Kering Hints at Move Into Beauty After Robust Q2
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PARIS — Could Kering be plotting a move into beauty?
Reporting first-half results after the market close on Wednesday, the French luxury group said it was looking at the segment, although it did not specify whether it might follow in the footsteps of Hermès International by launching its own beauty line, or whether it was on the hunt for acquisitions.
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Kering currently operates under a license model, with Coty Inc. handling Gucci, Alexander McQueen and Bottega Veneta; L’Oréal holding the rights for Saint Laurent, and Interparfums in charge of Boucheron.
Speaking after the group disclosed that net profit rose 34 percent in the first half versus the same period last year, group managing director Jean-François Palus said Kering was encouraged by the success of its eyewear division, launched in 2015, for which it is targeting revenues of 2 billion euros in the medium-term.
“Regarding beauty, it is a natural extension of our brands’ territory, and you know that currently, we operate under a license model. But our success with Kering Eyewear demonstrates that we can create a lot of value for the brands, on the one side, and as a consequence, for the group, by taking some disruptive and innovative approaches,” he said in a conference call with analysts.
“So beauty is definitely an area where we could contemplate some initiatives in the future and all options are open,” Palus added. There were reports a few years ago that Kering was eyeing The Estée Lauder Cos. Inc. as a potential takeover target, but the reports were never confirmed and, if true, the talks clearly went nowhere.
Palus declined to comment on the duration of Kering’s existing beauty licenses, but the group has in the past expressed dissatisfaction with Coty Inc. for failing to capitalize fully on the segment.
“The potential is absolutely huge and we are quite frustrated by the speed at which this potential is being exploited,” Kering chairman and chief executive officer François-Henri Pinault said in February 2020. In the interim, the leadership at Coty has changed, with the arrival in September that year of Sue Nabi as CEO.
With a free cash flow of 2.05 billion euros in the first half of 2022, Kering is in a position to make acquisitions. But since announcing in 2019 that its M&A search was back on, it has struck only a handful of small deals, including its recent purchase of U.S. eyewear brand Maui Jim for an undisclosed sum.
To be sure, the group is ending the first half in robust shape, despite the many challenges facing the luxury sector.
Group revenues in the three months to June 30 rose 20 percent year-over-year to 4.97 billion euros, representing a rise of 12 percent in comparable terms, as strong sales with local customers in the rest of the world more than offset the impact of lockdowns in China.
This compared with a 21.4 percent organic sales increase in the first quarter, and was above the consensus forecast for a 9 percent sales rise.
However, Kering’s cash cow brand Gucci continued to underperform versus the group’s other brands, with organic sales slowing in the three months to June 30, penalized by the label’s relatively high exposure to China. Revenues totaled 2.58 billion euros, up 4 percent on a like-for-like basis, following a 13.4 percent rise in the first quarter.
That was slightly above a consensus of analyst estimates, which called for a 3.5 percent increase in comparable sales at the maker of Dionysus handbags and horsebit loafers.
By comparison, organic sales at LVMH Moët Hennessy Louis Vuitton’s key fashion and leather goods division rose 19 percent year-over-year in the second quarter, reflecting the resilience of its star brands Louis Vuitton and Dior, in addition to smaller labels like Fendi, Celine and Loewe.
Kering, whose brands also include Saint Laurent, Bottega Veneta and Balenciaga, posted net income of 1.99 billion euros in the first half, a new record. Recurring operating profit was up 26 percent to 2.82 billion euros, yielding an operating margin of 28.4 percent, up from 27.8 percent in the same period last year.
“The group delivered sharply higher sales in the first half of 2022, sustaining last year’s top-line momentum — solid performances in retail around the world more than offset the impact of COVID-19-related measures in China in the second quarter,” Pinault said in a statement.
“In a period of heightened macro uncertainty, Kering is in great shape to surmount short-term challenges, take advantage of new opportunities, and support the ambitious strategies and tremendous prospects of all our brands,” he added.
The euro’s slide to parity against the U.S. dollar has boosted top-line revenues for companies that sell many of their goods abroad. In addition, U.S. tourists have taken advantage of the cheap euro to splurge on luxury goods in Paris this summer.
“We are above the level of 2019 in terms of purchases by American consumers in Europe,” Jean-Marc Duplaix, chief financial officer at Kering, said on the call. He expects the phenomenon to accelerate in the third quarter.
During the coronavirus pandemic, when international travel ground to a halt, Kering joined other luxury players in courting local customers to make up for the revenue shortfall.
“The share of locals in Europe and in the U.S., but also in China, has significantly increased. So when tourism is resuming, we will benefit from it and we will not forget about our local clients, of course, so it will be all additional,” Palus said.
Detailing the impact of Chinese measures designed to curb the spread of COVID-19, Kering said on average 20 percent of stores in mainland China were closed in the second quarter.
As a result, its luxury houses saw a 30 to 35 percent drop in local sales during the period, Duplaix said. “The situation has been gradually easing since June but remains unsettled,” he added.
Despite a dynamic performance from South Korea, Taiwan, Singapore, Malaysia and Australia, among others, revenues in Asia Pacific were down 15 percent in the second quarter.
Sales in Western Europe jumped 94 percent, while North America normalized with an 8 percent increase. Revenues in the rest of the world were up 24 percent, fueled by growth in the Middle East and Latin America.
As China has suffered, Western Europe and North America gained market share. They accounted for 26 percent and 27 percent of revenues in the first half, respectively, up from 21 percent and 25 percent during the same period last year. Meanwhile, Asia Pacific lost 8 points, representing 34 percent of overall sales.
Kering’s share price has fallen by more than 25 percent since the start of the year against the backdrop of looming recession, surging inflation, supply chain disruptions, Chinese lockdowns and the war in Ukraine. But Piral Dadhania, analyst at RBC Capital Markets, believes the stock is ripe for picking.
“We think Kering is an attractive stock, given its valuation profile and the potential for Gucci improvement,” he said in a report dated July 5. “We also appreciate the portfolio business model, and the strength of some of the brands including YSL and Balenciaga with longer-term potential for Bottega Veneta and the expansion of Kering Eyewear following two recent acquisitions.”
Kering said recently it is targeting revenues of 15 billion euros at Gucci. Detailing its action plan at its Capital Markets Day event in Paris last month, the group said Gucci’s medium-term growth hinged on fashion and timeless products, and there was strong potential in the men’s and travel categories.
Gucci plans to increase the proportion of leather goods in its sales mix, and expand its Gen Z clientele with aspirational categories, while simultaneously reinforcing the high-end offer to seduce mature customers. “The house is making good progress in its roadmap,” Duplaix reported.
Gucci is back on the top of Lyst’s quarterly hottest brand ranking after the spot was taken by Balenciaga for the last nine months, according to a report published on Wednesday.
Data compiled by the fashion shopping platform showed that searches for Gucci jumped 286 percent in the 48 hours after its collection with Adidas was released in June. The announcement of its collaboration with British singer Harry Styles on the Ha Ha Ha collection, which will be in stores in October, as well as the resort 2023 show in Puglia, also boosted the brand’s online engagement.
In June, Kering outlined Saint Laurent’s potential to become a megabrand, with a medium-term revenue target of 5 billion euros, double the 2.5 billion euros in sales registered last year. The house registered revenues of 742 million euros in the second quarter, up 31 percent on a like-for-like basis, and its operating margin hit a record of 29.6 percent in the first half.
“Saint Laurent’s trajectory remains spectacular, on track to deliver the ambitions presented last month,” Duplaix enthused. “In leather goods, the success of the new Icare handbag underscores the house’s ability to achieve higher price points.”
Sales at Bottega Veneta totaled 438 million euros in the second quarter, up 10 percent in comparable terms, benefiting from the return of tourism in Western Europe. The brand’s wholesale revenues fell 15 percent during the period as it continues to rationalize its network.
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“Bottega Veneta is right where we expected it to be at this stage in its journey,” Duplaix said.
Its “other houses” divisions, which groups brands including Balenciaga, Alexander McQueen and Boucheron, registered sales of 982 million in the second quarter, up 24 percent in organic terms. Menswear brand Brioni confirmed a sharp rebound, while jeweler Qeelin was impacted by its exposure to China.
Anticipating the impact of inflation, Gucci raised the prices of certain products by low- to mid-single digits in February, and again by mid- to high-single digits in June. Other brands pushed through price increases on shoes and handbags in May, but Duplaix did not comment on whether further price hikes were planned in the second half.
The Kering results come on the heels of figures from Compagnie Financière Richemont showing sales at constant exchange rates rose 12 percent in the April-to-June period, with double-digit revenue gains across all product categories and regions, except for Asia Pacific.
Meanwhile, Burberry reported that the Chinese lockdowns dented its growth in the fiscal first quarter. At constant exchange rates, retail revenue was flat in the 13 weeks to July 2. Hermès International is the next big luxury player scheduled to report second-quarter results, on Friday.
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