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 Duplaix, Chief Financial Officer. Please go ahead, sir.
Good evening to all of you, welcome to Kering's 2016 half year results call. I will first review our sales and earnings, then Jean-François Palus, the Group Managing Director, will share a few words of conclusion. After that, we will be available to answer your questions. On slides six and seven, 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 comm base you all remember. At group level, comparable H1 revenue was up 5.5%, 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 EUR 811 million. 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, you should not extrapolate this trend for the full year.
Finally, as you know, this was one of our top priorities, we came back to a robust and more normalized free cash flow generation, EUR 323 million in the first half. Our net debt level is typically higher at the mid-year 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 seven, 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. In sport and lifestyle posted a double-digit performance in Q2 at more than 11%.
Group recurring operating income stands at EUR 811 million, up 5%. EBITDA Luxury increased to EUR 34 million, or 4%, and Sport & Lifestyle added EUR 10 million, up 25%. EBIT margins were up 30 basis points and 50 basis points respectively. This is a highly satisfactory performance. I'm now going to look at how we got there in our key businesses, starting with luxury on slide eight. Reported revenue increased 3% in H1, with a one 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 two 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 two beneficiaries of currency swings and tourism flows in H1 2015. In the first half this year, and notably in the second quarter, 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. 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 first six months, our luxury activities reached an EBIT of EUR 840 million, up 4%. This is an all-time high for a 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 1,262 units. Let's now turn to Gucci's performance on slide nine. 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 15%, underscoring the great appreciation of Alessandro Michele's collections, with a sharp increase in orders per dollar. The decline in royalties was more modest than in Q1, as anticipated.
In June, Marco Bizzarri 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 prêt-à-porter and shoes. Gradually, the same goes for leather goods as the relative weight of the new lines increases together with their availability across the full network. By region, retail sales were especially buoyant in Western Europe, also against tough comps and a background of slowing tourism.
The brand achieved 20% growth thanks to solid increases from both local and tourist clienteles. In Japan and North America, the trend improved in the second 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 comm 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 60% 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 clienteles 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 fall/winter. 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 leverage and investment to support the current brand transition and rebalancing, Bottega Veneta's recurring operating income was 19% lower, and margin stood at 25.4%. At the same time, CapEx was down 28% year-on-year with some phasing impacts. The priority is given to network re-engineering with active store closings and relocations. 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 on 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 620 basis point 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 brand 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 Demna Gvasalia's collections in the second half of the year. Brioni is still under pressure, but the brand is building exciting foundations for renewed creative momentum. In hard luxury, trends remained 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 a sum result of quite different situations. At Balenciaga and Stella McCartney, performances were good.
The contributions of Alexander McQueen and Brioni were hampered by selective growth investments at the former and production capacity adaptation at the latter. Operating deleverage continued in watches, although mitigated by synergies and cost rationalization. Overall, CapEx was up at our other brands due to two major flagship store locations for Brioni in Paris and in New York. With slide 13, let's move on to our sports 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 Tretorn. In reported terms, growth was almost 4%, the bulk of the difference coming from weaker emerging country currencies versus the EUR. 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 demanding comps, 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% and 14%, 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 growth margins, even if the stronger US dollar is still penalizing sourcing costs.
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. Volcom 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&L summarized here on slide 14. Other non-recurring operating income and expenses were EUR 86 million negative. This item notably encompasses some litigation costs, restructuring charges at Brioni, and the losses from Kering Eyewear in the ramp-up period.
Net financial charges amounted to EUR 101 million, down 26% year-on-year. Within this, the cost of net financial debt was down 3% to EUR 62 million, and other financial charges nearly halved to EUR 38 million, mainly driven by the lower incidence of the ineffective portion of currency hedging. Corporate tax amounted to EUR 138 million, down 2%, corresponding to an effective tax rate of 22.1% in the first half. Consolidated net income group share reached EUR 465 million, up 10%. Adjusted for non-recurring items, group net income amounted to EUR 521 million. 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 EUR 5 billion. This is due to usual seasonality patterns, including dividend payments in the first half, which this year represented a cash outflow of EUR 530 million.
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. François, before we take your questions.
Thank you, Jean-Marc. Overall, we are quite satisfied with the group's performance in the first six months of 2016. We started the year with the clear priorities we discussed with you at the 2015 year-end results. You remember that François-Henri 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. 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 it has been the case.
Execution has been extremely effective from day one. 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 Bizzarri and his team laid out in detail at our Investor Day last month have started to translate into numbers. This is only the beginning of the journey. The strength of our luxury multi-brand model was really evidenced in the second quarter. 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. We worked exclusively on strengthening and refining our existing network, as well as closing less productive units. 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. 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. 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. 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. 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 Kering through this fast-moving environment. We are now ready to take your questions.
Thank you. If you would like to ask a telephone question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself by pressing star two. Once again, please press star one to ask a question. Our very first question today comes from Luca 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 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? The impression we have is the Intrecciato 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 Intrecciato 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. 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 a de-averaged position for Pomellato, for example, in comparison to watch brands that apparently would be more under pressure.
All right. Thank you, Luca. You are right in saying that you had difficulty to find innovation in our stores, which is a perception that a good deal of our non-customers have told us. The fact is that there's a difference in this perspective between the clients and the non-clients. The fact is that the number of new SKUs and the share of newness has grown, but the perception is not there. The brand audit that we have conducted shows that, and we, as a consequence, need to change both our communication and our displays in stores so that the newness 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 newness collection, which again is obvious and very successful.
In fact, what we realized is that the new products enjoy significant growth when it is true the iconic products are more difficult. 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 Brioni, 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. 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.
We are changing the store concept with the new one that opened in Paris on the 21st of July. As well 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. It is true that Brioni 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 [inaudible] together had a quite solid performance in the mature countries while we are working on consolidating the distribution in the emerging countries. In the countries where we are more focused, in the mature countries, the performance was very solid. We had very interesting development at Kering with very high growth level in China, where we see that the penetration of Kering is improving. Boucheron had a very solid performance in all countries and regions, but in France, because of the evolution of the tourism flows in France, the French market is very important for Boucheron, both with local clientele, but mainly with tourists. The performance of Boucheron is being unfortunately dragged by this situation in France.
When it comes to the watches, it's true that, in line with the sector, our watches brand had suffered, with some improvement, however, and some more positive signs during the second quarter. 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. Also we have continued to simplify the offer with very interesting and encouraging results in some recent launches, with more affordable prices, with steel case.
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 displaying and getting consumers and non-consumers to appreciate the new products. Because, when it comes to 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 one of four stores. The sales assistants told us that there were only 20 produced for the Western European market. 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. You know, Luca, it's also important for Bottega to manage scarcity and to avoid being over-distributed. This is something that we need to fine-tune. 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.
Understood. Thank you very much.
Thank you. Our next question today comes from Erik Karlsson of Bodenholm. Please go ahead, your line is open.
Thanks for taking my question. I guess all of us that have visited Gucci stores lately understand why sales are growing fast, given how beautiful the products are. 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 or exceptional during the first half. I think that as I have mentioned during my speech, the performance was very solid and outstanding in the second quarter, considering the very high comp base we had because of the exceptional action of last year. 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, but also now with an acceleration in the leather goods category. In the leather goods category, also with the new styles, 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 prêt-à-porter.
All 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 second quarter, approximately 70% of the sales. Going forward, by the end of the year, we should be close to, let's say, at least in the stores, but not necessarily in the sales, at around 90%, considering the substitution pace that has been presented by the management of the brand. In the stores, almost all the categories will have been revisited by the end of the year. You will see that we will have a gradual substitution in the two coming quarters from 70% to maybe almost 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. 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. 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 two 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 Hedi Slimane. I was curious to hear what you still want to change to do differently under the new designer, Anthony Vaccarello, be it product, distribution, communication. 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? Finally, a question on your relationship with Puma. Bjørn Gulden, the CEO, has been leading Puma's transformation for just over three 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? Are you still keen to continue investing a lot in A&P? Thank you.
Good evening, Thomas. You had announced three questions. You have asked four questions, We will answer only to three questions. Concerning 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 second quarter, that as we had explained, we had accrued for, in the gross margin, the bulk of the negative impact in the year 2014. All in all, it's not a help in terms of 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 effect of the combination of the FX impact and the hedging impact, which is clearly tailing for this year.
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 some new stores. All in all, we have decided to reinvest part of the support linked to the hedging impact. You know that our long-term ambition is to improve gradually the profitability of Gucci. 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.
Globally, we can expect this year an improvement of the EBIT margin of the total result of Gucci, but not to the extent of the hedging 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 what we have realized is that the whole company is being now transformed, and the whole organization has been rejuvenated and re-engineered. Everything is now aligned to really post a very solid growth in the next years. 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 with Anthony Vaccarello. You may remember that Anthony Vaccarello will present his first collection at the end of September. You will see the product in the stores later in the year. The Vaccarello effect, we won't see it this year. You can imagine that now the management of Saint Laurent is working with Anthony to define what will be the type of changes he will bring to the category, to the collection, to the stores. You will see that the outcome of this work in the coming months, but there is nothing to comment so far.
As regards 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. 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 reinsist on that. There was a catch-up in H1 margins due to a low base in H1 2015. Going forward, H1 and H2 margin savings should be less imbalanced compared to last year. 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.
However, for the full year of 2016, we feel confident that we can achieve to reach for the first time the 20% margin threshold or even slightly above. As far as Puma is concerned, the operating margin is going to improve considering that the A&P expense as a percentage of sales will stabilize very shortly, and also because we have a significant leeway to decrease the weight of expense as a percentage of sales, particularly general and administrative expense. Also, we need to improve the efficiency of our supply chain, of our IT systems and so forth. Also, we have gains to grab in the gross profit margin, thanks to our new sourcing entity, which will be up and running on a really full basis in October now. We are very confident that we are going to improve operating margin very quickly.
Also, we have much work to do to improve free cash flow, in particular regarding inventory management.
Thank you.
Thank you. We'll now move to our next 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. 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? Can you maybe talk to July trends as well there? 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? Do you expect the same levels of reinvestment in the second half, given I think that A&P was much more weighted to H2 last year? Also for Bottega, can you quantify the hedging benefit there that came through on the margin?
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's 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, Helen. Regarding your first question, I think that you are referring to the comments that have been made by Marco Bizzarri regarding the first trends of the first weeks. It's true that during the month of June, there was an acceleration, which is clearly linked, and it also will refer also to your next question. It will refer also to the fact that we've seen our now better penetration or 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 collections. Because we have the new handbag coming in the stores and you know the attractiveness that the leather goods category have for the customers in the emerging markets.
It has clearly helped the launch of, for example, the Sylvie bag, which is very successful. We see an acceleration with that bag, which is becoming clearly a bag along with the Dionysus and some other lines we have at Gucci. I think it was a continuous acceleration during the quarter. 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 is the part of the percentage of the hedging gain 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.
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. We are very confident for the remaining 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 noticeable for Gucci is the fact that the brand is delivering a very high level of growth in the different clusters, meaning with the tourists, but also with the local clientele. Gucci is particularly strong with the local clientele, and it was clearly the impulse we had with the local clientele in Europe.
Now we see in line maybe with some of the brands of the group, a recovery clearly in Asia, in Mainland China, with the Chinese customers, but also with the 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. I remind you that last year in Hong Kong, we had a very strong performance because of the midterm period. Interesting also now with local 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.
I think that it's a very well-balanced growth between the different nationalities, between the different type of customers, and with still more and more younger customers, is typically what is the engine for the renewed growth we have seen in Japan, especially in the last weeks of June, where we see more and more young customers in the Gucci stores in Japan. I think we have a last question, Helen.
Just on Bottega Veneta, actually, 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 believe that, we know that the margins should remain under pressure for the second half. It's fair to assume still some margins pressure and a decline of BV profitability, which magnitude could be in H2 quite similar as the one recorded in H1, so meaning between 300 and 350 basis points compared to last year due to the change in the product mix, all the initiatives in Advertising and Promotion, which is very important to attract again the clientele in October. Also as a reminder, during the second half, we had a less negative hedge impact compared to the H1.
Thank you very much.
Thank you, Helen.
Thank you. We'll move to our next caller. This is Hermine de Bentzmann from Raymond James. Please go ahead. Your line is open.
Hi, good evening. I have a few question as well. The first one is also on Gucci. Can you be a bit more precise on the 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 leather goods. Can we have a bit more precise figures for 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? 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 the 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 creative vision. We know that women ready-to-wear and shoes have boosted the results of the quarter with double-digit growth, especially with the newness of the pre-fall 2016 collection. Leather 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 Padlock, the Sylvie, and especially from the spring-summer 2016 collection and Gucci Signature and further development of the Sylvie.
After that, we had still a drag from the watches business, which is still under the process of being revisited, and it was a drag in the performance. 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 globally speaking 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 BV, where the performance was very solid in Mainland China and even in Greater China. 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 first quarter 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 globally speaking for the luxury division.
For the whole group.
For the whole group. I mentioned the fact that there was some saving in terms of CapEx for the first half. We will keep CapEx, by the way, under strict control, as previously mentioned. This year, CapEx at group level should be flat compared to last year in EUR terms, or slightly below maybe. Clearly down as a % 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-François 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? 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? With regards to Gucci's full-year expectations, could you maybe give us an update as 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 second quarter? 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 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 price architectures by categories, but also clearly a 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 have promoted in the stores that have been not refurbished, and principally some very important stores like in London and so on.
Also it was thanks to the very good refurbishment 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. We can, of course, repeat that the shoes category and the ready-to-wear categories have 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 handbag categories, but there is still some work to do in the small leather goods, in the luggage category, which are not small categories, as you perfectly know. Regarding the expectations for the full year, I won't provide you or make your modelization, of course.
Again, what we can say is that, I can confirm that the ambition again, is to gradually increase margins while reinvesting in the brand as we did in H1. As regard the top line, which was precisely your question, of course, we should have some higher comp, especially in Q4 when we had the start of the recovery. Also, we have a normalization, also more normalized comparable as regard the wholesale, because I remind you that we start to see a recovery of the wholesale channel performance last year during the Q4. However, and also you know that regarding the royalty lines, as I already flagged, the reviews should be still very slightly negative in H2, but with some improvement compared to the H1.
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.
Sorry, John. I think we didn't get your question, and I'm also sorry, we have a good line-up of questions going on, so we have to be 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 store concept, but not about the penetration of the new collections in the stores. At the beginning, as we have said, when we have installed the Cruise collection last September, we have started with the flagship stores. In fact, now the new collections have reached almost the full network. 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 like 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.
Hi, it's Antoine Belge at 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 regarding, actually, I'm really impressed by the performance in Western Europe from Gucci. Maybe the U.S., in comparison, seems to be a bit behind. Isn't it the case that maybe the European consumer, especially the local one, has been reacting more quickly to the new collections? Or maybe that's where you're gaining more new clients or regaining older clients. Any thought about that, please? Finally, end of June, I think François-Henri Pinault in the Financial Times indicated that Puma was not for sale and would be a part of Kering for quite some time.
Can you maybe share your thought about that comment?
In order to take as many questions as possible, 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 showed very good results in terms of self-productivity. 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 will be not refurbished 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.
It is 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 were probably more edgy, reacted first and more rapidly compared to some other regions with the new artistic direction of the brand. As I mentioned before, we start to see also a recovery in many regions, North America, Japan, among the others. Also, it's true that in the U.S., we have not the touristic 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. Clearly it does not help the consumer sentiment, does not support the consumer sentiment. Again, there is 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. This is from Melanie Flouquet of JP Morgan. Please go ahead.
Yes, good evening. Thank you for taking my questions. I have three. The first one is on Gucci, understanding both the top line and the margins. Basically on the margins, you have four drivers this year, which is Forex unwind, if I'm not mistaken, the product mix that is negative, the full price mix, which is positive, and the reinvestments, which are negative. Balance of all this, sort of doing what you guided for. Into next 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, can you remind us or update us on what your target for net debt would indeed be for this year?
My third 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 will be the trajectory of Gucci, both in terms of gross margin, in terms of top line, and in terms of EBIT margin. We had a lot of moving parts. Again, it's true that globally, if the things stay as they are, the Forex should remain tailwind for the second half and probably for next year, but it's impossible to predict still at this stage. We will have an improvement probably of the gross margin due also to the volume from our capacity to better manage the supply chain. 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 easily invested in the past.
I think also one of the driver of the growth is the like-for-like growth or the same-store growth, you need to entertain this growth by several actions in terms of communication and training. All in all, I think that it's a quite disciplined way to manage the trajectory of Gucci to protect, of course, the gross margin, to improve the gross margin due to all the factors you have mentioned, still with some reinvestments.
You wouldn't call this year the rebasing and 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.
Sure.
Concerning the net debt, you know that the objective for the group is to remain in a 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 2 times, 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.
I mean
If you could just explain, 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 McCartney growing quite fast with a significant improvement of the profitability. We are here at quite a positive evolution. Balenciaga, this is a transition phase. 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 good cash generation, with a good control of the open to buy and the inventory. At McQueen, we have good development in terms of the 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. I think that the appointment of a new CEO was also a sign that we want to accelerate the growth of McQueen, especially in retail. It will require some investment.
Here the margin is under pressure, but it's linked to the decisions we have taken regarding the development of the brand. At Brioni, 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 grip on the wholesale distribution margin is under pressure. I think that I've already commented the other luxury performance with a quite sound situation at Boucheron and Pomellato. An improvement at Sowind. Even if Yves Saint Laurent is still profitable, it's true that there was a drag due to the evolution of the sales.
No exceptionals at all, right? In all, everything that we have.
No, nothing exceptional, but more some mixed effects 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 Ortelli of Bernstein. Please go ahead.
Good afternoon from Mario Ortelli of Bernstein. Thank you for taking our question. The first one is about Gucci. Gucci showed buoyant sales and a wide acceptance through 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? 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 a new cost-cutting initiative in place, 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 brand, the group?
About the luxury division. Luxury division for cost, you were very good in the first half of the year. I would like to know if you have got additional initiative 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. 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 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 tourists 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 trusted, the acceleration to the sales are 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 store expenses, despite all the things we are doing in order to have a better grip on these lines of expenses.
I think that we are now in a phase where, compared to the sales, the ratio, store expenses to sales tend to stabilize, which is very positive. 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, and the profitability, and that increase the level of store expenses to the store expenses ratio. We continue to renegotiate the rent. There is still some pressure on the Advertising and Promotion line, I think we were quite low in the group in terms of percentage, I think it's good to push this line of expenses to promote more the brand.
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. Otherwise, it's true that we have put under tight control the other lines of expenses. Probably, we need, as I mentioned before, to invest in our brand, you can expect some growth of the operating expenses. I can tell you that day after day, we are very tight on the control of these costs. I'm afraid that we are running out of time, and we cannot take additional questions. Of course, you know that Clara and Andrea 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, 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.