Good day, ladies and gentlemen, and welcome to the Kering's 2015 First Half Results Conference Call. Today's conference is being recorded. Your host today is Mr. Jean Marc Duclay, Chief Financial Officer. Please go ahead, sir.
Good evening to all of you. I am pleased to welcome you to Terem's interim results call. I will first review our sales and earnings in the first half and then Jean Francois Pelus, the Group Managing Director, will share with you our views on our outlook and the execution of our strategy. And after that, we will both be available to answer any question you have. Together, Slide 56 summarize our performance in the first half in an environment that was once again affected by volatility and differing conditions across regions, mainly of them linked to currency swings.
At the top line level, we achieved a good first half whose most striking feature was a definite contrast between the two quarters. Overall, comparable revenues were up 3.5% with a small drop in Q1 followed by a jump of nearly 8% in Q2. While the biggest divergence came from Luxury, the rate of revenue growth in sport and lifestyle nearly doubled from Q1 to Q2. We will go through the drivers of this rebound ledger. On a reported basis, group revenues were up 17%, 1 7% in the first half with positive FX movements boosting top line, but mitigated by adverse hedging impact at gross margin level.
In this context, gross profit was up 13%, 13% as reported. Given notably the translation effect of OpEx denominated in foreign currencies, EBITDA was unchanged and recurring operating income was down 5%. In Luxury, each of our 3 major houses as well as our other brand, Ketan Together, achieved a strong positive revenue performance in the Q2 leading to a resilient first half. As a whole, our luxury brands generated a robust EBIT of over €800,000,000 unchanged from last year as well as significant cash flow. Our sport and lifestyle activities had revenue growth of more than 5% in the first half due to a significant acceleration in Q2.
However, currency and Q1's continued ground building investments weighed on EBIT. Finally, corporate costs rose in the first half mainly reflecting additional integration initiatives at the carrying level and here as well currency translation impacts. In the first half of twenty fourteen, below the operating line, our P and L still reflected the effect of our exit from retailing activities. By contrast, this year, our income statement is free of any such impact and consequently the group share of consolidated net income more than doubled to 4 €23,000,000 I am now going to look at each of our key businesses starting with Luxury on Slide 7. As you know, FX was a massive tailwind on our reported sales in H1, boosting overall revenues by 12 percentage points.
The division also recorded a 2 percentage point impact from SCOPE from the consolidation of Lisnowdown. As a whole, in the first half, luxury activities posted an increase in sales of 18%, 1 8% in reported terms with a sharp rebound in Q2, up 25% as reported and 8% comparable. This was driven by a solid performance in retail, up 13%, 1.3%, comparable in Q2 with some widening contrast between geographies. Growth was strong in mature markets in the quarter. In Western Europe, the trend was particularly impressive, thanks to both local time and tourism, especially Chinese and U.
S. Customers in key Eurozone destinations. Beyond the easy comparison base in April last year, Japan also remained very strong throughout the quarter with all brands benefiting from higher purchases by Chinese visitors. Although revenues in North America did not benefit from tourism, the region achieved 9% growth in retail in Q2. Emerging markets were more muted, primarily due to the sectors continuing weakness in Hong Kong and Macau and to conditions in Mainland China that remain unsteady.
The positive trends in South Korea and Australia were further confirmed in Q2 and overall Asia Pacific was up 2% in the quarter. The swing in other sales spending due to currency movements that started materializing at the end of Q1 clearly produced their effect in Q2. This is visible both in terms of geographic rebalancing of tourism purchases and in terms of catch up in overall growth. Wholesale, which represents 25% of our luxury revenues improved in Q2 and was down 7% in the first half, mostly driven down by Gucci. I will come back to that in a few minutes.
In the first half, our luxury activities posted a 4% increase in EBITDA and a stable recurring operating income. Both Bottega Veneta and YSL increased their contribution and together accounted for 30% 3 year of our Luxury EBIT. The EBIT margin was down 380 basis points at 21.4%, a dilution attributable in part to hedging losses, especially at Gucci, but also to the performance of our other brands and in particular watches. As I mentioned, on past calls, our CapEx level is now comfortable, allowing us to fully nurture each brand development and to prioritize our investments where they are most effective. The CapEx level is stable at around 4.5% of Luxury revenue, the increase in absolute churn being mostly asset driven.
In luxury, we added a net of 1515 directly operated stores in the first half with 45 openings and 3030 closings. This illustrates our commitment to constantly fine tune our store network and concentrate on the best locations. At the end of June, the total store count was 1201, of which 62% in natural regions. Let's now turn to Gucci's performance on Slide 8. In the first half, Gucci posted revenue growth of 12% with a slight dip in comparable revenue down 1.6%.
The trend improved considerably in Q2 with comparable revenues up 5%, driven by a broad turnaround in retail, up 10%. This massive swing was achieved across all regions and OT categories and was strongly helped by an extended markdown season on previous collections. By region, retail sales were especially buoyant in Western Europe and Japan, up 20% 19%, 1.9%, respectively, in Q2. In Europe, performance was driven by active tourism flow from Asia and North America combined with solid demand from local clients. Jia Bao was also a very attractive destination for visitors from other Asian countries, including mainland China.
Local customers were responsible for the improvement in retail trend in North America and in Asia Pacific compared to Q1 as tourism in the U. S. Was penalized by the stronger dollar and mainland Chinese customers continued to reduce the spending in Hong Kong and Macau. As expected, wholesale was again down double digit in Q2, reflecting additional action taken by Gucci earlier this year to ensure ever more exclusive distribution and prevent the resurgence of parallel markets. This trend should continue though to much lesser extent in H2.
In the first half, Gucci was able to sustain its high level of gross profit margin at constant currency. As anticipated, the combined effect of positive FX on the one hand and aging losses on the other diluted the operating profit margin and accounted for over half of the 4 70 basis points decline. The balance came from unfavorable geographical mix as well as higher store network operating costs. As of June 30, Gucci operated 5 12 stores with 7 net openings in the 1st 6 months. Operating investments were broadly stable compared to last year once phasing and FX related increases are taken into account.
Before giving you a quick update on the action plans we carry out at Gucci on Slide 9, I would like to remind you that neither the performance of Q1 nor that of Q2 was shaped by the new momentum taking hold at the brand. The rejuvenation of the brand image is on track and the new collections presented in H1 have drawn an enthusiastic reception. This positive development should gradually gain traction and have a definite impact on our numbers as we move closer to the latter part of the year. We have summarized here the action plans implemented at Gucci where the objective of rejuvenating the brand, acting consistently, but swiftly to support and sustain this new momentum. As we told you last quarter, the internal organization is already fully in place.
So I will focus today on recent achievements and the steps still ahead of us. 1st, in terms of creation, Alessandro Michele has given clear expression of its contemporary vision for the brand. The presentation in the first half of the fall winter 'sixteen-sixteen fashion show followed by in June by Alessandro's first full collection, Crude 2016 and then the main spring summer 2016 in late June have all been acclaimed by the industry. Some pictures of the presentation are on your slide together with the timeline of the deliveries in the stores. The first deliveries of the cruise collection will not start until the back end of Q3 and will mark the real starting point of the redefinition of the product assortment and merchandising messages.
In the meantime, you can witness hints of this new direction in the fallwinter advertising campaign as well as in new visual merchandising and window displays in key locations including Via Monta Napoleone in Milan and 5th Avenue in New York. These dedicated installations showcase Alessandro Michele's first fashion show items in our flagship across leading categories. The first new handbag designed for fallwinter has started hitting the shelves simultaneously with the unveiling of their refreshed layout for the Gucci website. The renewed or refreshed store concept will be progressively rolled out starting in main locations and the fully redesigned websites will go live 1st in the U. S.
In September followed by a sequential rollout in Europe and Asia. As you see, the new creative and executive teams at Gucci are not wasting any time and the overwhelming reception of the collection support or confidence in Gucci's renewed drive in the second half. Jean Francois Paris will come back on this later. Moving to Slide 10, Bottega Veneta posted another strong performance, accelerating in the 2nd quarter. Sales in the first half were up nearly 20% reported and above 6% comparable with Q2 up 9%.
Retail, which represents 83% of revenue, achieved a solid progression in Q2, up 12%. Western Europe and Japan were especially strong once again due to changing tourism flows tied to currency swings and pricing differentials. The trends were partly driven by Chinese customers whose purchases in these regions more than offset weaker spending in Greater China. As a result, the Chinese cluster is up quite strongly year to date, but this is a key growth driver, thanks to both iconic lines and novelty. The introduction of some new products with lower or no price differential between regions illustrates the responsiveness of the brands in addressing moving market conditions.
Wholesale was down slightly in Q2 against a very demanding base of comparison last year. Recurring operating income increased by 10% translating into a contained margin dilution of 2 40 basis points, driven by the adverse impact of hedging and a less favorable geographical mix. The brand remains fully on track with its medium term development plan. The Gotega Veneta's investment program in the first half resulted in the net opening of 4 stores, bringing the aggregate store count to 240 units as of June 14. While continuing to invest, the brand delivered strong free cash flow generation in the first half.
On Slide 11, you can find highlights of Saint Laurent's performances in the first half. In the period, the brand continued to sustain its astonishing momentum with comparable revenue up 24%. Revenue growth remained consistent in both channels throughout the first half. Retail representing nearly 2 thirds of sales achieved particularly strong growth, up 26% comparable in the first half with acceleration in Q2 when sales were up nearly 30%. Total Home's retail operations keep powering on quarter after quarter with very solid like for like performance.
Wholesale also performed very well with revenue growth consistently above 20% in both quarters. All key regions were again solidly positive in both H1 and Q2 with Western Europe and Japan accelerating sharply. In Asia Pacific, although the environment remains tough in Hong Kong and Macao, Saint Laurent delivered growth in the mid teens in both quarters. All product categories continued to post convincing double digit growth throughout the first half. Good sales of carryover items in all categories were complemented by strong demand for newly introduced seasonal business, some of which have immediately become must have products.
This confirms the modernity of the brand and its position as a key industry trendsetter. In the first half, Saint Laurent posted another jump in operating profit, up nearly 50%, resulting in a further 100 basis point expansion in the debt margin. This stems from solid operating leverage on comparable stores sales growth, enabling the brand to fully absorb an adverse hedging impact. To tap Saint Laurent's potential, the brand's overall CapEx budget was maintained at a high level above 6% of sales. It was dedicated to projects supporting the global expansion of the brand notably selected store openings with 7 openings and 3 closings during the period.
The brand also entered promising new markets like Mexico. Moving on to Slide 12, our other luxury brands posted positive revenue growth in the half year driven by retail up 13%, one-three percent. Revenue improved significantly in Q2 up 6% with retail up 18%, 18%. For its part, wholesale turned positive in Q2. I will elaborate on each brand's performance starting with soft luxury where sales were driven by strong growth across the expanding retail operations, up 19%, 19% in the first half.
Balenciaga enjoyed a solid first half with double digit growth in both channels and during both quarters. Retail was especially strong in Western Europe and Japan. In line with earlier periods, Alexander McQueen and Stella McCartney further confirmed their momentum with accelerating double digit increases in the Q2, again led by ongoing developments in retail. Brine and Me posted an encouraging revenue performance in the Q2, bringing to a halt in the downward pressure in the past few quarters due to the brand's traditional exposure to the Russian clientele. In hard luxury, trends were highly contrasted with diverging patterns between jewelry and watches defining in Q2.
All jewelry brands rebounded in the Q2, most of them achieving double digit revenue growth. For Muscroll, this upturn underscores the attractiveness of both the brand's iconic and new lines. Both Pomellato and Dodo enjoyed a good first half. In particular, Pomellato accelerated significantly, thanks to existing lines as well as positive response to its new collection. In watches, the market headwinds our brand faced in Q1 did not abate in Q2.
As a result, both Gerard Perregaux and Ulysse Nardin suffered strong pressure throughout the 6 months. During the first half, the operating profit of our other luxury brands declined. Margin erosion primarily stemmed from watches, while operating performances remain fairly resilient elsewhere, especially in subluxury. In watches, strict measures and first synergies are being implemented to mitigate the impact of the lower volume and the appreciation of the Swiss francs, while preserving the resources needed to fuel the brand's long term development plans. With Slide 13, let's move on to our sport and lifestyle activities, which demonstrated sustained revenue growth in the first half.
I will not be too long from Puma, which reported last Friday. I will focus on operating highlights for the first half during which the brand posted a commencing revenue performance with sales up 6% comparable accelerating in Q2 up nearly 8%. Throughout the first half, the quality of Tumaz revenue growth further improved with footwear, a category that represents 46% of sales, returning to solid growth. Sales of footwear accelerated sharply in Q2 with the pace of sales growth doubling quarter on quarter to reach 16%, 1 6% comparable. This was propelled by successful product introductions, especially in the running and training categories.
Apparel sales were also up on high comps from the sales of Football World Cup jerseys last year. By geography, all regions were positive through H1. Natural markets including Western Europe, North America and Japan saw combined growth of 3%, showing a notable acceleration in the 2nd quarter, up 6%. Emerging markets accounting for 38% of Puna sales in the first half also saw very good growth in excess of 10% in both quarters. Puma is revealing traction in China and is confirming its good momentum in Latin America.
Puma's senior revenue performance confirms the greater attractiveness of its product offering with key distributors and final customers. It will take a little bit more time, however, before this fully translates into higher margins. While certain operating performance metrics such as gross profit margin improved at constant currency, Puma's reported recurring operating income declined in the first half. This reflects ongoing investments in brand building initiatives, especially marketing and sponsoring at a time when currency pressure has been exacerbated.
Our other
Dokom in particular saw very good growth in Q2, up 6%, led by strong wholesale and satisfactory sell through in North America as well as growing e commerce. 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 €42,000,000 negative. This item notably encompasses some inventory write off and restructuring charges at Gucci relating to previous collections and following the changes in creative and management team. Net financial charges amounted to €136,000,000 Within this, the cost of the net financial debt was down 25% year on year to €64,000,000 reflecting 2 opposite effects: an increase in average debt during the first half, more than compensated by the lower net cost of financing, thanks to active management of our debt profile and the recent issuance of new bonds bearing a much, much lower interest rate.
Other financial charges for their part increased by €54,000,000 and without being too technical, it merely reflects the ineffective portion of currency hedging. The effective corporate tax rate amounted to 23.8% in the first half with a recurring tax rate of 19.8%, a slight increase compared to last year. Just a word on consolidated net income, which as I mentioned more than doubled following the completed disposal of legacy assets that was still impacting our P and L last year. Adjusted for non recurring items and discontinued operations, group net income amounted to €489,000,000 Let's now have a quick look at slide 15, which highlights the evolution of our free cash flow from operations. As a reminder, in H1 last year, free cash flow from operations had benefited from the sale of a real estate asset in New York.
Restated for this, the starting base is just about €300,000,000 Our luxury activities generated strong free cash flow in H1, an incremental €160,000,000 compared to last year. Conversely, spot and lifestyle free cash flow deteriorated, especially at Puma, on the back of higher working capital requirements to support sales growth. In addition, at the Kering corporate level, as you know, we have new projects that require funding such as the ramp up of Kering Eyewear operations and IT investments. You should also take into account that our CapEx is impacted by FX related inflation. After these changes directly deriving from operations, our free cash flow is more or less stable compared to last year.
On the non operating side shown on the right, we have the cash impact of hedging and the initial oil termination payment to Sesilo resulting in free cash flow in the period of about €60,000,000 As you know, cash flow generation is one of our top priorities and the H1 performance should not be extrapolated for the full year. Now on Slide 16, you will find the change in our net financial position during the year period. In the first half, net financial debt increased compared to December last year. This is due to usual seasonality patterns, including dividend payments in the first half, which this year represented a cash outflow of 5 €37,000,000 The increase in net debt is essentially the consequence of the level of free cash flow generation combined with the final cash outflow related to disposed assets and the impact of the translation into euros of FX denominated debt. This ends my remarks.
So let me now pass the phone to Jean Francois before we take your questions.
Thank you, Jean Marc. On slide 18, we have summed up the key takeaways of the 1st 6 months and our priorities for the balance of the year. Overall, our performance in the first half of twenty fifteen was commendable. After a challenging Q1 impacted by a number of one off elements from external and some specific to Kering, we have a much better second quarter pretty much across the board. Despite the contracted currency impact we have flagged, we maintained a solid operating profitability in our luxury activities.
Finally, 2015 is a year of undertaking for our group, both in our existing businesses and in new ventures and this impacted our first half free cash flow which always also reflects normal seasonality and the impact of hedges. So after a demanding start, we are seeing at this midpoint of the year many encouraging signals. 1st and foremost, it's at Gucci that we were seeking to create a new dynamic. All indications are that we are on the right track. In record time, the House's new creative and executive teams have demonstrated their deep understanding of the brand's identity.
They have the skills needed to intensify its aura and restart its growth engine. Already in the first half, beyond the pickup in sales in the Q2, there is a host of processing development. The new Gucci image at once true to the brand's heritage and completely fresh, absent the day and Alessandro Miquera's contemporary vision subtly but systematically conveys this new expression of the brand. The teams are not leaving any elements unchanged, applying Gucci's new code across products, collections, campaigns and all other customer touch points. With its modern reinvention of the Gigi Signature, Gucci is moving toward a more directional product offer.
It was very satisfying to see that the fashion industry responded favorably to what we are doing. The reception of the cruise and men's fallwinter20 15/16 collections was highly positive, reestablishing Gucci in its role as a fashion authority. It is critical that we diffuse this excitement all the way to our fine customers and Gucci's focus on distribution is central to this task. In retail, we are planning fewer openings, fewer conversions of wholesale doors to concessions or directly operated stores. We are focusing on providing the best customer experience in Gucci stores, leveraging CRM capabilities and improving sales productivity.
We are turning Gucci into a truly omni channel organization, seamlessly integrating our physical and online presence. In the coming months, you will see plenty of manifestations of Gucci's new spirit. New advertising campaigns will accompany the upcoming fall and truth collection. The new website will be launched and new packaging will be introduced. From the retail side, the refreshed fall concept will be revealed in the fall at the Via Montena Corleone store in Milan and gradually interpreted in other locations.
On the wholesale side, we have exciting collaboration projects planned with a number of specialty stores. We are not working only on elements that bolster Gucci's top line, but also on better arrangements with suppliers and other initiatives to improve production and sourcing costs. Once again, while we are pleased with all the progress Gucci has made in such a short time and confident in its achievements, please do keep in mind that these initiatives will not show their full translation into our accounts until the back end of this year and in 2016. Gucci is a priority. It is not our sole focus.
We are making steady progress in a number of areas that will support and strengthen our profitable growth trajectory. The first step of curing our wear has been successful. Its first collection, Colestion Hoona, presented in late June was very well received and we are comforted in our decision to take the eyewear activity back in house. The collection will be available in stores next November after we collect orders from key accounts and from independent officials. A far reaching digital project is underway aimed at expanding all of our brands' presence online, including mobile and social media.
Our objectives are manyfold: to raise the share of sales generated online and reach new clientele segments enhance our CRM and facilitate convergence of online and offline systems, improve in store product availability and store productivity. We recently set up a dedicated online channel task force involving functional experts from around the room and are expanding our in store triampling app enabling sales associates to view client profiles and assets for inventories. During the first half, comparable revenues generated online by our luxury activity jumped 23%. We are working systematically at optimizing our operating cost base, focusing on sourcing and manufacturing. We are also reviewing rents, renegotiating them whenever feasible, notably in Hong Kong.
We have made considerable progress a lot of this past this past in the past months and our streaming up lining initiatives should start bearing fruit later this year or in 2016. So, on hold, while investing in projects that will secure and strengthen our growth in the medium to long term, we remain as responsive as ever in the short term focusing on efficiency. Our absolute priority is on fostering organic growth in each of our businesses. Before moving to questions, I want to reiterate our confidence in Kering's sound fundamentals and in our proven multi brand strategy. We are in good shape to address the fast moving environment and to deliver strong profitable growth over the long run.
Jean Marc and I are now ready to take your questions.
Thank
And we'll take our first question from Thomas Chauvet of Citi. Please go ahead.
Good evening, Jean Francois and Jean Marc. Three questions please. The first one on Gucci Retail. Congratulations on a strong performance. I wanted to get a bit more clarity on what drove that big swing.
As I understand the new products, new initiatives are not yet impacting the numbers. So what is your best estimate of the impact of clearance activity on your 10% retail sales growth at Gucci in Q2, whether you did clearance activity outside of Greater China and how did it impact margins? Secondly, on Gucci Wholesale, that's still down 20% or so. Is it fair to assume trends will be perhaps less negative in H2 return to positive territory next year? You were talking Jean Francois about specialty store initiatives.
Can you confirm there's no more sizable wholesale clients to cut that could drive further decline in wholesale next year? And finally, on the broader environment, can you provide an update on how you see the demand evolving in the second half in Mainland China, Hong Kong and Macau? And given the abnormal trend in Europe, up 20% in Q2, can you try to estimate the breakdown of European demand between local clientele, tourists and parallel markets? It looks like there's some big changes, big shifts there in demand patterns. Thank you.
Hello, Thomas. It's Jean Marc Viebrecht speaking. In fact, I think that first of all, all the luxury brands including Gucci have benefited from the shift of the Chinese tourists in Japan and in Europe and also of the American tourists to Europe. And this has benefited including for Gucci to full price sales. So basically, thanks to local clientele and to tourists, the business in Japan and in Europe has been very positive with the full price sales and you know that in Japan, we have no markdown operations.
Where it's fair to say that markdown had an impact is in Asia Pacific and especially in China where the clearance you mentioned has clearly boosted the activity. And that's the reason why for the first half of the business, the revenues are up, slightly up in Mainland China. It's clear that in Q3 where we won't have yet the products of the new collections And then and when we have no markdown operations plan, the trends should not be so positive waiting for the deliveries of the cruise collection in the stores in Q4. Just to mention about the U. S.
Maybe. In the U. S, the business was also positive, mainly thanks to the local clientele. You know that in the past quarters, the business in the U. S.
Was good for Gucci, where the elevation strategy has already bear some fruits. And I think that the combination of Maradhan operations and to the current trends we have already experienced in the U. S. Has clearly pushed the business with local clientele. When with tourists because wholesale and maybe Jean Francois will add something.
The wholesale and maybe Jean Francois will add something. You know that we you're right to say that we have cut many accounts in the past quarters at wholesale. Of course, there will be a positive impact, thanks to the delivery of the new collections. But and also we are very pleased to see that Gucci is back with some new key accounts. And I mean, I imagine that you have read last week the announcements regarding double street market.
But basically, we expect for the next quarters to be still down, but to a far lesser extent. If we compare the Q2 of this year with the Q2 of last year, the decrease in terms of number of doors is double digit. So it does explain why we have this trend in wholesale. So all in all, for the second half, we should see still negative trend in wholesale but to a far lesser extent. And we have very positive signs when we look at the orders of the cruise collections.
And your last question was about the trend for H2 globally and especially in APAC. We have to be very lucid, I think, about the situation in Hong Kong and Macau. We have not seen any major improvements during Q2 and not even a stabilization. Recent trends are not very encouraging in Hong Kong and Macau. So far, we don't expect any improvement in the short term.
And as regards China, this market is still volatile, exposed to some macro trends and especially with the evolution of the Shanghai stock market, still with the decline in the real estate market and prices. So we are quite cautious as regard the trend in China Mainland China, but we are quite confident as regards the Chinese cluster when we see already in Q2 the shift of the Chinese tourists to some other regions, So mainly Japan and Europe, as I mentioned, but also to some other Asian countries. It was the case in Korea until June, unfortunately, affected by the NERSC crisis outbreak, but we can expect a rebound still in Korea with the Chinese tourists.
Thank you, Jean Marc. Just a follow-up perhaps. There's been obviously a pickup in Q2 for the Chinese cluster as you said given you've accelerated so much in Europe. Is that trend still holding up in July for the overall Chinese clientele, in particular, in Japan and Europe?
You may imagine that we won't comment on current trading and it's too early to assess that. What is just demonstrate the combination of the success of the markdown period in China, which is however a demonstration that the brand is still appealing in the region, plus the trends we see in Europe and in Japan does illustrate the very high sensibility of the Chinese customers to the price gap. So we can imagine that if the price gap remains, even if we are working to reduce the price gap, if the price gap remains, we would see still some move to other territories. But it's too early to comment on the current trading.
Thank you.
Thank you, Thomas.
Thank you. We'll take the next question from John Guy of MainFirst. Please go ahead.
Yes. Good afternoon, Jean Marc. Good afternoon, Jean Francois. A couple of questions, please. First of all, just following on from the Gucci 2nd quarter retail comp, congrats on that.
Could you just explain what the sales contribution was on space and what the volume and value drivers were, so slightly different rather than sort of going on a specific regional base. Maybe just within the regions, just on Hong Kong and Macau, can you maybe just talk around the price differential and the volume uplift that you saw specifically within Hong Kong and Macau? And if I'm correct in terms of the store updates, you've mentioned that the first new format will come out in the fall in the Milan region. But could you explain where we are in terms of the old Giannini format? And what format or what market format you're calling this?
And effectively, how many stores need to conform to the new format? Now I also have sorry, I just have one other follow-up as well just in terms of the watches EBIT margin decline. Could you quantify the actual watches EBIT margin decline within the other luxury brands as well, please? Thank you.
Good evening. I think that, of course, you can imagine that I won't elaborate by splitting the performance of Gucci between sales volumes and value. What I can say that you will have seen, we have not increased the number of stores. So space contribution is quite minimal. In terms of value, we had the occasion to remind that the increase in terms of address selling price was less impacting than before.
So we can assume that the bulk of the growth in the first half was driven by volume. And it's interesting to note that at the same time, we were able to stabilize the gross margin looking at constant currency, of course, constant currency, the gross margin is stabilized. Coming to Hong Kong and Macau, it's true that on top of all the negative impacts, the price gap played a role because it became more expensive to buy in Hong Kong than in some other regions in Asia, like in Korea, for example. So basically, it was another reason for the fulfillment of Hong Kong and Macau, but I think that it's not the major one. I think that many Chinese clients have discovered that in some of the regions, they could have also a better retail experience.
It's typically the case in Japan, where they can find a broader offering in terms of products and also clearly a far better retail experience. Your third question was about the new format. Yes. As regard to new format, the around we have a plan to refresh around 30 stores to an after version of the concept. So more in line with Alessandro Michele's creative vision for Gucci.
So it's not a complete refurbishment, it's a refreshment. A list of the stores up for refurbishment has been defined across all key regions and this list has been determined regarding the contributions to the sales. So let's say that these stores should represent something like 1 third of the total revenues, the retail revenues. And we have mentioned Monta Napoleone to be soon refreshed. And we will have some other key locations in the leading destination cities.
And we have already and also with shopping shop also in key department stores in Paris, Milan, but also in London. Simultaneously, of course, when we will open new stores, the new stores will also have a new not really a new concept, but also will benefit from probably a more fine tuned and an upgraded concept. So in order to manage properly the CapEx budget, so the refreshment will be very efficient at a minimal cost. And of course, the new concept corresponding to this refreshment will be in terms of CapEx in line with the previous cost per square meter.
Jean Marc, sorry, just on that consistent with some of your recent or historic analysis when you're looking at stores saying that you felt within Gucci some of the newer formats you could reduce the net operating cost per store by at least 20%. Is that still effectively does that still hold true in terms of some of these newer formats?
Absolutely, because it's more about the design that the story out that there is a refreshment. It's about the light, about the way the products are showcased and it's not about the basic functionalities of the furniture, which are very efficient. So clearly, this is the reason why we consider this is clearly an altered or an improved version of the existing concept. Now coming to your point on watches. I won't provide you with any figures, but the situation is very simple.
I think that the reevaluation of the Swiss francs had a direct hit on the gross margins that it was very difficult to offset. Some brand like Girard Perrigo or Lisinardin have 95% of the cost of goods sold in Swiss francs. And at the same time, they are selling with with sales in different currencies. So it was very difficult to offset this reevaluation in a market where you have, as you know, a very high level of inventory in the different region and mainly in Hong Kong. So the combination of these two factors have clearly had a very negative impact on the EBIT margin of these brands with a decline corresponding to several 100 points in terms of EBIT margin.
Okay. Thank you. That's really clear. Maybe just one final follow-up. Just in terms of the Eyewear business, you mentioned I think there was some costs around €30,000,000 for the half year.
Could you maybe just talk about how you expect the overall costs and the investments you're going to put into Eyewear for 2015 and into 2016? How should we look to model the cost evolution please?
Well, actually the cost for the first half of this year was not in the ballpark that you mentioned. It was way below that. And of course
EUR 15,000,000 Sorry? Is that around EUR 10,000,000 to EUR 15,000,000, Jean Francois?
We do not disclose this figure, but it is something that is way again way below the €30,000,000 that you mentioned. And this is something that of course will increase as we have a ramp up, of course, but also we're going to have some first invoicing by the end of this year, which we do did not expect. And so we think that the impact on the EBIT for next year will be very sensible.
Okay. That's great. Thank you very much indeed.
Thank you. We'll take the next question from Louise Singlehurst of Morgan Stanley. Please go ahead.
Hi, good afternoon to you all. Good evening, in fact. Three questions for me please. Firstly on the pricing challenges that we're really seeing across the industry. Obviously, we're seeing some nice uptick for Europe.
But I just wondered the last time we spoke to you, I think in April at the Q1, you were testing out different formats. I think you had a launch of a slightly different pricing structure for one particular Bottega Veneta bag. And I wondered if there was any plans to do the one price, one product initiative better as we come into the first half. I think it's up around 18% reported if we exclude Puma. If we think about the luxury business, I presume that's all current and obviously you've got rid of the discontinued items in the last quarter.
And then my last question just on rentals. You obviously have painted the color in terms of potential cost savings coming through. Can you give us any update? Is there any closures in Mainland China and Hong Kong that have been going on? And any more color on the timing?
Thank you very much.
Good evening, Louise. Thank you for your questions. Yes, you're right to mention that during our call on Q1 sales, we had mentioned that we are not in the logic to purely decrease prices in Mainland China, as we believe, it's not viable in the long term, neither to post significant increases in Europe nor to adopt a one price fits all strategy across all products, all brands and all regions. Because we believe that any side pricing structure does not allow indeed sufficient flexibility to adjust later for currency move. So our view is, however, that this level of price gap still needs to be addressed, but by a combination of solutions.
And our objective is to progressively to come back to a more normalized price differential, meaning closer to a maximum of 30%, 35%, for example, if Mainland China. So the combination of solutions are the following one. On price strategies, the main idea is being to keep a balanced spread between geographies in some cases and you mentioned Bottega Veneta. We have piloted a test in Mainland China. And we have introduced a 1 product, 1 price approach on an handful of SKUs with a corridor of plusminus10%.
And what we can say so far is that the pilot test led by BV on the Olympiad CROS bag, shoulder bag has exceeded our expectations with STU that initially sold out quite rapidly in China because it was a product designed for the Chinese customers initially. And then that's met a great commercial success through Q2 also in Europe and in major countries. It does demonstrate that on selected items, this strategy could work, but we believe that we cannot extend this strategy to all products. We have also slightly adjusted the price on some selected items, mostly best sellers. Prices have been generally increased by a few percentage points in the Eurozone.
And in some cases, for some specific brands, we have reduced the price down in Asia Pacific. On collection structures, this is the second point. This could cover some specific product launches or some additional SKUs within the collection that could be, for instance, available only in certain markets and within certain strategic price brackets. 3rd issue or a sub point on internal adjustments, this could encompass, for example, some adaptations to our hedging strategy to give us more flexibility on lead time when it comes to pricing the forthcoming collections. However, to be very clear, the simplest way to reduce the price gap is basically to work on the price architecture of new collections and new SKUs in productions and we will have surely a great opportunity with Gucci to do so, considering the launch of new lines and carryover items in the coming months.
Now coming to your point about the increase of inventories. We have reviewed, of course, the inventories level brand by brand in the Luxury division. In fact, we have an increase, which is partly driven or mainly driven by the FX impact because when we look at the level of inventory compared to the future sales or expected sales, we have rather decreased the days of inventories. It's particularly true at Gucci and it's true that we believe that the markdown policy we have applied was quite sound to clean up the inventory level. It's true also that because of the success of certain of our brands, we have anticipate some deliveries of our next collections and we have also inventories in the central warehouse ready to be shipped.
Now coming back to the rents, which is a very interesting subject, And I read what you wrote today, very interesting indeed. It's still challenging to negotiate. We have started negotiations in Hong Kong and Macau and Mainland China, but not only in these regions, we have considered that it was level everywhere in the world. So we have a task force working region by region to renegotiate. I must say that the discussion is ongoing in Hong Kong, Macau and Mainland China.
We have the impression that mainly landlords have not necessarily understood that the markets may have changed structurally in the region. So we expect to convince them that it would be beneficial for both parties to revise the rent level because at this stage, considering the level of sales we are reaching in some locations, the minimum guarantee so that at the end of the day, the percentage of the rate compared to the sales is increasing. Even if in absolute terms, it has really decreased compared to last year. But in terms of percentage of sales, it has increased. So it's too early to tell you what could be the corresponding savings that we are still negotiating.
Now regarding the store closings, we have already stated that in Mainland China, we considering that we have the right number of stores. It's a question now to close some doors and to open some others, considering the short term lease we have of 3 years. And as regards on count, it's not an option we consider so far. But if landlords are not able to understand that revision of the rent is needed, then we will consider this option in the midterm.
Wonderful. That's very clear. Thank you.
Thank you.
Thank you. We'll take the next question from Luca Solca of Exane. Please go ahead.
Yes, good evening. Marco Bizzari and Istima are clearly proceeding at very high speed on many different fronts in upgrading and updating Gucci's position in the market. I wonder if you could help us understand in the current set of numbers, how much we see of their action by product category. I expect for example that in ready to wear as were explaining most of the impact and most of the positive effect of Alessandro Michele's new collections are still to be seen and still to be appreciated in results. I wonder how this is when it comes to handbags, when it comes to small leather goods and other major product categories.
I noticed that the proportion of handbags in the mix towards the end of last year was seemingly quite low. I wonder if you see an opportunity for this area for example to benefit from their action. On the Bottega Veneta front, in comparison you're saying that the brand is proceeding according to plan. I wonder how you see product evolution there and how satisfied you are in terms And also in terms of developing the brand beyond IntraCharter, which remains, I understand, the core DNA of Bottega Veneta. And last but not least, I wonder if you could give us an update on Kering Eyewear and where you stand on that Thank you very much.
Thank you, Luca. I will answer to your first question. Your first question is regarding Gucci, and then I will pass the floor to Jean Francois. You're right. This quarter's trends by category were not clearly representative given the ongoing markdown and also because basically the first collection entirely designed by Alexandre will hit the shelf only at the end of Q3, beginning of Q4.
However, what we can say is that the handbags cluster did perform quite strongly in Q2 as well as ready to wear on shoes. And as you might remember, Gucci witnessed already a rebound of the sales of the ready to wear category since let's say Q2 2014. Now, of course, we have high expectations with the new collections designed by Alessandro Michele. You're right to mention the handbags category where we will clearly add new handbags in the entry price category with, as we had already mentioned, a reinterpretation of the GG category. You will soon discover a line of products developed to gradually substitute carry other lines in line with the new cultivation and upgraded and enriched version of the GG logo lines.
Main distinctive features of this line would be, for example, the high percentage of leather mixed with canvas, luxurious lining and so on. So I think that we are in line with the plan we had to also to upgrade this enterprise category with enlarged offer. Of course, we see already the benefits of the actions taken by Marco Bizzari and the management of Gucci in terms of organization, in terms of efficiency of the organization, also in terms of mindset at Gucci and in the Gucci organization. And of course, the impulse by Marcus Bizzari is probably one of the reason why we were able to implement very rapidly all these action plans and why we are confident so far with the introduction of the new collections next fall.
Regarding the leeway to expand the brand through new product categories, first of all, we want to develop the ready to wear where we think we have a very significant potential both in men and women. And also we want to enlarge our offer in shoes also both in men and women. And the fact is that our home collection at Bottega was very well received and that's why we want to also emphasize on this new product category, which has a very good potential. What to do so, we have taken several types of actions. 1st, the new merchandising team has re envisaged the way they work with the creative department and Thomas Meyer to also be more proactive and more commercial with the collections.
And then also we want to enlarge our stores to be able to display more product categories and more SKUs than what we do today. So what are the in the future for Bottega, there will be some stores openings, but most of all, there will be some store enlargements to really make the most of this high potential in new product categories. Coming back to eyewear, again, we are very, very well advanced with our eyewear product category. We have launched our first collection. We have initiated orders with the major customers.
And the setup of the commercial and sales force is well underway. Everything is ready. And as I said, even though we did not anticipate to post some turnover in 2015, we will have some sales this year.
Just one brief follow-up, if I may. Looking at what is happening with Chinese demand and more and more Chinese consumers buying outside of China and given that with Gucci, for example, had some homework to do to upgrade the retail network there, is there an opportunity for Gucci to actually trim the network and to save a bit of CapEx in the process as you're capturing consumer demand outside of China anyway?
Luca, as you we have mentioned, we have not expanded the network in China. And the level of CapEx required to keep the stores or to keep the store network as it is in China would be very minimal. And I think that we have a far more stringent policy when it comes to assess the performance of the stores at Gucci, not only at Gucci in all the brands of the group. And of course, if we believe that we are not in a position to renegotiate the rents in good condition, then we will close some doors and we won't hesitate if needed to reduce the store counts in China. But for the moment, we are satisfied with the number of stores we have in the country.
Understood. Thank you very much indeed.
Thank you, Luca.
Thank you. We'll take the next question from Melanie Fluke of JPMorgan. Please go ahead.
Yes. Good evening, everyone. Thank you for taking my questions. The first one I'm sorry, they are going to be a bit quantified. The first one is on the impact of previous design.
If I assume that Asia Pacific which was tracking on minus 10 percent in Q1 went to plus 3% thanks to this in retail, would it be fair to say that it has a roughly a 5 points impact on your retail sales acceleration in Q2? Number 2, usually you give us a net impact of currencies. I wasn't very clear whether when you say the Gucci brand half of the impact on margin and you refer to hedging. Is this a net impact of currencies? And net of currencies net of the underlying impact minus hedging?
Or is it just the hedging impact? And sorry, on the one off of €42,000,000 €43,000,000 that you are reporting you mentioned that there were some inventory provisions within this. Could you quantify what this impact is? And sorry my last question is more strategic. It's regarding the mix.
The mix has been a very big contributor to Gucci over the course of the last 2 years and actually mitigated some of the negative impact on volumes. What are you expecting the mix to how are you expecting it to evolve over the course of H2 and next year? Thank you very much.
Melanie, concerning your first question, you will understand that we won't answer on these questions. I think that we provide a large set of figures. We are quite transparent about our performance. So I think that you have all the elements you may need to make your judgment on the performance of the brand in the first half. The second point is a very complicated one because it depends on if we think about the pure hedging impact or if we think about the combination of currency fluctuations and hedging.
And I think that the most relevant analysis is rather to look if we look at the percentage of it as a combination of currency movements and hedging because the 2 are going along and analyzing one without the other one does not make sense. So if you look at the decrease in terms of EBIT margin of the division and of Gucci because of course Gucci the weight of Gucci on the total is consequent. And I think that Bottiglavin has more or less the same profile concerning the exposure to different regions. All in all, more than half of the decrease at Gucci in terms of basis points is driven by the combination of currency fluctuations and hedging. And when it comes to but again, I'd like to preempt another question or follow-up.
The full impact or the decrease of EBIT margin is completely attributable to the combination of currency fluctuations and hedging. Now coming to your point about the non recurring items. In fact, you have a combination of different elements and you will find some more analysis in the half year management report that will be online soon in a few minutes. But it's true that we do have in non recurring items some write off of inventories at Gucci considering also that the markdown reserve had been already adjusted as in of last year to anticipate some markdown period this year. Of course, the markdown reserve has been estimated very cautiously still at the end of this first half, and we will continue to keep a cautious approach as regard the markdown reserve for the full year.
So on one side, we had adjusted the markdown reserve with an impact on the profitability. On the other side, we have also some exceptional depreciation of inventories in the non recurring items line. And of course, we should not that should not be that is purely a one off effect for the first half as regards the non recurring item. Now coming to your point about the combination of price effect and volume. I think that as we have mentioned and it's also the reason why if you look on a constant currency basis, the gross margin is more or less stable is that we have not benefited anymore from the increase of average selling price, which was until now driven by the mix because we had already clearly stated as in of last year that we had reached more or less an optimum in terms of mix.
So the mix effect is no more there. You have just the impact of the price increase on one side. And on the other end, I think in that case, we have clearly a good impact.
Would you expect thank you very much for the definition. It's very clear. Would you expect the one off nonrecurring including the restructuring to be other? Is this $43,000,000 enough for the full year?
What we can expect is no more inventory depreciation in the non recurring item. However, we may have some restructuring costs in the sense of anticipation of write off of assets. But the exceptional items first of all, it's difficult, of course, to forecast exceptional items. And it will depend on the plans of the management of Gucci Management in terms of restructuring of the store network. So it's too soon to tell you what would be the amount of or if there will be some exceptional items.
But what we can say is that as regard the inventory depreciation, the bulk of the depreciation was accounted for during the first half.
And the sales were realized in H1? Or are they going to are these inventories that are basically remaining on your balance sheet not to be sold?
By definition, if it's an nonrecurring item, it does concern inventory, which won't be sold.
Which will be solved.
Thank you. Which won't be will not be solved.
Well, a lot of the discount anyway. Thank
you. Thank you. We'll take the next question from Antoine Belge of HSBC. Please go ahead.
Yes. Hi, good evening. It's Antoine at HSBC. Three questions. First of all, I understand that you don't want to be more specific in terms of quantifying the impact of those clearance sales.
But they must be quite significant because you clearly beat constant expectation on top line, but in terms of margin at Gucci you are online. So at least could you quantify on the EBIT margin the negative impact of those clearance sales? My second question relates actually to the order backlog that you mentioned or at least the new collection being well received. Is there any way to quantify that in terms of order backlog in wholesale for instance? And finally, today you announced a newcomer in terms of the management team coming not really from the luxury industry?
What will be our focus in the next 12 months? Thank you.
Thank you, Antoine. I will reiterate what I said previously. Sales in food at full price were up in Japan and in Europe. So the performance of Gucci has been very boosted by the Marrowdown sales in Asia Pacific. But fundamentally, the performance was very sound even in full price stores at food price.
So we won't quantify this impact. Again, you have all the elements, but we can say that the performance in APAC is clearly helped by the markdown. And also what we see is that the margin, absent H, the gross margin was more or less steady. So it does mean that the impact of markdown had been marginal because partly anticipated already during the second half of last year and still with a high level of markdown reserve during the first half. Coming to your point on wholesale, I have already commented also the fact that wholesale would be down during the second half despite the very good reception by the buyers of the new collections.
If we look on the constant number of those, in fact, the performance is up. But because, as I mentioned before, we have a decrease of more of something more than double digit of the number of doors we are delivering to. We anticipate still a decline of the wholesale figures during the second half, but to a fairly fair extent. I can confirm just that the buyers are very enthusiastic about the cruise collection And the fact that we were able to attract new accounts is a demonstration that the brand is back at the center, is more fashion forward again with a more contemporary approach. And that's the reason why we are able to gain new accounts.
However, again, the performance will be down during the second half.
Regarding the appointment of Greta Lovesac, where She will be in charge of the emerging brand in Couture and Leather Goods, which are Balenciaga, Alexander McQueen, Brioni, Christopher Kane and Thomas Meyer. And of course, her role will be twofold. First, she will steer the teams of those brands and the CEOs of those brands will report directly to her. And then also she will animate and fuel and lead the programs that we have across the division. Those program also involving Gucci, OTEC, Veneta and Saint Laurent.
I'm afraid we are running out of time and we cannot take additional questions, but Claire and Edouard will be of course available to answer the remaining question. Thank you very much for listening to our call and for all your questions. And we wish you a happy Sunday break. Thank you.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may