Ladies and gentlemen, welcome to the first half 2014 results call. I now hand over to Mr. Jean-Jacques Guiony. Sir, please go ahead.
Thank you. Ladies and gentlemen, good afternoon, and welcome to this conference call. I am Jean-Jacques Guiony, the Chief Financial Officer of the LVMH group. Before I begin, I must remind you that certain information to be discussed on today's call is forward-looking and is subject to important risks and uncertainties that could cause results to differ materially. For these, I refer you to the safe harbor statement included in our press release. Let's now move to today's topic, first half figures. I shall cover the first part with most significant numbers, and Chris Hollis, group's head of investor relations, will cover the main developments of our different business groups. After this, both Chris and I will be available for your questions. The press release is available on our website, as well as the slides for today's presentations and the interim financial report.
Let's move to slide two. I shall start with revenue for the first half. As you may see, we ended the semester with most of our business groups in the positive territory. You will note that published growth is lower than organic growth, despite a roughly 2% positive perimeter impact stemming from the first time consolidation of Loro Piana. We suffered an adverse currency impact of about 4%, with a 4% drop in the USD and an 11% drop in the JPY. Chris will comment main business groups in more details, but the main points to be reminded are as follows. First of all, Wines & Spirits had a somewhat difficult semester due to heavy destocking in the cognac business in China, despite a good level of activity in the U.S.
Fashion & Leather is up 4% in organic terms with a heavy impact from Japan, which we shall discuss in a moment. Perfumes & Cosmetics is up 6% in organic terms, beating most, if not all market performances in its main geographies. Watches & Jewelry is a bit under pressure in the first half, particularly with regards to the watch component of the business. Finally, Selective Distribution is showing a very strong performance with a 9% growth in organic terms. Let's move to slide three, where you can see a comparison between first and second quarter in terms of organic growth. The key points to have in mind is that anticipated purchases ahead of the VAT increase in Japan boosted sales in the first quarter.
This added about two points to Q1 organic growth, as we discussed before, while Q2 was affected by about one point by the logical decrease in the Japanese business after the VAT increase implementation in early April. If you take this out, our organic growth, despite differences division by division, was essentially stable in Q1 and Q2. Let's now move to slide four, which shows the geographic breakdown of revenues. Europe and Asia, including Japan, account for roughly one-third each, while the U.S. is one quarter. No major change on this chart in the first half of the year. Moving to slide five, you may see the organic evolution of sales in our main geographies. You see the impact of the Japanese VAT increase, which I mentioned before, with +32% in Q1 and -11% in Q2. Yes, overall, Japan grew 11% in the first half.
Other geographies showed similar growth in between Q1 and Q2. Europe is essentially stable, while Asia is impacted by the weakness of the wine and spirit business in this region. U.S. is showing mid-single digit growth with a slight improvement in quarter two. Let's now move to the next slide, where you may see our simplified profit and loss account for the period. Main comments are as follow. We already discussed revenues, which is growing 3%. Gross margin was quite stable at 65.5% of sales, against 65.8% of sales in the same period of last year. Operating expenses grew a bit faster than sales, excluding currency impact and the first-time consolidation of Loro Piana, selling expenses grew about 9%, marketing 6%, and admin expenses 4%. Profit from recurring operations is down 5%, but up 2% excluding currency and perimeter impact. We shall discuss this in a moment.
Other operating income and charges are negative by EUR 49 million, reflecting mostly amortization and depreciation of intangibles at a level which is not entirely different from last year's. I shall discuss financial charges in a separate slide in a minute, but no major difference compared to last year. Same comment for income taxes, with tax rate being stable at around 30.5%. As a result, group shares of net profit is down 4%. Let's now look at the profit from recurring operation, which is broken down by business groups on slide seven. Wine and spirit had a difficult first half, as I told you, with -15% in profit from recurring operations. This is obviously the consequence of the 7% drop in sales in euro terms. Chris will discuss in more detail this in a moment.
Fashion and leather ended the semester more or less flat, penalized by negative currency impact and a complete strategic reshuffle at Marc Jacobs. To be noted that LV margin was stable in the first half of the year. Perfume and cosmetic shows a 2% increase in profit from recurring operations in line with sales in euro. Watches and jewelry was affected by the softness of the watch business and the production and distribution reorganization currently being implemented at TAG Heuer. Otherwise, the rest of the business was quite strong. Finally, with selective distribution, we had a very solid first half at Sephora, but DFS margins suffered a significant adverse impact stemming from both product mix and rising occupancy costs in airports. Let's move to slide eight and a word on the reasons for the change in profit from recurring operations. You are familiar with this chart.
What you can see is that the perimeter impact of EUR 47 million on Loro Piana helps the profit by about 2%, while currencies had a negative impact of almost 9%. Excluding both these items, organic growth in profit would have been around +2%. Let's now turn to slide nine and the analysis of the net financial charge. A few points to mention. The cost of debt is slightly down, despite a 25% rise in average debt in connection with the Loro Piana acquisition funded at the end of last year. We strongly benefited from lower interest rates, obviously. The cost of hedging was a bit lower than last year and should hopefully represent about one-half of the total year's amount. Finally, income on the financial investment portfolio was in line with last year. The bulk of this amount, as you know, is dividends received on our Hermès shareholding.
Moving on to slide 10, where you can see the balance sheet structure. The structure of the balance sheet did not evolve much compared to 2013 year-end. Total equity is in excess of 50% of the balance sheet, whilst inventories represent about 17% of the total. Turning to slide 11, a few words on the cash flow statement. First, net cash from operations before changes in working capital was down EUR 68 million, i.e., -2% compared to last year's number. Working capital used about EUR 1.27 billion in cash, about EUR 250 million more than last year. This comes mostly from an increase in inventories as well as a decrease in payables, which is normal at the end of the year, but which magnitude was higher than it was last year. Finally, capital expenditures are more or less in line with last year's number.
I will finish this first half of the presentation with a comment on the group's net debt, which you can see on slide 12. The level of net debt reached EUR 6.5 billion, about EUR 1.1 million higher than at the end of last year. As you well know, this increase is quite usual in the first half of the year, when the payment of dividends to our shareholders and minority equity partners exceeds traditionally our net cash flow. The group's net debt at the end of June represents 23% of total shareholders' equity. I will now turn to Chris, who is going to review the main developments within our various business groups. Chris?
Thank you, Jean-Jacques. I will turn to discussion on our business groups, beginning with wines and spirits on slide 14. This business, as you all know, was impacted negatively by both the destocking by distributors in China following the anti-extravaganza measures being taken there, and by the impact of the strong euro. Consequently, this group saw a 1% decrease in organic revenue growth. On a reported basis, taking into account the negative currency impact, revenues were reported down at 7% at EUR 1.677 billion compared to EUR 1.795 billion in a year ago first half. Looking at the two main categories, in the first half of 2014, champagne and wine's organic revenue grew by 6%, but after a negative 6% currency impact, reported revenue fell only slightly to EUR 723 million compared to the first half of 2013.
For cognac and spirits, organic revenue declined 7%, and after a 4% negative currency impact, reported revenue was EUR 954 million compared to EUR 1.068 billion in the a year-ago period. Profit from recurring operations for this business group declined 15% to EUR 461 million for the first half of this year. Breaking this down, champagne and wine still with EUR 152 million in profit, while cognac and spirits contributed EUR 309 million for the first half. This latter reduction was primarily due to the negative mix impact resulting from the current destocking of cognac in China. Let me discuss the trends we're seeing that were behind this group's performance. In the champagne business, volumes rose by 3%, with price and mix being very similar.
During the first half, in particular, the prestige cuvees continued their solid development, and on a geographic basis, the group saw good performance both in Asia and in the U.S. For wine, specifically, the solid momentum underway at Chandon was offset by the negative effect of the depreciation of the Argentine peso and a more limited contribution of some high-end French wines due to a different phasing of shipments. Moving on to cognac. Volumes in this business declined by 1%. As we've seen in the first quarter, the good momentum continued in the U.S., in particular for the VS. However, in China, continued destocking by distributors of the VSOP, XO, and super premium cognacs, as I mentioned, continued to impact the business in the first half. Finally, among the group's other spirits, both Belvedere and Glenmorangie are seeing sustained growth.
Looking to the second half of the year, the group is committed to continuing to enhance the image and the desirability of its wines and spirits brands. This will be achieved through delivering ongoing product innovation in order to maintain the loyalty of existing customers and to attract new ones, as well as through developing the brands in new markets and continuing to invest in highly compelling marketing and advertising. At the same time, the group is working to further develop production capacity in order to support the longer-term growth potential of the brands. Taken together, this work will help the brands be in a good position when the destocking in China subsides, although this is expected to continue through the second half of the year. Turning to our fashion and leather goods brands. This group saw a 4% rise in organic revenue in the first half of 2014.
After taking into account a 7% structural impact, essentially relating to the integration of Loro Piana and a negative 4% currency impact, reported revenue rose 7% to in excess of EUR 5 billion. Profit from recurring operations was about flat for the period, year-over-year at EUR 1.487 billion. It's clear that the strength of the euro has had a significant impact in the period. This also reflects continued investment being made to support the growth of brands with the highest potential in the group's portfolio. As Jean-Jacques mentioned, Marc Jacobs is an example of a brand going through a strategic reshuffle. It is also important to note that the operating margin at Louis Vuitton remains stable in the first half of 2014. Turning to the highlights of the fashion and leather goods group in the first half. That's slide 18.
I'll begin with Louis Vuitton, where the brand's enhanced focus on ensuring the highest quality in terms of products and the brand experience is achieving the desired results. In the first half of the year, it was clear that the brand is benefiting from a strong creative dynamic with its fantastic new designer, Nicolas Ghesquière, and a number of new products driving excitement. This includes development in its leather lines, the successful launch of new models in its beloved Monogram collection, and the very positive reaction to Nicolas Ghesquière's first show, which was reported on in the media with enormous enthusiasm around the world. I'll now speak briefly about some of the developments of other group brands. Fendi saw significant growth in its leather goods lines due to the success of both its new 2Jours bag and its iconic Peekaboo and Selleria lines.
Celine continued its wonderful streak since Phoebe Philo's arrival several years ago, with particular strong growth in its leather lines and shoes. The integration of Loro Piana has gone exceptionally smoothly, and we look forward to further building on the strengths of this iconic Italian brand. At Berluti, the positive momentum continues, driven by exciting advertising and marketing to highlight the extraordinarily crafted products and new flagship stores, which opened to great buzz in Milan and New York. As we look ahead, please see slide 19. There are very compelling initiatives underway to continue the momentum across the group's fashion and leather and goods brands. At Louis Vuitton, work will continue to further the qualitative development of the brand, including the introduction of new leather products, enhancing existing stores, and opening select new ones.
In addition to this, Nicolas Ghesquière's new collections will be available for purchase in the second half. At Fendi, a new flagship store with a similar concept to those in Paris and London will open on Madison Avenue in New York City. This is expected to draw significant attention. Loewe will hold the first show of its women's collections designed by JW Anderson, which is highly anticipated in the fashion community. Givenchy will expand its retail network with new store locations in Miami and Asia. I should also mention that beginning in September, Philippe Fortunato will assume the CEO role of Givenchy after having served most recently as the head of Louis Vuitton in Asia. At Givenchy, he succeeds Sebastian Suhl, who will assume the CEO role at Marc Jacobs, working to take that business to its next level of success around the world.
Turning back to the slide, Kenzo will continue to enhance its ready-to-wear collections with bags and accessories. Finally, Loro Piana will continue its measured pace of targeted boutique openings. Moving on now to perfumes and cosmetics, slide 20. For the first half of the year, organic revenue rose 6%, after a negative 4% currency impact is translated into a 2% rise in reported revenue of EUR 1.839 billion. Profit from recurring operations in this business group rose 2%, in line with published revenue and reached EUR 204 million. Now I'll expand on the brand performance behind the numbers. I'll begin with Parfums Christian Dior, which continues to build on its strengths on a global basis. Notably, in the first half of this year, the brand has seen further market share gains for its exceptional fragrances, J'adore, Miss Dior, and Dior Homme.
At the same time, the Dior Addict makeup line is performing exceptionally well, and the prestige skincare line is also a strong performer. Growth at Guerlain over the first six months of the year was driven by the worldwide success of its skincare line, Abeille Royale. The first half also saw the launch of its new fragrance, L'Homme Idéal. At Kenzo, its Flower in the Air delivered good performance in the first half. Benefit, innovative eyeliner They're Real! has been very well received. Finally, Fresh continues to deliver strong growth in the U.S. Exceptional growth in Asia, where it continues its expansion. As to the outlook for the second half of the year in the Fragrance Cosmetics group, see slide 22.
In short, the group's goal is to bolster the success of brands and gain greater share in key markets through maintaining investment both in exciting product innovation and attention-catching marketing and advertising. At Parfums Christian Dior, the focus is on supporting the continued success of Dior Addict and the launch of a new highly compelling communication program for J'adore. In terms of highlights in the second half for the other brands, Guerlain will benefit from the opening of a new production site for skincare and makeup at Chartres to support ongoing innovation and growth, as well as they'll also see the rollout of the fragrance L'Homme Idéal, launched in the first half. Givenchy will launch a new women's fragrance, Dahlia Divin, and Fresh, Benefit, and Make Up For Ever will each open new boutiques in key markets. We now move to watches and jewelry. Please see slide 23.
In this group, organic revenue grew by 3% on a reported basis, and after taking into account a negative 4% currency impact, revenue was down 1% to EUR 1.266 billion in the first half of this year. In short, solid progress in the group's jewelry brand's own stores was offset by cautious purchasing from multi-brand watch retailers, given the uncertain economic environment. Profit from recurring operations was down 31% in this group at EUR 107 million for the first half of the year. This decline reflects most significantly an impact from the strength of the euro, as well as the softness in the watches business. In addition, investments in communication and the production reorganization being implemented at TAG Heuer should support the near and longer-term growth of the brand. Now to give some more color on these numbers.
Jewelry brands generally achieve solid progress in their own stores, which help to offset cautious purchasing among multi-brand watch retailers, as I mentioned earlier. In terms of other highlights, the group's brands saw success with their new watches at Baselworld during the spring. Bulgari saw good momentum in the first half, during which the brand celebrated its 130th anniversary with events and media around the world, and it delivered particularly strong progress in its jewelry lines. At TAG, innovation continues to reign supreme, which coupled with enhanced communication, reflects the brand's strategy to further develop its clientele in order to fuel continued growth over the long term. Over the first half across the brands, the group continued to make investments designed to optimize production and enhance communication in order to drive awareness and excitement about innovative new products.
As we move into the second half of the year, the focus will continue as the group works to strengthen the image of its brands and further develop the iconic designs and products for which they're well known. Among other exciting initiatives, they will include launching numerous new products at Bulgari. In terms of distribution, the group will continue to expand the own store network of its brands while being increasingly selective about its multi-brand store partners. Moving on to our last business group. Let's look at the selective retailing business on slide 26. This business group saw a 9% increase in organic revenue, which is particularly notable in that it came on top of a very robust rise of 19% in the first half of 2013.
After taking into account a negative 5% currency impact, reported revenue rose 4% to EUR 4.382 billion in the first six months of 2014. Profit from recurring operations in this business group declined 3% to EUR 398 million. While Sephora's first half was solid, DFS's margin was impacted by product mix and rising occupancy costs in airports. This follows ongoing investment in the marketing expansion and renovation of several of its airport concessions. Looking at the businesses in more detail on slide 27, I'll start with DFS. During the first half, this business benefited from the continued growth of tourism among Asian clientele, although this was somewhat offset by the impact of the weak JPY on Japanese travelers, and particularly the T Gallerias in Macau were strong performers.
Profitability at DFS was, however, impacted by costs associated with the expansion and renovation of several airport concessions, as I mentioned, all of which are very well worthwhile longer-term investments. Finally, DFS, I should note that the rollout of the T Galleria brand and visual identity is going very well and continue the pace. Turning to Sephora. This business continues to be a star, delivering market share gains in all key regions. In particular, Sephora saw excellent momentum in North America, Asia, and the Middle East. The driver of this performance continues to be Sephora's proven expertise with respect to mastering new cosmetic trends and offering their clientele highly innovative, exciting brands and products. In the first half of the year, this included the global rollout of two exclusive brands, Marc Jacobs and Formula X for Sephora.
As in the past, Sephora's online business continues to deliver rapid growth. Finally, I'll discuss the outlook for selective retailing. At DFS, the focus will be on continuing to strengthen its leadership in the Asian market. This will include renovating the Changi Airport concession in Singapore, which was recently renewed. DFS will also start to deploy its loyalty program and launch a multimedia, multi-channel advertising and marketing program to drive the excitement. At Sephora, ongoing growth is a theme. Consistent with this, Sephora will continue to renovate its existing store network as its exciting store experience is key to its highly successful consumer approach. It will also work to expand into new markets, including Indonesia and others. Finally, Sephora will continue to focus on innovation in digital and mobile technologies, where it is a well-established leader in the retail sector.
With all of that, I will now turn the call back to Jean-Jacques for a brief wrap-up before we take your questions. Thank you.
Thank you, Chris. I will finish this first part of the presentation with a brief overview of the activity and a few comments on H1 performance, highlighting the most significant points. First and foremost, I would like to stress the negative impact of currencies, which had a negative impact of 9% on our operating profits. Secondly, most of our markets are experiencing modest growth, which reinforces the previous point on currency impact. Implementing measures to offset negative currencies is not that simple when end demand is showing some sluggishness. Finally, I would also like to mention some geographies like the Middle East or North America, where we see a good momentum. Asia seems to be a bit under pressure, but if one eliminates the punctual cognac situation in China, organic growth is in line with last year's March. What about the rest of the year?
We highlight a few points on the last chart of the presentation. Always difficult, obviously, to make forecasts, but I shall give you some points which we view as important. First, again, currencies. What can I add to what I've already said? Secondly, cognac, where we expect the Chinese situation to normalize later this year, which will make visible the strong advances of Hennessy throughout the world, particularly in the U.S. and the ex-China Asia. Certainly, we feel our product line is strong for the second half, and combined with innovative marketing initiatives, they should support the business. That is basically all we wanted to say. We shall now open the Q&A session. Thank you.
Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. We have a first question from Thomas Chauvet from Citigroup. Please go ahead.
Good evening, Jean-Jacques and Chris. Three questions, please. The first one on fashion and leather. If we exclude Japan, the growth was about plus 2% in the second quarter versus something like plus 6% ex-Japan in the first. Can you perhaps comment on what happened in the various regions, U.S., Europe, Asia, and perhaps comment on the second half? I know you've got quite a few product launches. Secondly, on cognac. One of your competitors recently estimated that depletions for the category in China improved to single-digit negative in the second quarter with the modern on-trade up slightly. Can you explain what the situation was in Q2 at Hennessy? When do you expect depletions to recover and ultimately your shipments to China to return to positive growth? Lastly, on the Chinese clientele of Vuitton.
In April, Jean-Jacques, you mentioned that there was an improvement in domestic demand in mainland China, resilience in Chinese tourist demand elsewhere. Can you tell us what trends you've seen at home and abroad in Q2, and also whether the crackdown on gifting is still in year two affecting you? Thank you.
Okay. Thank you, Thomas. Starting with fashion leather and your question about what happened in the other regions than Japan. I would say that the U.S. was a bit better than the first quarter of the year. Europe was more or less in line. While Asia, as a whole, decreased quite significantly its growth level. Second question on cognac depletions. I quite agree with the comment. I mean, what we see on depletions is low single-digits negative. As you suggested in some segments of the market, particularly the modern on-trade, we see some very significant improvement and some strong double-digit growth. A very contrasted situation, but as far as sell-outs or depletions are concerned, we see a very marked improvement compared to last year.
One point to bear in mind is that this growth rate depends very much on the assessment of what the depletions were last year. It's not that easy. We had a few surprises there. It's not that easy to assess exactly what was depleted last year and the level of inventory in the system. Assuming our analysis is good and we expect it to be accurate now, we are in low single-digit decrease in depletions. Obviously, it will take a little bit of a while for sell-in numbers to coincide with these sellout numbers. As you know, we exceeded by a fairly large extent the amount of sellout last year. I mean, our sell-in was significantly higher than our sellout numbers last year, hence the build-up in inventories. We have to reduce these inventories.
This is currently being implemented, explaining why the numbers are what they are in H1 of this year in depletions cognac. It's not over yet, and we expect the move to unfold again in the second half of the year. It will not be before Q4, and probably the end of Q4, that the situation will fully normalize. The Chinese clientele, yes, we were not optimistic, but we saw better numbers for Q1. Unfortunately, as far as Vuitton, and it's true for some other brands as well, we saw a little bit of decline, both domestically and with tourists in the second quarter of the year. We haven't seen the same level of business in the second quarter of the year.
Altogether, the Chinese clientele is still mid-single digit up in the first half of the year, but it's a lower number than what we had at the end of Q1.
Thank you.
The next question, from Antoine Belge from HSBC. Please go ahead.
Yes. Hi, it's Antoine Belge, HSBC. Three questions. First of all, to follow up on the previous question. I think if you look at fashion and leather alone, the growth went from 9 to 0. If you assume that Japan was having an impact of around 3%, can you explain maybe what is the other sort of 3%? I think you mentioned China being softer. Some of your competitor mentioned a softness in Hong Kong, especially since May. What's the situation in Hong Kong for Vuitton and also, by the way, for maybe DFS? Second question is on the margin side within fashion and leather. I think you said Louis Vuitton flat margin. Is it at constant ForEx, or is it also after including the quite significant FX impact? Maybe could you say a word on the evolution of the margin of the other brands?
By other brands, leaving aside, obviously, the integration of Loro Piana. Finally, I was a bit surprised by the big decline in the watch division EBIT. I understand the FX impact, maybe could you quantify what the FX impact, and maybe other factors? Moreover, do you expect this to improve in the second half? Thank you.
Thank you, Antoine, for your 3 questions. On fashion and leather, you pointed out rightly that Hong Kong is a bit difficult. We've seen a very strong first quarter in Hong Kong, since then, particularly after May, the level of business, for various reasons, some of them being connected with a little bit of political unrest there, we've seen the level of business slowing down markedly. Hong Kong explains also why Asia has been slowing down in Q2 compared to Q1. It's also a little bit the case for Macau and for the rest of Asia, with the notable exception of Korea, which has been quite strong. Singapore, for instance, following the disappearance of the Malaysia Airlines aircraft, has proven very soft. As we understand, some tourists are reluctant to travel to Singapore and to Thailand, which was a sort of classical route, particularly for Malaysian.
It's throughout the region, we've seen some weakness in fashion and leather, DFS was no exception to that, we've seen some slowdown. DFS was close to double-digit growth in Hong Kong in Q1, was a few single-digit points up in Q2. Also a slowdown at DFS in Hong Kong in Q2. As far as margins are concerned with Vuitton, it's EUR margins. We have the same increase in some change in sales and operating profit, so it's not excluding ForEx. As far as watches and jewelry decline is concerned, yes, you mentioned FX, which has a negative impact. I think it's about EUR 35 million or EUR 40 million impact on a division which is much smaller in terms of profit than the other divisions. Obviously, the impact was quite dramatic for watches and jewelry.
We also had some one-off restructuring costs TAG Heuer connected with reorganization of production lines for about EUR 15 million-EUR 20 million. We are talking about significant adverse impact, which explains why the operating profit for the division is down about 30%.
Okay. Maybe I also ask about the other fashion and leather brands, and maybe just a follow-up on Hong Kong. Obviously, you mentioned that the slowdown started only in May, I guess July was probably on the same vein. Do you expect this to be a short-term phenomenon or that after a while, as other Chinese tourists will be traveling elsewhere, or what's your first analysis of this trend that I understand is quite recent?
Well, the short answer is, I don't know. To give you a little bit more color on this, it's not that easy to analyze. What we see is actually traffic increasing, but the level of business done with one single client being lower than what it was. Basically, what we see is a qualitative change in the business. We do see more people in the stores. It's exactly the opposite from what we saw last year following the implementation of the new regulations regarding travel from China. It's quite as expected. We didn't think that type of trend would happen. We need probably a little bit more time to really understand what's going on. Is there a next question?
We have a next question from Mario Ortelli from Bernstein. Please go ahead.
Hello, Jean-Jacques. Hello, Chris. Two questions for me. The first one is about Marc Jacobs. You told about a strong investment in Marc Jacobs. What are the plan of the company on that brand, and what are the targets that you have in mind also because you have put one of your most experienced manager at the helm of the company quite recently. The second one is about Louis Vuitton. You mentioned new models in leather goods lines for the next month. If you can give us a bit more visibility regarding these new product launches and which impact do you think they will have on the face of Vuitton. Thank you.
I'll be pretty short on the second part of the question. Some of the developments we've already seen at the end of H1, particularly on advertising. You've seen the Lockit being introduced fairly recently. Some other developments will take place in the course of H2, which I cannot really elaborate on at this point in time. Importantly, you will also see the first results of Nicolas Ghesquière creation that you've seen on the runway shows earlier on this year. That will be in the stores. That's why we feel that our products pipeline should definitely help the business in the second half of the year. As far as Marc Jacobs is concerned, as you know, we have a lot of hopes for this company. We think this is a very well-positioned brand in the contemporary segment. We expect to develop it much further.
This is the reason why Marc decided to devote 100% of his time to his brand. This is a very important move. Following this move, we have also, as you mentioned, appointed an experienced and talented manager at Marc Jacobs. Obviously, we need to make some revisions as to retail, wholesale, and the product policy, which is currently being implemented and which is having some impact in the short term on profit. Definitely, we are doing that with in mind the medium to long-term development of the brand. We shall probably be still a little bit under pressure for the second part of the year as we are incurring larger costs on a few things and cutting some businesses here and there. It has some impact on the profitability.
Definitely, this is with the objective in mind to really develop, in a large way, this very exciting business.
Excuse me, just one clarification. These are focused on the contemporary segment. Can be probably used also to relaunch Donna Karan? It seems a bit a sleeping brand in your portfolio.
Well, it's also a very exciting brand. We are not advanced enough to be able to make any announcement as of today. We're working on this as well.
Thanks, Jean-Jacques.
We have a question from John Gill from Berenberg. Please go ahead.
Yes, good afternoon, Jean-Jacques and Chris. A couple of questions from me, please. First of all, with regards to pricing at Louis Vuitton during the second quarter, could you maybe talk through any significant or material pricing activity, especially in Japan, and also within Hong Kong and mainland China? The second question is around Loro Piana and the development there that you've seen in the first half of the year. If we're looking at the sales and EBIT development, am I in the ballpark thinking that Loro Piana has generated just over EUR 360 million in turnover and just over EUR 60 million in EBIT? Also, finally, with regards to the watches and jewelry category, with regards to the inventory position that you are seeing at the moment, I appreciate that it's always a little bit tougher for TAG to operate in some of the Asian markets.
With regards to inventory, especially in relation to TAG Heuer in the U.S. and also in Asia, could you just maybe make a few comments there as well? Thanks very much.
Okay. Thanks for your questions first, John. On the pricing for LV, we had regular price increases in Europe and in the U.S. of about 3%. I think it was in March, if I'm not mistaken. End of the first quarter. We had an 11% increase in Japan— 8% increase in Japan, sorry, in the same period. A little bit later in April in China of the same magnitude. That were the main price increases that we implemented throughout the first half at Vuitton. On Loro Piana, it's about EUR 350 million—
330
sorry, EUR 330 million in sales, and the operating profit was EUR 47 or EUR 48 million. You can get that from the various indications we made in the presentation. All the perimeter impact comes from Loro Piana. Finally, on watches and jewelry, the inventory situation. I think the inventory situation is a bit complex. It's not that in dollar terms, our retailers have too much inventories. The issue that they have is that they have too many slow movers. There are a few expensive products that were sold to them in the last few years that do not really sell, and that are absorbing a significant portion of the money they can devote to the purchase of TAG Heuer's product, with the consequence of retailers not buying fast movers. Not buying products that sell well because they have too many slow movers.
We definitely have to take some action, which we are currently doing, and we will continue to do in H2 to correct the situation, because we are in a sort of paradox when some of our products would sell extremely well if the retailers had the money to buy them. In order for them to release the money to buy them, they have to get rid of some of the expensive models that they have on the shelves. It's a little bit of a tricky situation that explains why the business has been under real pressure in the first part of the year, not only from a sales viewpoint, but obviously from a profitability viewpoint.
Okay, great. Do you have any idea or any sort of visibility at the moment as to when you think this is going to start to turn? Certainly, within a broader perspective in Asia, the export comps get a lot softer running through into the second half of the year. I just wonder if you had any sort of visibility or any expectation as to when you think that that might change. If I could just add one final one. With regards to, I think, a comment you made at the back end of last year, the development of some of the other fashion and leather brands, Fendi, Celine, et cetera, with some of the planned extensions in retail. The expectation in 2014 was that they would be effectively margin neutral. Is that what you still expect to see? Thanks.
The answer is yes on your last question. We see some developments at Celine, Fendi, both are growing fast and with stable or slightly increasing margins, particularly at Fendi, which is not necessarily very visible due to positive one-offs we had last year. Nevertheless, the developments are very favorable. Same thing with Kenzo and Givenchy. We have a few improvements there. Sorry, I missed your first.
Turnaround in Asia.
Sorry.
Turnaround in Asia.
No, the turnaround for watches. How long it could take. It's a difficult question, obviously. It depends a little bit on the underlying strengths in the market. As you well know, in the Asian part of the world is, in the watch business, showing some sluggishness. Obviously, the higher the growth, the quicker it's going to take. It's quite stating the obvious. It will take, in my view, a few months, and probably quarters, to normalize the situation. We can be more optimistic in the U.S., where sell-out is proving much stronger in the first half of the year than what it was in the last year.
That's fantastic. Thanks very much.
The next question from Luca Solca from Exane BNP Paribas. Please go ahead.
Yes, hello, Jean-Jacques. Hello, Chris. It's Luca Solca from Exane BNP Paribas. I wonder if you could step back and tell us how your ambition for organic growth, normalized organic growth, over the medium term in fashion and leather goods stacks up against the 4% in the first half. Specifically, where do you assess you stand on the Louis Vuitton development? The new product and the new style development and momentum has been strong. Is there a similar pickup on the part of consumers? In what geographies do you see that the new approach at Vuitton is working best or working worst, according to the first half evidence that you have in hand? Second, I was wondering, I was sort of reading in between the lines that offsetting ForEx pressure in an environment where demand is subdued through pricing is not necessarily an option.
I wonder if you anticipate in the second half significant cost action to address the other side of the P&L. Thirdly, I saw that there were press reports about Sephora, which is developing very well, but apparently losing share in some developed markets in Western Europe, most notably France. I wonder if you have any comments on market share trends at Sephora and your future ambitions for this. Thank you.
Okay. Thank you, Luca. Well, you don't really expect me to answer the first question, do you? This is not something we normally share, and frankly, it's a quite difficult question. Our business is also a function of the end demand, and the end demand is what it is today. It's quite difficult. One can be optimistic about the end demand improving in the future, particularly in Asia, where it is a little bit under pressure. With product and marketing initiatives, we expect to be in a position to benefit from that. The reality for the timing is that we don't see a major improvement in end demand. As far as Vuitton is concerned, it's not a two-month process.
What we explained last year as to our product strategy and the introduction of soft leather line and the idea to improve the mix at Vuitton is taking some time. It's underway. We are solving product issues, production issues, one after the other. It's working according to plan, I would say. Again, end demand is not helping very much. Definitely, the numbers would be better if end demand was stronger. I'm again stating the obvious. As far as the reception to our new product lines is concerned, it's definitely going according to our plans. Third question on significant cost action in H2. As you know, we are not great fans of slashing costs harshly and putting the various brands upside down.
We are progressively curving the growth rate in cost, particularly in selling expenses, which is not done in 10 minutes as we take commitments to open stores way in advance of opening them. It's happening. The only thing I can say is that the growth in operating costs in the second half of the year, well, X currency, will be lower than what it was in the first part of the year. Finally, your comments on Sephora. I've seen the article. I don't really know what they are talking about. As far as prestige cosmetics is concerned, which is our business, we are not in the business of mass cosmetics. We are not in the business of pharmacies, we don't know what it is about. As far as prestige cosmetics are concerned, we are definitely gaining market share.
We are the first in France with a market share which is higher than 30%, excluding exclusive products and the Sephora brand. It means that our market share overall is even higher than that. We are pretty pleased with this market share, which is growing and has been growing year after year for many, many years now.
Thank you very much.
A question from Hermine de Bentzmann, from Raymond James. Please go ahead.
Hi, good evening. I have three questions, please. The first one on fashion and leather goods. On the 0% growth in Q2, can you maybe split between retail and wholesale growth? The second question is on Japan. On the -11% that we saw in Q2, can you also split month by month? Did you see a recovery in June? Finally, can you maybe update us on your hedging rate for the dollar and the yen? Thank you.
Okay. First question on retail, wholesale, it is obviously ex Vuitton, which is 100% retail. Our figures for wholesale were flattish to a bit negative, while our numbers for retail were close to mid-single digit up. They were not dramatic in either way. Japan, month by month. You see -11% for the quarter. Definitely, I do not have the numbers with me here, but it was -25% in April, -18% in May, something like that, and a better number in June. Bear in mind, nevertheless, that as far as June is concerned, we had a price increase of a significant amount last year on the 1st of July at Vuitton. The numbers for Vuitton in Japan in June 2013 were inflated by the announcement of the price increase.
This explains why the recovery in numbers in Japan in June is there, but maybe not as strong as it could be if we eliminate this price increase of last year. Finally, hedging. Hedging, we have on the dollar, a 50% cover for 2015, which is at 137. For the yen, it is about the same percentage, 55% at 140. For 2014, more or less 100% of the position is hedged now at 132 for the dollar and 127 for the yen.
Thank you very much.
A question from Mélanie Flouquet from J.P. Morgan. Please go ahead.
Yes. Good evening. Sorry. I have three questions as well. The first one is on Louis Vuitton in China. You mentioned that it had slowed down in Q2. I was wondering whether you could shed some light as to why this could be the case in your analysis, because I think we're well aware of what's going on in Hong Kong. China, I was under the impression had further deteriorated for so much of the year. My second question is on LV margin. I'm pleasantly surprised that they are flat year-on-year, including currencies. Could you tell us what you've been doing, maybe on your cost side, that leads to that? My third question is on DFS. Last year, you had taken on the Hong Kong concessions, which had a negative impact. We were expecting an improvement this year. The first half is challenging.
What should we expect for the remaining of the year? Thank you very much.
Well, I wish I knew the answer to the first question. I mean, the growth rate of LV in China is lower in Q2 than it was in Q1. Frankly, it's quite difficult to explain. I mean, giving you precise explanations on a few percentage points lower or higher quarter after quarter is always a very challenging thing for me. I could provide you some sort of macro explanation such as anti-extravaganza measures impact and that type of thing, the overall climate for business, the risk of real estate prices, and so on and so forth. I don't think this would convince you 100%. Frankly, we see a lower level of business. We understand that we are not the only one, given the numbers that we have. Bear in mind that we are like for like, more or less in China.
We have not opened that many stores in the first part of the year. On LV margin, what have we done? We have done a few things. We have controlled, in a very strict way, the cost increase for all the components, be it selling, marketing, and admin. Gross margin improved a little bit as well due to hedging gains, but also due to mix. We had a very strong first quarter in Japan. The bulk of the business in Japan is usually Monogram, it helped a little bit, not to a great extent, don't get me wrong, but it helped a little bit. This is basically a combination of all these factors which explain why the margins were flat at Vuitton. Finally, DFS. The airport business in Hong Kong recovered sharply in the first part of the year.
We are still losing a bit of money, but a few million EUR, so it's quite a good improvement. It's really the rest of the business where we had two big factors. One is that the category growing the fastest is by far watches, where gross margins are on average 10 or 15 points lower than the rest of the business. Obviously, we have a very negative impact on gross margins stemming from the growth in watches. We have seen that in the past already, but not to the same magnitude. Second thing, as you know, we have renewed a few important concessions in airports, namely Los Angeles, San Francisco, not to mention Hong Kong, but also Singapore. Obviously, at the beginning of the new concessions, the P&L is always a little bit under pressure.
It's not losing money, hardly making any profit, this is impacting the P&L. The second point was definitely budgeted, while the first point is a little bit of a negative surprise for us in the first half.
Sorry, as a follow-up, did you say that watches were the best performing? Is that what you said?
Yes.
How do you explain that in the context of what we are seeing in general in watches?
Well, it was particularly true in Q1. We saw a little bit of slowdown in Q2, but definitely watches was the fastest-growing category in the business mix of DFS.
Okay, perfect. Thank you very much.
We have a question from Rogerio Fujimori from Credit Suisse. Please go ahead.
Hi. Thank you for taking my question. Jean-Jacques, could you comment on demand trends you saw in France in Q2 for LV and your main business, and also trends in other key European markets like Italy, U.K., and Germany? It would be appreciated. Thank you.
Thank you, Rogerio. Well, the luxury market for France is no exception to what's happening for France as a whole. I mean, it's basically well under the rest of Europe. We've seen stronger numbers for Spain, for Italy, even for the south of Europe. Obviously, we decreased sharply over the past few years, so it's more a recovery than pure growth. Germany and the U.K. are doing okay, and France is a little bit under pressure. The domestic client base is not showing any growth, and we are also suffering from the fact that the Japanese customers, which used to be doing a large portion of the business, for instance, at Vuitton, are dropping by again 20% or 25%. This is exerting some pressure on the business.
Overall, both on the domestic side and on the touristic side, we have experienced a little bit of pressure in France, which is overall down a few percentage points for the first half of the year.
Jean-Jacques, is the business of the Chinese in France holding up well in Q2?
Its growth is lower than Q1, it's holding up, yes.
Thank you very much.
We have a question from Mélanie Flouquet from J.P. Morgan. Please go ahead.
Yeah, sorry. It's me again. I was wondering whether you could talk a bit about the Monogram, which clearly had done pretty well in quarter one, seems to have had even an impact in margins. What do you expect in the second half? I was under the impression there was some momentum still in the Monogram coming up because of the 160 anniversary. Are we going to see the elevation more moving into next year just by virtue of the anniversary of the brand? Thank you.
Well, Monogram did well, as you said, in Q1, but also in Q2, which was not surprising. It was expected, but which is more significant in my view. We expected the Japanese business to boost Monogram in Q1, but we didn't have the Japanese business in Q2. Despite that, Monogram did well in Q2. This is mainly due to introduction of new products, the Metis, the Pallas last year, the Montaigne this year. All these products are doing very well, and we are quite hopeful for the rest of the year.
We shouldn't really expect a big shift in mix this year, right? Given the success of Monogram since the beginning of the year.
Overall, we nevertheless get a faster growth and a larger share for leather products than we have for the canvas product. There will be a little bit of mix impact, but it is offset a little bit by the success of Monogram, which is definitely good news.
Thank you.
There is no more question for the moment.
Okay, this ends this conference call for the first half of the year. I've no particular closing remarks to make. We already sum up a little bit what we think about this semester and what type of outlook we may expect. I look forward to discussing with you Q3 numbers in October. Thank you for attending the call.
Ladies and gentlemen, this concludes the conference call. Thank you all for your attending. You may now disconnect.