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 Duplaix, Chief Financial Officer. Please go ahead, sir.
Good evening to all of you. I'm pleased to welcome you to Kering's interim results call. I will first review our sales and earnings in the first half, then Jean-François Palus, the Group Managing Director, will share with you our views on our outlook and the execution of our strategy. After that, we will both be available to answer any question you have. Together, slides five and six summarize our performance in the first half in an environment that was once again affected by volatility and differing conditions across regions, many 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 later. On a reported basis, group revenues were up 17% 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% 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 three major houses, as well as our other brands taken together, achieved a strong positive revenue performance in the second quarter, leading to a resilient first half.
As a whole, our luxury brands generated a robust EBIT of over EUR 800 million, 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 Puma's continued brand-building investments weighed on EBIT. Finally, corporate costs rose in the first half, mainly reflecting additional integration initiatives at the Kering level, and here as well, currency translation impacts. In the first half of 2014, below the operating line, our P&L still reflected the effect of our exit from retailing activities. By contrast, this year our income statement is free of any such impact, consequently, the group share of consolidated net income more than doubled to EUR 423 million. I'm now going to look at each of our key businesses, starting with luxury on slide seven.
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 two percentage point impact from scope from the consolidation of Yves Saint Laurent. As a whole, in the first half, luxury activities posted an increase in sales of 18.18% 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 13.13% 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 clientele and tourism, especially Chinese and US 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 sector's 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 overseas 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% 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's development and to prioritize our investments where they are most effective.
The CapEx level is thus stable at around 4.5% of luxury revenue, the increase in absolute terms being mostly FX-driven. In luxury, we added a net of 15, one-five, directly operated stores in the first half, with 45 openings and 30, three-zero, 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 1,201, of which 62% in mature regions. Let's now turn to Gucci's performance on Slide eight. 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 all key 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% and 19% respectively in Q2. In Europe, performance was driven by active tourism flow from Asia and North America, combined with solid demand from local clients. Japan was also a very attractive destination for visitors from other Asian countries, including mainland China. Local customers were responsible for the improvement in retail trends 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 their 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 even more exclusive distribution and prevent the resurgence of parallel markets. This trend should continue, though to a 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 hedging losses on the other diluted the operating profit margin and accounted for over half of the 470 basis points decline. The balance came from unfavorable geographical mix as well as higher store network operating costs. As of June 30th, Gucci operated 512 stores with seven net openings in the first six 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 nine, 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. These positive developments 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, with 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. I will focus today on recent achievements and the steps still ahead of us. First, in terms of creation, Alessandro Michele has given clear expression of his contemporary vision for the brand.
The presentation in the first half of the fall/winter 2015-2016 fashion show, followed in June by Alessandro's first full collection, Cruise 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 fall/winter advertising campaign, as well as in new visual merchandising and window displays in key locations, including Via Monte Napoleone in Milan and Fifth Avenue in New York. These dedicated installations showcase Alessandro Michele's first fashion show items in our flagships across leading categories.
The first new handbag designed for fall/winter has started hitting the shelves simultaneously with the unveiling of a 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 website will go live first 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 supports our confidence in Gucci's renewed drive in the second half. Jean-François Palus will come back on this later. Moving to slide 10, Bottega Veneta posted another strong performance, accelerating in the second 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 also true for the European and American clientele. Leather goods were again the key growth driver, thanks to both iconic lines and novelties. The introduction of some new products with lower or no price differential between regions illustrates the responsiveness of the brand 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 240 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. Bottega Veneta's investment program in the first half resulted in the net opening of four stores, bringing the aggregate store count to 240 units as of June the 30th. 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 two-thirds of sales, achieved particularly strong growth, up 26% comparable in the first half, with acceleration in Q2 when sales were up nearly 30%. Saint Laurent'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 Macau, 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 pieces, 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 points expansion in EBIT margin. This stemmed from solid operating leverage on comparable store 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 selective store openings, with seven openings and three 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 13.3%. Revenue improved significantly in Q2, up 6%, with retail up 18.8%.
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 19.9% 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 second quarter, again led by ongoing development in retail. Brioni posted an encouraging revenue performance in the second quarter, bringing to a halt 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 amplifying in Q2.
All jewelry brands rebounded in the second quarter, most of them achieving double-digit revenue growth. Boucheron's 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 brands faced in Q1 did not abate in Q2. As a result, both Girard-Perregaux and Ulysse Nardin suffered from pressure throughout the six months. During the first half, the operating profit of our other luxury brands declined. Margin erosion primarily stemmed from watches, while operating performances remained fairly resilient elsewhere, especially in soft luxury.
In watches, strict measures and first synergies are being implemented to mitigate the impact of the lower volume and the appreciation of the Swiss franc, 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 on Puma, which reported last Friday. I will focus on operating highlights for the first half, during which the brand posted a convincing revenue performance with sales up 6% comparable, accelerating in Q2 up nearly 8%. Throughout the first half, the quality of Puma's 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 16.16% 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 sale of Football World Cup jerseys last year. By geography, all regions were positive through H1. Mature markets, including Western Europe, North America, and Japan, saw combined growth of 3%, showing a notable acceleration in the second quarter, up 6%. Emerging markets, accounting for 38% of Puma sales in the first half, also saw very good growth, in excess of 10% in both quarters. Puma is regaining traction in China and is confirming its good momentum in Latin America. Puma's stronger 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 sport and lifestyle brands, namely Volcom and Electric, had a somewhat more muted first half, but posted improving trends in the second quarter, with revenue up 3%. Volcom, in particular, saw very good growth in Q2 at 6%, led by strong wholesale and satisfactory sell-through in North America, as well as growing e-commerce. Moving on to the remaining lines of the P&L summarized here on slide 14. Other non-recurring operating income and expenses were EUR 42 million negative.
This item notably encompasses some inventory write-offs and restructuring charges at Gucci relating to previous collections and following the changes in creative and management teams. Net financial charges amounted to EUR 136 million. Within this, the cost of the net financial debt was down 25% year-on-year to EUR 64 million, reflecting two 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 lower interest rate. Other financial charges, for their part, increased by EUR 54 million. 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 were still impacting our P&L last year. Adjusted for non-recurring items and discontinued operations, group net income amounted to EUR 489 million. 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 above EUR 300 million. Our luxury activities generated strong free cash flow in H1, an incremental EUR 160 million compared to last year. Conversely, sport 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 a 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 early termination payment to Safilo, resulting in free cash flow in the period of about EUR 60 million. As you know, cash flow generation is one of our top priorities, and the H1 performance should not be extrapolated for the full year. On slide 16, 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. This is due to usual seasonality patterns, including dividend payments in the first half, which this year represented a cash outflow of EUR 537 million. 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 euro of FX-denominated debts. This ends my remarks. Let me now pass the phone to Jean-François before we take your questions.
Thank you, Jean-Marc. On slide 18, we have summed up the key takeaways of the first six months and our priorities for the balance of the year. Overall, our performance in the first half of 2015 was commendable. After a challenging Q1 impacted by a number of one-off elements, some external and some specific to Kering, we had a much better second quarter, pretty much across the board. Despite the contrasting 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 also reflects normal seasonality and the impact of hedging. After a demanding start, we are seeing at this midpoint of the year many encouraging signals.
First 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 second quarter, there is a host of promising developments. The new Gucci image, at once true to the brand's heritage and completely fresh, has seen the day, and Alessandro Michele's contemporary vision subtly but systematically conveys this new expression of the brand. The teams are not leaving any element unchanged, applying Gucci's new code across products, collections, campaigns, and all other customer touchpoints. With its modern reinvention of the GG 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 Fall/Winter 2015 and 2016 collection 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 final 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 cruise collections.
The new website will be launched, and new packaging will be introduced. On the retail side, the refreshed store concept will be revealed in the fall at the Via Monte Napoleone 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 test of Kering Eyewear has been successful. Its first collection, Collezione Uno, 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 opticians. A far-reaching digital project is underway aimed at expanding all our brands' presence online, including mobile and social media. Our objectives are manifold: 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 Group and are expanding our in-store clienteling app, enabling sales associates to view client profiles and access store inventories. During the first half, comparable revenue generated online by our luxury activities jumped 23%. We are working systematically at optimizing our operating cost base, focusing on sourcing and manufacturing. We are also reviewing rents, renegotiating them wherever feasible, notably in Hong Kong. We have made considerable progress along this path in the past months, and our streamlining initiatives should start bearing fruit later this year or in 2016. All told, 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 a 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 you. If you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We'll take our first question from Thomas Chauvet of Citi. Please go ahead.
Good evening, Jean-François, Jean-Marc. Three question, please. The first one on Gucci retail. Congratulations on a strong performance. I want 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. 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-François, 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?
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? 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? Looks like there's some big changes, big shifts there in demand patterns. Thank you.
Hello, Thomas. Jean-Marc Duplaix speaking. In fact, I think that first of all the luxury brands, including Gucci, have benefited from the shift of the Chinese tourists in Japan and in Europe, also of the American tourists to Europe. This has benefited, including for Gucci, to full-price sales. Basically, thanks to local clientele and to tourists, the business in Japan and in Europe has been very positive with the full-price sales. 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 the reason why for the first half-year 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 when we have no markdown operations planned, 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. I think that the combination of markdown 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 of the strength of the U.S. dollar, the trend with tourists was less positive.
If I may, I will comment on the wholesale and maybe Jean-François will add something. 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. Also, we are very pleased to see that Gucci is back with some new or key accounts. I imagine that you have read last week the announcements regarding Dover Street Market. 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. It does explain why we have this trend in wholesale.
All in all, for the second half-year, 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. 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. As regard 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.
We are quite cautious as regards the trend in Mainland China. 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, 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 MERS crisis outbreak, but we can expect a rebounding 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, it's too early to assess that. What it just demonstrates, 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. The trends we see in Europe and in Japan do illustrate the very high sensibility of the Chinese customers to the price gap. 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 will 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-François. A couple of questions, please. First of all, just following on from the Gucci second quarter retail comp, and congrats on that. Could you just explain what the sales contribution was on space and what the volume and value drivers were? 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.
Could you explain where we are in terms of the old Giannini formats, and what format or what mark format you're calling this, and effectively how many stores need to conform to the new format? 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 want to elaborate by splitting the performance of Gucci between space, volumes, and value. What I can say that you will have see, we have not increased the number of stores, space contribution is quite minimal. In terms of value, we had the occasion to remind that the increase in terms of average selling price was less impacting than before. We can assume that the bulk of the growth in the first half was driven by volume. 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. Basically, it was another reason for the performance 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 other 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, huh?
Yeah. Thanks.
As regard the new format, we have a plan to refresh around 30 stores to an altered version of the concept. More in line with Alessandro Michele's creative vision for Gucci. 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. This list has been determined regarding the contributions to the sales. Let's say that these stores should represent something like one third of the total revenue, the retail revenues. We have mentioned Monte Napoleone to be soon refreshed. We will have some other key locations in the leading destination cities. Also with a shop-in-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 not really a new concept, but also will benefit from probably a more fine-tuned and upgraded concept, so in order to manage properly the CapEx budget. The refreshment will be very efficient at a minimal cost. 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-
Yeah.
Is 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%? Does that still hold true in terms of some of these newer formats?
Absolutely. Because it's more about the design, the store layout, that there is a refreshment. It's about the lights, about the way the products are showcased. It's not about the basic functionalities of the furniture, which are very efficient. Clearly, that's 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 franc had a direct hit on the gross margin, that it was very difficult to offset. Some brand like Girard-Perregaux or Ulysse Nardin have 95% of the cost of good sold in CHF. At the same time, we sell in different currencies.
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. 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 hundred 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 EUR 30 million 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.
Is it EUR 15 million?
Sorry?
Is that around EUR 10 million-EUR 15 million, Jean-François?
We do not disclose this figure, but it is something that is, again, way below the EUR 30 million that you mentioned. 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 did not expect. So we think that the impact on the EBIT for next year will be very sensible.
Okay. That's very clear. 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 from me, please. Firstly, on the pricing challenges that we're really seeing across the industry. Obviously, we're seeing some nice uptick for Europe. 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 were any plans to do the one price, one product initiative going forward, or what the plans are medium term. Secondly, I wondered if you could just discuss the inventory position. Obviously, that looks a little bit 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. 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? Are there any closures in mainland China and Hong Kong that have been going on? 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 a 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. We believe that any fixed pricing structure does not allow indeed sufficient flexibility to adjust later for currency move. Our view is, however, that this level of price gap still needs to be addressed, but by a combination of solutions. Our objective is to progressively to come back to a more normal price differential, meaning, closer to a maximum of 30%-35%, for example, with mainland China. The combination of solutions are the following one.
On price strategy, 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 one product, one price approach on a handful of SKUs with a corridor of ±10%. What we can say so far is that the pilot test led by BV on the Olimpia cross bag, shoulder bag, has exceeded our expectations with a SKU that initially sold out quite rapidly in China because it was a product designed for the Chinese customers initially. That met a great commercial success through Q2, also in Europe and in mature 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 bestsellers. Prices have been generally increased by a few percentage points in the Eurozone. In some cases, for some specific brands, we have reduced the price down in Asia Pacific. On collection structure, this is the second point. This could cover some specific product launches or some additional SKUs within a collection that could be, for instance, available only in certain markets and within certain strategic price brackets. Third issue or third point on internal adjustments, this could encompass, for example, some adaptations to our aging 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 introductions.
We will have surely a great opportunity with Gucci to do so, considering the launch of new lines and carry-over 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 inventories, 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 inventories 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. Not only in these regions, we have considered that it was absolutely necessary to review the rents level everywhere in the world. 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.
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 rent compared to the sales is increasing. Even if in absolute terms, it has decreased compared to last year, in terms of percentage of sales, it has increased. It's too early to tell you what could be the corresponding savings, but we are still negotiating. Now, regarding the store closings, we have already stated that in mainland China, we are 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 three years.
As regard on account, it's not an option we consider so far, but if landlords are not able to understand that a 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 Bizzarri and his team 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 you 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, 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 of product evolution. Both in terms of moving into other categories as the plan anticipated, and also in terms of developing the brand beyond Intrecciato, which remains, I understand, the core DNA of Bottega Veneta. Last but not least, I wonder if you could give us an update on Kering Eyewear and where you stand on that front. Thank you very much.
Thank you, Luca. I will answer to your first question regarding Gucci, then I will pass the floor to Jean-François. 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 Alessandro will hit the shelves 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 and shoes. 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 handbag 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 carrier of the lines in line with the new creative vision, and an upgraded and enriched version of the GG logo lines. Main distinctive features of this line will be, for example, the high percentage of leather mixed with canvas, luxurious lining, and so on. I think that we are in line with the plan we had to also to upgrade this entry-price category with enlarged offer. Of course, we see already the benefits of the actions taken by Marco Bizzarri and the management of Gucci in terms of organization, in terms of efficiency of the organization, also in terms of mindset at Gucci and the Gucci organization.
Of course, this impulse by Marco Bizzarri is probably one of the reasons 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. Also, we want to enlarge our offer in shoes, also both in men and women. 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. To do so, we have taken several types of actions. First, the new merchandising team has re-envisaged the way they work with the creative department and Tomas Maier to also be more proactive and more commercial with the collections. Then also, we want to enlarge our stores
To be able to display more product categories and more SKUs than what we do today. 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 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, you 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 we have mentioned, we have not expanded the network in China. The level of CapEx required to keep the store network as it is in China would be very minimal. I think that we have a far more stringent policy when it comes to assess the performance of the stores at Gucci, but not only at Gucci, in all the brands of the group. Of course, if we believe that we are not in a position to renegotiate the rents in good conditions, then we will close some doors, and we will hesitate if needed to reduce the store count in China. 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 will take the next question from Mélanie Flouquet of JPMorgan. Please go ahead.
Yes, good evening, everyone. Thank you for taking my question. The first one, I'm sorry, they're going to be a bit quantified. The first one is on the impact of this one-off sale, as it is, of the previous designer. If I assume that Asia-Pacific, which was tracking on minus 10% in Q1, went to plus three thanks to this in retail, would it be fair to say that it had a roughly a five-point impact on your retail sales acceleration into Q2? Number two, 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, net of the underlying impact minus hedging, or is it just the hedging impact?
Sorry, on the one-off of EUR 42 million, EUR 43 million that you are reporting, you mentioned that there were some inventory provisions within this. Could you quantify what this impact is? Sorry, my last question is more strategic. It's regarding the mix. The mix had been a very big contributor to Gucci over the course of the last two years and actually mitigated some of the negative impact on volumes. How are you expecting it to evolve over the course of H2 and next year? Thank you very much.
Mélanie, concerning your first question, you will understand that we won't answer on these questions. I think that we provide a quite large set of figures. We are quite transparent about our performance. 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. I think that the most relevant analysis is rather to look, if we look at the percentage of it as the combination of currency movements and hedging, because the two are going along, and analyzing one without the other one does not make sense.
If you look at the decrease in terms of EBIT margin of the division and of Gucci, because of course, the weight of Gucci on the total is consequent, I think that Bottega Veneta is 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. When it comes to Bottega Veneta, to preempt another question or a follow-up, the full impact of 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.
It's true that you have, in non-recurring items, some write-off of inventories at Gucci, considering also that the markdown reserve had been already adjusted at the end 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. 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 inventory in the non-recurring item line. Of course, that is purely a one-off effect for the first half as regards the non-recurring item. 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 any more from the increase of average selling price, which was until now driven by the mix. Because we had already clearly stated at the end of last year that we had reached more or less an optimum in terms of mix. 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 volume effect.
Thank you very much for this explanation. It's very clear. Would you expect the one-off non-recurring, including the restructuring to be over? Is this EUR 43 million 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 cost in the sense of anticipation of write-off of assets. First of all, it's difficult, of course, to forecast exceptional items. It will depend on the plans of the management, of Gucci management in terms of restructuring of the store network. It's too soon to tell you what would be the amount or if there will be some exceptional items. What we can say is that as regard the inventory depreciation, the bulk of the depreciation was accounted for during the first half.
The sales were realized in H1, or are these inventories that are basically remaining on your balance sheets not to be sold? Sorry.
By definition, if it's a non-recurring item, it does concern inventories which won't be sold.
Which will be sold. Thank you.
Which won't be. Will not be sold.
Well, or at a big 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. They must be quite significant because you clearly beat consensus expectation on top line. In terms of margin at Gucci, you were online. 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? Finally, today you announced a newcomer in terms of the management team, coming not really from the luxury industry. What will be your focus in the next 12 months? Thank you.
Thank you, Antoine. I will reiterate what I said previously. Sales at full price were up in Japan and in Europe. The performance of Gucci has been very boosted by the markdown sales in Asia Pacific. Fundamentally, the performance was very sound, even in full price stores at full price. We won't quantify this impact. Again, you have all the elements. What we can say that the performance in APAC is going helped by the markdown. Also what we see is that the margin, absent H, the gross margin was more or less steady. 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 collection. If we look on the constant number of doors in fact the performance is up. Because, as I mentioned before, we have a decrease 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 far lesser extent. I can confirm just that 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. That's the reason why we are able to gain new accounts.
Again, the performance will be down during the second half.
Regarding the appointment of Francesca Bellettini. She will be in charge of the emerging brands in couture and leather goods which are Balenciaga, Alexander McQueen, Brioni, Christopher Kane and Tomas Maier . 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. Then also she will animate and fuel and lead the programs that we have across the division. Those program also involving Gucci, Bottega Veneta, and Saint Laurent.
I'm afraid we are running out of time, we cannot take additional questions. Claire and Edouard will be, of course, available to answer the remaining questions. Thank you very much for listening to our call and for all your questions, we wish you a happy summer break. Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.