEx down 26% year on year.
We will maintain a selective CapEx approach going forward, but you should, however, keep in mind that there is a phasing effect here and so you should not extrapolate this trend for the full year. Finally, and as you know, this was one of our top priorities, we came back to a robust and more normalized free cash flow generation, €323,000,000 in the first half. Our net debt level is typically higher at the midyear point than at year end due to the dividend payment. Nonetheless, year on year, our net debt is down and we are on track with our debt reduction ambition. Switching to Slide 7, you will find more detail on operating performances.
At the top line level, we achieved a very good first half with acceleration in Q2 against tough comps. Group revenue was up nearly 8% in Q2 last year. This acceleration holds true for both Luxury and for Sport and Lifestyle. Luxury doubled its Q1 trend in Q2 to reach more than 5% comparable and Sport and Lifestyle posted double digit performance in Q2 at more than 11%. Group recurring operating income stands at €811,000,000 up 5%.
EBIT in Luxury increased €34,000,000 or 4 percent and Sport and Lifestyle added €10,000,000 up 25%. EBIT margins were up 30 basis points 50 basis points, respectively. This is a highly satisfactory performance, and I'm now going to look at how we got there in our key businesses starting with Luxury on Slide 8. Reported revenue increased 3% in H1 with 1 percentage point negative FX impact and no change in scope. Comparable revenue growth was well balanced between retail, up 4% and wholesale, up 5% in the first half.
To focus on Q2, once again, it's worth pointing out that the performance was consistent between the 2 distribution channels and that in both growth trends improved compared to Q1. The most impressive achievement is clearly retail, which grew 5% on top of a 13% increase in Q2 last year. By region, we saw a reversal of last year's trend in retail. Emerging markets saw the largest gain this year, whereas Western Europe and Japan had been the 2 beneficiaries of currency swings and tourism flows in H1 twenty fifteen. In the first half this year and notably in the Q2, the local clientele was clearly much stronger than tourists in all regions.
It's the case in Western Europe with a marked slowdown in tourism in Q2. Same in the U. S, where this deceleration is not new. But we also see it now in Japan, where tourism flows and purchases were lower from high comps due to the appreciation of the yen. Conversely, in Asia Pacific and Latin America, the trend towards repatriation of purchases to the domestic markets was confirmed with the drivers you well know: weaker currencies against either the dollar or yen, security concerns in Western Europe and recent tax changes in Mainland China.
Asia Pacific posted a 6% increase in retail in Q2 with positive trends in both mainland and Greater China and strong overall performance in the rest of Asia. In the 1st 6 months, our luxury activities reached an EBIT of €840,000,000 up 4%. This is an all time high for our first half. The EBIT margin improved 30 basis points to 21.7% driven by Gucci and YSL. CapEx in the period was less than 4% of revenue, down 10% year on year.
As we told you already, our CapEx peak is behind us. We are investing selectively and working to enhance the efficiency and productivity of our network and the return on our investments. I'm not going to comment on the store network brand by brand. You have all the details in the appendix. Let me just stress that the total Luxury store count is down slightly compared to year end at 12 62 units.
Let's now turn to Gucci's performance on Slide 9. In the first half, Gucci posted comparable revenue growth of more than 5%. After a 3% increase in Q1, the trend more than doubled in Q2 with total revenue up 7%. Retail was also up 7% on a double digit comp gain last year. Wholesale accelerated up 16%, underscoring the great appreciation of Alessandro Michele's collections with a sharp increase in orders per door.
The decline in royalties was more modest than in Q1 as anticipated. In June, Marco Bizzare and his team provided a detailed review of the massive brand reinvention we are undertaking at Gucci. Until recently, we had positive encouraging signals. We have now reached the stage where we see the first tangible results of Gucci's strategy. The momentum of the new collections, which were not included in seasonal sales, more than offset the substantial revenue base deriving from the exceptional clearing action of last year.
The weight of the new collections represented approximately 70% in Q2. Success is particularly impressive in the categories where the creative transition is most advanced, namely women's ready to wear and shoes. Gradually, the same goes for leather goods as the relative weight of the new lines increases together with their added availability across the full network. Per region, retail sales were especially buoyant in Western Europe also against tough comps and a background of flowing tourism. The brand achieved 20% growth, thanks to solid increases from both local and tourist clientele.
In Japan and North America, the trend improved in the 2nd quarter and in Asia Pacific, we are back on the growth track, driven notably by Mainland China with also some signs of improvement in Hong Kong, while the rest of Asia region remains very dynamic. In the first half, Gucci balanced targeted reinvestment in OpEx to support the rejuvenation of the brand and raised its profitability. Recurring operating income was up 7% and the margin up 80 basis points. This is consistent with the trajectory we exposed last month. CapEx was down nearly 8% in H1, the focus being to steadily roll out the new concept implemented in more than 20 additional stores in the period.
We are also expanding the use of new visual tools in stores that are not being refurbished. At the same time, we are pursuing store optimization, meaning closings, relocations and a few selective openings to maximize the efficiency and productivity of the network. Overall, the store count is down in H1. Moving to Slide 10, Bottega Veneta faced a quarter of headwinds, resulting in revenue down 9%, almost on par with Q1, but against a much tougher comp base. What we told you in Q1 still stands in Q2.
The brand suffered from its exposure to the Asian clientele and was severely impacted by the slowdown in tourism in Western Europe, but also in North America and Japan. Just as a reminder, in Q2 last year, Western Europe was up more than 50% at the retail level and Japan more than 25%. Conversely, the brand experienced positive momentum in Asia Pacific, up 2% at retail in Q2, benefiting in part from the price adjustments made at the end of Q1 in Greater China. This repatriation of consumption also witnessed elsewhere in Asia, combined with encouraging trends from local clientele in mature markets, was not enough yet to offset the downward pressure from tourism. In this difficult environment, the brand is proactively pursuing its strategy to accelerate the renewal of the offer with a strong lineup of leather goods for fallwinter.
Among other initiatives, a new website presentation featuring better segmentation and engaging storytelling has just been launched in selected countries and is being rolled out worldwide. The way in which products are displayed is perfectly consistent with the new store layout. The shoe category, a strong lever to diversify and rebalance the brand, is already proving successful with double digit growth in H1. Though it faces short term headwinds, the brand is not compromising and continues to reinforce its high end positioning. In particular, we are keeping wholesale under tight control to contain markdowns, reflecting both operating deleverage and investment to support the current brand transition and rebalancing, Bottega Veneta's recurring operating income was 19% lower and margin stood at 25 point 4%.
At the same time, CapEx was down 28% year on year with some phasing impact. The priority is given to network reengineering with active store closings and relocation. We are carrying also out store refurbishments and layout changes evolving the store concept notably to accommodate shoes in locations where they were not available. On Slide 11, you can find highlights of Saint Laurent. In H1, the brand continued to sustain its astonishing momentum with comparable revenue up 24%, delivering substantial operating leverage.
Revenue growth was driven by retail. All regions and all product categories were up double digit in both H1 and Q2, reflecting the very strong appreciation of the collections and permanent styles. Wholesale growth was not as dynamic in Q2, but this is mostly due to some shift in deliveries. In the first half, Saint Laurent posted a very strong jump in operating profit, up 80%, resulting in a 6 20 basis points expansion in margin. This stemmed from the considerable leverage we generate from comparable store sales growth combined with disciplined OpEx management.
Considering that in the first half, we were working against a low base, it's fair to assume that the phasing of margin improvement this year should be different from what we experienced in 2015. CapEx was down in H1, consistent with the current directly operated stores network consolidation phase. Moving on to Slide 12, our other luxury brands posted unchanged revenue in the half year. Revenue improved in Q2, up 3%, driven by wholesale. Starting with soft luxury, our U.
K. Brands Stella McCartney and Alexander McQueen continued to lead growth. Recent trends at Balenciaga were more subdued in anticipation of the arrival in stores of Denmark Vasilya's collections in the second half of the year. Briony is still under pressure, but the brand is building exciting foundations for renewed creative momentum. In Hard Luxury, trends remain contrasted, but getting better in Q2.
Overall, jewelry brands had a positive quarter and watches showed some limited improvements. During the first half, the combined operating profit of our other luxury brands declined, but this is the sum result of quite different situations. At Balenciaga and Stella McCartney, performances were good. The contributions of Alexander McQueen and Briony were hampered by selective growth investments at the former and production capacity adaptation at the later. Operating deleverage continued in watches, although mitigated by synergies and cost rationalization.
Overall, CapEx was up at our other brands due to 2 major flagship pro locations for Briony in Paris and in New York. With Slide 13, let's move on to our Sport and Lifestyle activities, which demonstrated sustained revenue trends in the first half and are back to profit growth. Comparable revenue was up 9%, adjusted for electric and free turn. In reported terms, growth was almost 4%, the bulk of the difference coming from weaker emerging country currencies versus the euro. As you know, Puma reported yesterday.
In H1, the brand posted a strong top line performance with sales up 11% comparable, accelerating in Q2, which was up 13%. Puma's revenue performance was strong across all categories and all regions. Apparel sales grew 20% in Q2. This was notably fueled in Western and Eastern Europe by soccer jerseys for the Euro 2016. Growth was also strong in Asia and in the Americas.
Footwear continued to increase solidly on top of demand incomes, a testimony to the success of Puma's product innovation and its new collections. By geography, all regions were positive in the quarter. Mature and Emerging Markets grew 13% 14 percent, respectively. A strong performance was achieved in Mainland China, where revenue jumped by more than 50% in the quarter with e commerce up more than threefold. Puma also confirmed its good momentum in Latin America.
The greater attractiveness of Puma's product offering has started to translate into higher pricing power and better gross margins even if the stronger U. S. Dollar is still penalizing sourcing cost. After several years of brand investment, the OpEx base is now growing at a much slower pace. As expected, Puma is back to growth with recurring operating income up 29% and margin up 60 basis points.
Welcome had a weak revenue performance in the period. On the one hand, wholesale, which represented 80% of sales, is still under pressure from the bankruptcy of specialized action sports retailers in North America. On the other hand, retail sales grew double digit in the quarter. Volcom has taken actions to limit the impact of revenue decline on its results. Now moving on to the remaining lines of the P and L summarized here on Slide 14.
Other non recurring operating income and expenses were 86 €1,000,000 negative. This item notably encompasses some litigation costs, restructuring charges at Briony and the losses from Kering Highware in the ramp up period. Net financial charges amounted to €101,000,000 down 26% year on year. Within this, the cost of net financial debt was down 3% to €62,000,000 and other financial charges nearly halved to €38,000,000 mainly driven by the lower incidence of the ineffective portion of currency hedging. Corporate tax amounted to €138,000,000 down 2%, corresponding to an effective tax rate of 22.1% in the first half.
Consolidated net income, group share reached €465,000,000 up 10%. Adjusted for non recurring items, group net income amounted to €521,000,000 Now on Slide 15, you will find the change in our net financial position during the period. In the first half, net financial debt increased compared to December last year to stand slightly above €5,000,000,000 This is due to usual seasonality patterns, including dividend payments in the first half, which this year represented a cash outflow of €530,000,000 However, I would like to stress that compared to June a year ago, our net debt level has decreased, notably thanks to a much stronger normalized free cash flow generation. This ends my remarks. So, Francois, before we take your questions.
Thank you, Jean Marc. Overall, we are quite satisfied with the group's performance in the 1st 6 months of 2016. We started the year with the clear priorities we discussed with you at the 2015 year end results. You remember that Francois and I reviewed our strategy in this new phase of our development and how we were planning to implement it. These priorities were dictated by our appreciation of what we must do to anticipate and benefit from the changes in our markets.
As we also told you, this is a process that we are engaging for the long term, and we don't believe its success can be judged over a quarter or even a semester. This being said, we expected both our customers and our organization to respond positively to our new strategic direction. We are, of course, pleased that HIT has been the case. Execution has been extremely effective from day 1 and many of our brands are clearly outperforming their respective market segments. It is the case for Gucci where the bold decisions we made are really starting to pay off.
The initiatives that Marco Bizzari and his team laid out in detail at our Investor Day last month have started to translate into numbers, and this is only the beginning of the journey. The strength of our luxury multi brand model was really evidenced in the Q2. Along with Gucci, we had strong performances at Saint Laurent, Alexander McQueen and Stella McCartney in particular and in some of our jewelry brands. These more than offset the temporary slowdown Bottega Veneta is going through as we work on the next stages of its growth strategy as well as tough market conditions slowing down some of our smaller brands. One of our top priorities is to bolster our same store performance.
In the first half of the year, our total Luxury store count was down and we worked exclusively on strengthening and refining our existing network as well as closing less productive units. So the recent sales growth reflects improved like for like and this will remain top of our agenda for the second half and next year. Our strength also owes much to our determination to focus on brand distinctiveness across all customer touch points, not just collections. Gucci's audacious self reinvention has gotten the most notice, but what we're doing at Brioni, at Balenciaga, at Saint Laurent really at all our brands also demonstrates our belief that uniqueness is the key success factor in our businesses. In Sport and Lifestyle, Puma is clearly benefiting once again from the power of its brand.
It is regaining greater pricing authority across categories and across markets and the erosion of its profitability has been stopped and reversed. As you heard from Jean Marc, top line growth went hand in hand with operating expense discipline. We were able to reinvest effectively to solidify the future growth of our brands and at the same time to raise overall profitability. So our performance is fundamentally healthy. We have significantly reduced CapEx in the first half, not just in our store networks, but at the corporate level as well.
Our generation of free cash flow was back to normal, and our net debt is down. We cannot be oblivious of the fact that we are operating in an environment that has rarely been more unpredictable. Economic and political uncertainty weighs on all our markets. In this context, I want to assure you that we are as cautious as ever in our decision making and in our execution. Equally important, I want to emphasize again the strength of our organization and our solid fundamentals.
They will see carrying through this fast moving environment. We are now ready to take your questions.
Our very first question today comes from Lukas Solca of Exane. Please go ahead. Your line is open.
Yes. Hello. Thank you. On Bottega Veneta, you are mentioning difficulties with Asian consumers and tourist in inflows being under pressure in Europe, for example. We also noticed during store checks that it was very difficult to find new products in the Bottega Veneta stores both in Milan and Paris.
I wonder on the innovation side, what is the plan there? Because the impression we have is that the Intracharto idea has run its course. It has been very successful. It's an icon. But most of the established consumers in the market already bought IntraChateau Bottega Veneta bags and would like to buy new ones.
On another point, if you could elaborate on your plans for Brioni, which has also been under pressure. We noticed a number of new initiatives on the communication side. I wonder if you could tell us more on how you see the revival of the brand going forward? And last but not least, looking into the luxury businesses, if you could give us a bit more detail on how you see performance there? There seems to be quite at the average position for Pomellato, for example, in comparison to watch brands that apparently would be more under pressure?
All right. Thank you, Luca. You're right in saying that you had difficulties to find innovation in our stores, which is a perception that a good deal of our non customers have told us. And the fact is that there's a difference in this perspective with between the clients and the non clients. The fact is that the number of new SKUs and the share of newness has grown, but that the perception is not there.
So the brand audit that we have conducted shows that. And we as a consequence, we need to change both our communication and our displays in stores so that the new lens can be displayed more. We need also to change the way we manage the open to buy so that our stores really buy more of the Nuna's collection, which, again, is obvious and very successful because, in fact, what we realized is that the new products enjoy significant growth when it is true the iconic products are more difficult. So this is something that we want to do, which is both refreshing and updating the iconic carryovers and emphasizing the newness in the stores. Talking about Briony, it's true that we are conducting a complete revival of the brand.
As you know, we have appointed a new Artistic Director, Justin O'Shea, who realized his first show in early July. The show was very well received, and it also induced very promising new customers. So this is from the Artistic standpoint, we also have changed the merchandising and the way we edit the collections. We also have revised and revamped and rejuvenated our communication to make it more accessible. And then we also we are changing the way that the store contact with the new one that opened in Paris on the 21st July.
And as well from in the back office, we have readjusted the manufacturing capacity, changed the organization, also renewed a significant portion of the retail sales associate and retail store managers and so on
and so forth. So it is
true that Vioni is going through a significant transformation.
Good evening, Luca. Just I will provide you with a rapid overview of the performance of the hard luxury segment. Regarding Pomellato, it's true that Pomellato and they go together at a quite solid performance in the mature countries, while we are working on consolidating the distribution in the emerging countries. So in the countries where we are more focused, so in the mature countries, the performance was very solid. We have very interesting development at Killeen with very high growth level in China, where we see that the penetration of Off Killing is improving.
Buford a very solid performance in all countries and regions, but in France because of the evolution of the tourism flows in France and the French market is very important for Boucheron, both with local car and car and car and car and car and car and car and car and car and car but mainly with tourists. So the performance of Bouchermal has been unfortunately dragged by this situation in France. And when it comes to the watches, it's true that in line with the sector, our watches brand accepted with some improvement, however, and some more positive signs during the Q2. And I think it's a good moment also for us to work on the synergies between the two brands. We have continued to search for synergies regarding the distribution, the supply chain.
So I think and also we have continued to simplify the offer with very interesting and encouraging results in some recent launches with more affordable prices with Steelcase.
Thank you very much. If I may have a little follow-up on Bottega Veneta. I was just wondering whether product availability could also be part of the actions that you're taking on top of clearly intarsia, our impression from the store checks we carried out was that it was very difficult to find it, and we could only find it in 1 of 4 stores. The sales assistants told us that there were only 20 produced for the Western European market. So it's a beautiful bag, but it seemed to be in very short supply.
I wonder if more product in the second half could potentially help Bottega Veneta.
Yes. But Luca, it's also important for Bottega to manage scarcity and to avoid being over distributed. So we this is something that we need to fine tune. And again, by better managing open to buy and central logistics, which we are doing right now, this is something that we're going to reach very soon.
Our next Our next question today comes from Erik Karlsson of Bodenholm.
I guess all of us that have visited Gucci stores lately understand why sales are growing fast given how beautiful the products are. But given that the growth acceleration was quite tremendous, could you help us understand if there was anything that you would call out extraordinary within that number, any channel build or anything like that? Thank you.
Thank you for your question. In fact, there was nothing special, right, exceptional during the first half. I think that as I've mentioned during my speech, the performance was very solid and outstanding in the Q2 considering the very high comp base we had, because of the exceptional actions of last year. But this year, what is very interesting is to see that the growth has been driven by the full price sales of the new collections. First of all, with ready to wear and shoes, also now with an acceleration in the leather goods category.
In the levergood category, also with the new style, which are working very well, which are growing double digit, but you know that we have not yet made the full substitution in that category. We have also had some interesting initiatives, for example, with the capsule collection with Met A Porter. So all of these initiatives have clearly helped the performance during the first half, but definitely nothing special.
Very helpful. Can I just ask one follow-up? What's the proportion of new products now?
It has been said that it was during the Q2 approximately 70% of the sales. And going forward, by the end of the year, we should be close to, let's say, at least in the stores, not necessarily in the sales at around 90% concerning the substitution pace that has been presented by the management of the brand. So in the stores, almost all the categories will be revisited by the end of the year. So you will see that we will have a gradual substitution in the 2 coming quarters from 70% to maybe or not 90%.
Very encouraging. Thank you very much.
Thank you. Our next question today comes from Thomas Chauvet of Citi. Please go ahead. Your line is open.
Good evening. I have three questions, please. The first one on Gucci. So if you I suppose your gross margin was probably up given the anniversary of the clearance of last year. You didn't also have the FX dilution on your reported margin.
So can you comment perhaps on the profitability ex currency and how you see the need to reinvest in the brand in the following quarters effectively the profitability ex currency is probably not as good. I'm also just wondering on Gucci, you're now entering obviously in year 2 of this impressive Gucci Renaissance. How comfortable are you that the trend can continue? Some of the maybe easy drivers of the last 12 months are going to be less pronounced going forward. What was, for instance, the trend in July?
Secondly, on Saint Laurent, I think most of us will agree that the brand's foundation are very solid even after the departure of Edgisli Man. I was curious to hear what you still want to change to do differently under the new design on Soniva Carrelo, be it product, distribution, communication? And with regards to profitability, H1 profit almost doubled 20% margin. Could you comment on your medium term target here even if we assume a normalization in growth? And finally, a question on your relationship with Puma.
Beyond Golden, the CEO, has been leading Puma's transformation for just over 3 years now, I think quite successfully in terms of brand repositioning revenue growth, less so in terms of profitability. When you think about next year and the medium term at Puma, are you starting to consider that perhaps it's time for Puma management to start working on getting the margin back to more reasonable, more acceptable levels? Or are you still keen to continue investing a lot in A and P? Thank you.
Good evening, Thomas. You had announced a few questions. You have asked 4 questions, so you will answer only to 3 questions. Concerning the Gucci, first, a reminder concerning the performance of last year because last year, it's true that we had some quite massive clearance actions during the Q2. But as we had explained, we had accrued for in the gross margin the bulk of the negative impact in the year 2014.
So all in all, it's not a help in terms of the improvement of the margin this year. I would add also that we have some product mix effect this year, which are partly deleting the margin. We have, of course, the FX or the combination of the FX impact and the aging impact, which is clearly a tailwind for this year. But as we had announced, we have decided to reinvest a significant part of this support in different actions in the brand, especially about marketing and communication, about some actions and events in the stores when we have opened new stores and refurbished new stores. So all in all, we have decided to reinvest part of the support linked to the aging impact.
And you know that we our long term ambition is to improve gradually the profitability of Gucci. So we will have still an improvement, of course, of the EBIT margin during the second half, but it will be an improvement, which is quite consistent with the one we have recorded during the first half if we compare to the second half of last year. So globally, we can expect this year an improvement of the EBIT margin of the Teva de EBITDA, but to the of Gucci, sorry, but not to the extent of the aging gain compared to last year. Okay.
As to the capacity of Gucci brand to sustain this rejuvenation and this high growth for the future, yes, we are very confident that this will happen, and this is confirmed because all of the what we have realized is that the whole company is being now transformed and the whole organization is has been rejuvenated and reengineered. So everything is now aligned to really post a very solid growth in the next years. So yes, we are very confident.
Regarding your question on Saint Laurent, you will understand that we won't elaborate during this call, which is about the actual results about what will be the changes. We continue that Carreload. You may remember that Anthony Carreload will present its 1st collection in September, at the end of September. So you will see the product in the stores later in the year. So the Sacagaylo effect, we want to hit this year.
You can imagine that now the management of Cementor is working in Santenie to define what would be the type of changes we will bring to the category, to the collection, to the stores. So you will see that the outcome of this work in the coming months, but there is nothing to comment so far. As regard the trajectory of Saint Laurent, I think it's another great achievement to deliver this level of growth during this quarter, and we are confident that we can deliver still a very strong growth during the second half. And when it comes to the margin, I would like to make a comment about the EBIT margin. I said it in my speech, but I think it's important to re insist on that.
There was a catch up in H1 margins due to a low base in H1 'fifteen. Going forward, H1 and H2 margin savings should be less unbalanced compared to last year. So meaning that H2 should be still up compared to last year, but of course not to the same extent as we have recorded in the first half. So however, for the full year 2016, we feel confident that we can achieve to reach for the first time the 20% margin threshold or even slightly above.
Okay. As far as Puma is concerned, the operating margin is going to improve, considering that the A and P expense as a percentage of sales will stabilize very shortly. So and also because we have a significant leeway to decrease the way of expense as a percentage of sales, particularly general and administrative expense, but also we need to improve the efficiency of our supply chain, of our IT systems and so forth. Also, we have gained to grow in the gross profit margins, thanks to our new sourcing entity, which will be up and running on a really full basis in October now. So we are very confident that we are going to improve operating margin very quickly.
Also, we have much work to do to improve the free cash flow, in particular, regarding inventory management.
Caller. This is Helen Brand from UBS. Please go ahead. Your line is open.
Hi, good evening. Three questions from me. I think first of all just on Gucci. At the Investor Day at the start of June you talked to low single digit organic growth in Q2 and clearly a much higher number than this posted today. Should we read into this that we saw a strong acceleration in June in terms of trading?
And can you maybe talk to July trends as well there? And secondly, just in terms of the margin at Gucci, I understand you've decided to reinvest some of that hedging benefit. But can you just quantify the amount of the margin that you've reinvested? And do you expect the same levels of reinvestment in the second half given I think that A and P was much more weighted to H2 last year? And also for Bottega, can you quantify the hedging benefit there that came through on the margin?
And then finally, I guess just in terms of Gucci at retail, up 7% in Q2. Can you break down the growth by consumer globally? Understand, obviously, tourism has been weak, but in terms of domestic European, Chinese, U. S. And Japanese, I'm just interested there that you said you saw some signs of Hong Kong improving.
Can you sort of quantify a little bit around that and what you're seeing there?
Good evening, Alain. Regarding your first question, I think that you are referring to the comments that have been made by Marco Biberi regarding the first or the first trends of the 1st weeks. It's true that during the month of June, there was an acceleration, which is clearly linked and it's also it will refer also to your next question. It will refer also to the fact that we should have now a better penetration or a better understanding, let's say, of the new collections by some customers in certain regions. I think about Japan, I think about Asia, I think about North America, where we see that clearly the consumers are embracing more the new styles and new collection also because we have the new handbags coming in the stores And you know the attractiveness that the leather goods categories have for the customers in the emerging markets.
So it has clearly helped the launch of, for example, the CB bag, which is very successful and we see an acceleration with that bag, which is becoming clearly a big bag along with the Dionysus and some other lines we have at Gucci. So I think it was a continuous acceleration during the quarter. And again, I would like to insist principally due to the full price sales. I won't, of course, and you can imagine it, answer to your second question about what will be what is the part of the percentage of the hedging day compared to last year, we will reinvest. I think that the trajectory that has been defined both by the group and the brand is very clear, is to improve year after year the profitability of Gucci.
And I can tell you that so far, we are very confident that we can deliver this or be on par with this trajectory that we have announced. So we are very confident for the winning part of the year in terms of improvement of the profitability of Gucci. Now coming to the segmentation of the customers. I think that, first of all, what is not stable for Gucci is the fact that the brand is delivering a very high level of growth in the different clusters. So meaning with the tourists, but also with the local clientele, we are which is particularly strong with the local clientele and it was clearly the impulse we had with the local clientele in Europe.
Now we've seen in line maybe with some of the brands of the group a recovery clearly in Asia, mainly in China with the Chinese customers, but also with local customers and the Chinese tourists in the other countries of the region, maybe with some more weakness in Taiwan and still Hong Kong delivering poor performances, but with some improvement in the quarter, totally consistent with the launch of new products. And I remind you that last year in Hong Kong, we had a very strong performance because of the Mariner period. And interestingly also now with our core customers in the U. S, because clearly there is a lack of traffic of tourists in the U. S, There is a ramp up in terms of performance in the U.
S. So I think that it's a very well balanced growth between the different nationalities, between the different type of customers. And with 2 more and more younger customers is typically what is the engine for the renewed growth we have seen in Japan, especially in the last week of June, where we see more and more young customers in the grocery stores in Japan. I think the last question, Elani?
Just on Bottega Veneta, in terms of the margins there and the FX hedging contribution and what we should maybe expect into H2 for Bottega?
Regarding Bottega Veneta, we should we believe that and we know that the margin should remain under pressure for the second half. It's fair to assume some margin pressure and a decline of busy profitability, which magnitude could be in H2 quite similar as the one recorded in H1. So meaning between 300 basis points, 3.50 basis points compared to last year due to the also to the change in the product mix or the initiative in advertising and promotion, which is very important to attract again the clientele in October. And also, as a reminder, during the second half, we had a less negative hedge impact compared to the H1.
We'll move to our next caller. This is Hermione Vincemann from Raymond James. Please go ahead. Your line is open.
Hi, good evening. I have a few questions as well. The first one is also on Gucci. Can you be a bit more precise on the sales growth organic sales growth you have by category? You've mentioned the good success of shoes and women ready to wear, but also the improving trend at laser goods.
So can we have a bit more precise figures for the all of this category? You've mentioned as well an improvement and acceleration in Mainland China. Can you be also a bit more precise on this figure? And lastly, on CapEx for the full year, do you have any guidance to share with us? Thank you very much.
You can imagine that, of course, we won't provide any more details regarding the performance by category. I think that's a very good performance in Q2 of product categories reflect almost fully accomplished transition to
the new
Gucci offer and also the repositioning of the brand in line with the new characterization. We know that new men's ready to wear on shoes have boosted the result of the quarter with double digit growth, especially with the newness of the pre fall 16 collection. Lezger Goods also posted a very good performance in the quarter with handbags registering double digit growth in full price with the new lines like the Dionysus, the Pablo, the Sylvie and especially from the springsummer 2016 collection and Gucci signature and further development of the silvie. After that, we have still a drag from the watches business, which is still under the process of being revisited, and it was a drag in the performance. So clearly, the boost was from the ready to wear and the shoes.
The handbag performed very well with the new collection, but you know that the transition is not fully accomplished in that category. In Mainland China, I don't know if your question was especially on Gucci or more global picking on the Luxury division. What we can say is that in Q2, figures were positive for all the brands in Mainland China, for Gucci, for Bilib, where the performance there was very solid in Mainland China and even in Greater China. So I think that the figures turned positive in Q2 for all the brands with clearly a recovery now also in Tier 2 cities. We have mentioned during the call of the Q3 that there was encouraging signals in Tier 1 cities and now we start to see some good performances as well in Tier 2 cities.
The same regarding CapEx, I don't know if your question was more specific on Gucci or more, we'll be speaking for the luxury division?
For the whole group.
For the whole group. So I mentioned the fact that there was some phasing in terms of CapEx for the first half. We will keep CapEx, by the way, under strict control, as previously mentioned. So this year CapEx at group level should be flat compared to last year in euro terms or slightly below maybe and turned down as a percentage of sales.
Okay. Thank you.
Thank you. Our next caller today is John Guy from MainFirst. Please go ahead. Your line is now open.
Yes, good afternoon, Jean Francois and Jean Marc. Three questions, please. With regards to Gucci Retail, obviously, very strong performance, up 7%. Can you give us an idea around the volume and value splits during the quarter, please, for Gucci? And you mentioned that 70% of the collection was now effectively new.
Could you just comment in terms of the percentage of newness within leather goods compared to ready to wear and footwear and how you see that evolving by the end of the year? And with regards to Gucci's full year expectations, could you maybe give us an update to how you see the organic growth rates now rolling through into the full year in light of slightly softer comps after that very tough comp in the Q2? Thank you very much.
Good evening, John. You can imagine that we won't provide any detailed information about the contributions of volume versus value in the growth. I think that what should may characterize the performance of Gucci during this first half is that this is a very well balanced performance. I've mentioned that it was very well balanced between regions, categories, but also I think that there was a very nice balance between the volumes and the values with selective price increases with new cross architectures by categories, but also clearly push in terms of volumes because of the efficiency of the new stores, the efficiency also of the visual tools that the management of Gucci has promoted in the stores that have been not refurbished and principally some very important stores like in London and so on. And also it was thanks also to a very good establishment policy due to the efficiency of the supply chain.
When it comes to the percentage of newness in the various categories, it's not a level of information that we are sharing. Of course, I think, as you can, of course, repeat that the shoes category and the ready to wear category has been completely revamped, which is not yet the case of the leather goods. It's an ongoing process. We are quite well advanced in the handbags categories, but there is still some work to do in the small leather goods and the luggage category, which are not small categories as you perfectly know. Regarding the expectation for the full year, I won't provide you or make your modernization, of course.
But again, what we can say is that this is I can confirm that the ambition again is to gradually increase margins while reinvesting in the brand as we did in H1. And as regard to top line, which was precisely your question, of course, we should have some higher comps, especially in Q4 when we had the start of recovery. Also, we have a normalization also normalized comparable as regards to wholesale because I remind you that we start to see recovery of the wholesale channel performance last year during the Q4. However, and also you know that regarding the royalty lines as already flagged, the revenue should be still very slightly negative in H2, but with some improvement compared to the H1. So all in all, we are quite confident about the capacity of the brand to continue to deliver a very solid growth as we did during the first half.
Thank you very much, Jean Marc. If I could just have one follow-up in terms of the number of directly owned stores that now have the new collection in. Could you just provide the number of stores? Is that possible? Thank you.
John, I think we didn't get your question. And I'm also sorry, we had a good lineup of questions going on, so we have to keep it short now. Can you repeat your last question?
It was just how many Gucci stores now have the new collection in? I think that's something that you provided over the past few quarters.
I think that what we have provided in the past quarters was about the implementation of the new stock concept, but not about the penetration of the new collections. In the stores at the beginning, like we have said, when we have installed the Crude collection last September, we have started with the flagship stores. But in fact now, the new collections have reached almost the full network. And to anticipate a possible question, just to say that we are on par with the plan of refurbishing around 50 stores during the year. We did something in 30 stores during the first half.
That's fantastic. Thank you very much.
Thank you. We'll move to our last question on the call today. This comes from Antoine Belge of HSBC. Please go ahead. Your line is open.
Yes. Hi. It's Antoine Belge of HSBC. Three quick questions. First of all, actually following up on the retail network, especially the conversion.
Could you share maybe some qualitative comment about what it is bringing on top of obviously the new products, but also what this new concept brings in? Second question on regarding actually I'm really impressed by the performance in Western Europe from Gucci. And maybe the U. S. In comparison seems to be a bit behind.
So isn't it the case that maybe the European consumer, especially the local one, has been reacting more quickly to the new collections and or maybe that's where you're gaining more new clients or regaining older clients or any sort about that, please? And finally, end of June, I think Francois Pinault in the financial time indicated that Puma was not foreshadowed and would be part of caring for quite some time. So can you maybe share your thought about that comment?
In order to take as many questions as possible, just I will answer you quickly. As regards the retail network and the gains deriving from the new concept, I won't provide you with any figures. But as mentioned already, the new concept combined with the new offer shows very good results in terms of sales productivity. So we see an improvement. But we see also an improvement simply with the new visual tools being currently rolled out in the key stores that we do not refurbish in the short term.
I think also that the attractiveness of the new collections helped. And I think that now it's a way also for us to make a nice arbitration or an efficient arbitration between open to buy and to push the collections in all the stores and CapEx and why we are able also to monitor more strictly the CapEx because of the attractiveness of the collection and the efficiency of the new visual tool. In Europe, certainly, you're right. I think that the European consumers who are probably more AG reacted first and more rapidly compared to some other regions with the new artistic direction of the brand. But as I mentioned before, we start to see also recovery in mainly regions, North America, Japan, among the others.
And also, it's true that in the U. S, we have not the touristy flows to help. In Europe, there was clearly a decrease in terms of tourism flows, but there are still tourists in Europe. And clearly, it has also helped the performance of Gucci, which is again well balanced between local customers and tourists. In the U.
S, we must also admit that there is still some volatility on the market, that the department stores are still also struggling a little bit. So clearly, it does not help the consumer sentiment, does not support the consumer sentiment. But again, there was a very strong recovery of Gucci in the U. S. In the last week of June, and we are quite encouraged by the first trends we
see this summer. Regarding Puma, I will say that the priority is still to pursue the very good trading momentum that we have been enjoying, to work on increasing profitability and also to enhance cash flow generation.
Thank you.
Thank you.
You're welcome.
We'll now move to our next question today from Melanie Flouquet of JPMorgan. Please go ahead.
Yes, good evening. Thank you for taking my questions. I have 3. The first one is on Gucci, understanding both the top line and the margins. But basically on the margins, you have 4 drivers this year, which is the ForEx unwinds, if I'm not mistaken, the product mix that is negative, the full price mix, which is the year, if you could help me understand this maybe a little bit better, ForEx in theory, we're not expecting much.
Can you help me understand what you're expecting from product mix, full price mix and reinvestments at Gucci into next year? My second question is on your can you remind us or update us on what your target for net debt would indeed be for this year? And my first question is on the other business, and that's probably a less pleasing question, but I didn't quite understand why that was under pressure and what we should expect moving forward. Thank you very much.
Good evening, Melanie. I believe that Marco has extensively explained what will be the evolution, what would be the trajectory of the 2 both in terms of gross margin, in terms of top line and in terms of EBIT margin. So we had a lot of moving parts. Again, it's true that globally, if we think stay as they are, the ForEx should remain tailwind for the second half and probably for next year, but it's impossible to predict at this stage. So we will have an improvement probably of the gross margin due also to the volumes and our capacity to better manage the supply chain.
But again, I think that we have learned from the past that it's important to continue to invest in the brand, in the training, in the retention, in the actions of communications where we have not even invested in the past. I think also one of the driver of the growth is a like for like growth or the same store growth. And you need to entertain this growth by several actions in terms of communication and training. So all in all, I think that it's quite a disciplined way to manage the trajectory of Cuchi to protect, of course, the gross margin, to improve the gross margin due to all the factors you have mentioned, but still with some reinvestment.
And so you wouldn't call this year as a rebasing in reinvestments, just to be clear. You continue to invest next year over proportionately to the top line or?
We continue to invest with the objective to increase the profitability again and gradually for next year. It's what I can say so far. Concerning the net debt, you know that the objective for the group is to remain in the range of 1 to 2 times the EBITDA going forward in the long run. Short term for the year, we can expect that if we stay and we are able to keep that discipline and to push our free cash flow as we did during the first half, we could be in a range of 2x, so in the high range of our target, but with a very significant deleverage this year compared to last year.
Melanie, the last question was about other luxury brands profitability?
It was about, yes, other luxury brands profitability. If you could just explain, I mean, I think it was under more pressure than we expected. I think we understand it would have been under pressure, but it was under more than expected. Were there any one offs in there or anything that will not recur moving forward?
I think that we have different situations. We have Stella Marchene growing quite fast. There's a significant improvement of the profitability. So we have a clear, quite a positive evolution. Balenciaga, this is a transition phase.
So with sales growing, but not at a rapid pace, but with a good protection of the profitability, thanks to all the initiatives taken by the management and with a good cash generation with a good control of the open to buy and the inventory. At Macquarie, we have good development in terms of top line, but with some reinvestments in the structure because we are at a level or at a situation where we need to invest in the brand. And I think that it was a retirement of the new CEO was also a sign that we want to accelerate the growth of Macquarie, especially in retail. So it will require some investments. So here the margin is under pressure because that is linked to the decisions we have taken regarding the development of the brand.
At the beginning, there is no need to explain that because of the restructuring and the situation of the sales or the evolution of the sales and the decision, we have taken also to have a better control, a better group on the wholesale distribution margin is under pressure. And I think that I've already commented the hard luxury performance with a quite sound situation at Bouffron and Tomellato, an improvement at sewing. And even if there is a release now, it's still profitable. It's true that there was a drag due to the evolution of the sale.
So no exceptionals at all, right, in every single
No, nothing exceptional, but more a mix some mixed effect and still a drag from the watches brand.
Thank you.
Thank you, Melanie.
Thank
you. We'll now move to our final question today. This is from Mario Aurelio of Bernstein. Please go ahead.
Good afternoon from Mario. It's Albert Bernstein. Thank you for taking our question. The first one is about Gucci. Gucci showed buoyant assays and a wide acceptance for consumer.
Are you thinking to increase the prices of Gucci's product and new collection in the second half of the year leveraging on this success? The second question always about Gucci. You mentioned that Chinese consumer are finally appreciating the new creative direction. Can you give us an idea in your retail shop to Chinese consumers regardless where they bought? How much has increased their spending and which percentage of total sales of Gucci were done to Chinese?
And last about cost discipline, you showed in the first half of the year a good focus on cost keeping them down. What we should expect from the second half of the year? You have got new cost cutting initiatives in place and so we expect even a growth of cost even lower than in the first half or what?
Sorry, Mario, can you repeat your last question?
It's about Gucci or about generally speaking about the luxury brands, the group?
About the luxury division. Luxury division for Costa, you were very good in the first half of the year. I would like to know if you got additional initiatives that will put down your cost structure even more in the second half of the year.
Look, at Gucci, increasing prices is not an objective, but the fact is that continuing to upgrading the brand will have, as a consequence, to increase the average selling price of our product. So yes, we will continue because it proves right. The perception of the brand is really high. The brand is very successful. And so we are in the process of in the continuous process of increasing the average selling price.
Right. Concerning the Chinese, just
to say that Chinese customers still represent around 35% of the sales of Gucci. If you look at the Chinese cluster, considering the combination of tourist and domestic shoppers, the cluster is up, which is very encouraging. But of course, I won't provide you with more detailed information. Again, what has to be stressed is the acceleration to the sales of the sales with the Chinese customers. Regarding the control of cost of the Luxury division, I think that this is and it's a theme that I repeat quite frequently.
I think that we have some pressure on some lines of expenses as a store expenses despite all the things we are doing in order to have a better grip on this line of expenses. And I think that we are now in a phase where compared to the third ratio, expenses to sales tend to stabilize, which is very positive. And we are also working at being more selective in terms of new stores and also closing some doors, which are not sufficiently profitable in that way on the profitability and that increase the level of store expenses to store expenses ratio and we continue to renegotiate the rent. There is still some pressure on the advertising and promotion line, but I think we were quite slow in the group in terms of percentage. And I think it's good to push this line of expenses to promote more of the brand.
And especially, there is also reallocation of the marketing expenses towards more digital, because we believe strongly in the fact that we need to accelerate in terms of digital communication and also in terms of digital business. And otherwise, it's true that we have put under tight control the other lines of expenses. So probably, we need, as I mentioned before, to invest in our brand. So you can expect some growth of the operating expenses. But I can tell you that day after day, we are very tight on the control of this cost.
So I'm afraid that we are running out of time and we cannot take additional questions. But of course, you know that Claire Andre will be, of course, available to answer the remaining questions. Thank you very much for listening to our call and for all your very interesting questions, and we wish you a happy summer break. Thank you very much. Thank you.
Thank you. That will now conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now
disconnect.