Can U.S. Consumers Keep Delivering Growth for Luxury Brands?

·7 min read

PARIS The U.S. consumer is proving a powerful growth driver for luxury brands as they emerge from the coronavirus pandemic, reducing the sector’s reliance on China — but can the momentum last?

Kering reported on Tuesday its luxury houses saw retail sales in North America soar by a whopping 263 percent year-on-year in the second quarter, with brands led by Gucci gaining traction with all age groups, despite a continued dearth of tourism due to long-running travel restrictions designed to curb the spread of COVID-19.

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Revenues in the region were up 86 percent compared with the same period in 2019, considered a more reliable comparison base due to the widespread disruption caused by lockdowns last year.

While stimulus checks resulted in a jump in U.S. retail sales in March, luxury executives believe the trend runs deeper than that — as evidenced by a flurry of investment in new stores, not only in traditional retail hubs like New York City, Los Angeles and Miami, but across the nation.

“Obviously, there is a situation where there is a very high degree of confidence of the U.S. consumer, which is not only due to the stimulus checks,” Jean-Marc Duplaix, chief financial officer of Kering, said on a conference call to discuss the group’s first-half results, released after the market close.

Kering said revenues in the three months to June 30 jumped 91.1 percent year-on-year to 4.16 billion euros, representing a rise of 95 percent in comparable terms. This was above a consensus of analyst estimates, which called for an 83 percent sales rise. Sales were up 11.2 percent versus the same period in 2019, it added.

“The trends in the U.S. were sustained throughout the quarter with all the different clusters,” said Duplaix. “Maybe it won’t last, but what is interesting is that we have more and more new generations and new profiles of customers coming to our stores, and I think that it’s something that is sustainable in the long run.”

While the short-term outlook remains cloudy, Kering plans to ramp up investments to win the loyalty of recent converts to its brands. It intends to increase marketing and clienteling actions at Gucci to accompany the recent relaunch of the Diana handbag, and the delivery of its Aria ready-to-wear collection in late September.

“In the long run, we are very confident that we have been able to attract new clients, and that we should continue to invest in the U.S. to be sure that we can reattract these clients in the stores,” Duplaix said.

Gucci, the group’s star brand, saw retail sales in North America jump 225 percent in the second quarter, even as the Asia-Pacific region posted a 48 percent rise, while Europe was up 75 percent.

This reflected a tougher comparison base for Asia, which emerged from the pandemic much earlier than other regions. Sales to Chinese consumers remained very robust, up double-digits compared to the same period last year, and ahead of 2019 levels, Duplaix noted.

However, those customers are no longer gobbling up market share. “Because of the surge in terms of performance with American clients, the share of Chinese clients in the total has not changed so much,” he said.

Revenues at Gucci, which is celebrating its centenary, totaled 2.31 billion euros in the second quarter, up 86.1 percent on a like-for-like basis, following a 24.6 percent rise in the first quarter.

That was above the consensus forecast for a 79 percent jump in comparable sales at the maker of Jackie handbags and horsebit loafers.

By comparison, organic sales at LVMH Moët Hennessy Louis Vuitton’s key fashion and leather goods division rose 122 percent year-over-year in the second quarter, reflecting the resilience of its star brands Louis Vuitton and Dior. Compared with the same period in 2019, the division’s revenues were up 40 percent.

LVMH reported on Monday that sales in the U.S more than doubled in the second quarter and were up 60 percent in the first half, almost equaling growth in Asia, excluding Japan, where revenues rose 70 percent during the first six months of the year.

The world’s biggest luxury group recently opened a temporary store for Dior on Fifth Avenue in New York City as part of a vast U.S. retail expansion program for the brand, while Fendi earlier this month unveiled a gleaming new flagship on the corner of 57th Street and Madison Avenue.

While Kering is globally more conservative in terms of store openings, it plans to increase spending on communication and marketing in the second half as market conditions improve.

The group, whose brands also include Saint Laurent, Bottega Veneta and Balenciaga, posted net income of 569.3 million euros in the first half, up 159.5 percent year-on-year. Recurring operating profit rose 134.9 percent to 2.24 billion euros, yielding an operating margin of 27.8 percent, up from 17.7 percent in the same period last year.

Kering said recurring operating profit was almost equivalent to its level in the first half of 2019. By comparison, LVMH reported that profit from recurring operations was up 44 percent versus the same period in 2019.

Jean-François Palus, group managing director of Kering, nonetheless sounded a note of confidence. “Our performances in the first half were excellent, consistent with the path we outlined at the beginning of the year. We are not slowing down the pace of our strategic initiatives,” he said on the conference call.

“The pandemic is not behind us and we are fully aware that we are operating in an environment that can change rapidly. This being said, as far as factors we can control are concerned, we are firmly back on our profitable growth trajectory,” Palus added. “With an abundance of initiatives and activations across the board scheduled for the second half, we are confident in our prospects for the full year.”

Duplaix said he expected profit margins for Gucci and other brands to continue to improve in the second semester, despite the additional investments.

Organic sales at Saint Laurent rose 118.5 percent in the second quarter, with retail sales in North America up 399 percent. Profitability was back to pre-pandemic levels and the house resumed its store expansion, with 12 net openings in the first half, mostly in Asia-Pacific and North America.

Comparable revenues at Bottega Veneta were up 69 percent in the second quarter, with retail sales in North America gaining 472 percent, far outstripping any other region. The brand was the last to bring its e-commerce activities back in-house, completing a group-wide process launched in 2018.

Like-for-like sales at other houses, a division that includes Balenciaga, Alexander McQueen and Boucheron, rose 111.3 percent during the quarter, with both soft and hard segments recording triple-digit increases.

Following its recent sale of a 5.9 percent stake in sportswear maker Puma, Kering is in a strong position to make a sizeable acquisition following smaller investments this year in luxury resale platform Vestiaire Collective and Cocoon, a London-based subscription platform for luxury handbag rentals.

The Kering Eyewear division bolstered its portfolio with the acquisition earlier this month of Danish brand Lindberg, but Palus once again said Kering was on the lookout for a bigger deal — though he declined to comment on any specific companies, such as Burberry, which is frequently discussed as a potential target.

“This is really an add-on acquisition and this is not exclusive of a more transformational move,” Palus said of the Lindberg acquisition. Analysts say Kering needs to reduce its reliance on Gucci, which accounted for three quarters of its recurring operating income in the first half of 2021.

“Luxury is about scarcity, so indeed, there are very few targets, but we are very active on watching the market and we are working to find the best target and at very good conditions, as always. It’s what we’ve been doing for the past years, and what we will do in the future,” Palus said.

Despite its poor track record with U.S. brands, following short-lived investments in action sports brand Volcom and the Florida-based Tomas Maier label, perhaps it’s time for Kering to cast its net across the Atlantic once again.

SEE ALSO:

Marco Bizzarri on Next Chapter of Gucci

LVMH Sees No Wallet Shift Away From Luxury Goods as Markets Reopen

Marco Gobbetti on the Velocity of Luxury, and Building Up Burberry

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