Kering SA (KER) Earnings Call Transcript

Welcome to the Kering 2024 Third Quarter Revenue Conference Call and Webcast. Please be advised that today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Armelle Poulou, Group Chief Financial Officer. Please go ahead, madam.

Thank you. Good evening to all of you and welcome to Kering's 2024 Third Quarter Revenue Call. Starting on Slide 4. Our revenue in the quarter was close to EUR 3.8 billion, down 15% reported and 16% comparable. Creed provided 2-point positive scope impact while FX was 1 point negative. The quarter was challenging, marked by a worsening macro backdrop weighting on consumer sentiment. This translated into persistently weak traffic. [Technical Difficulty]

Ladies and gentlemen, please hold the line. The conference will resume shortly. Ladies and gentlemen, the connection with the speakers is back.

Okay. So sorry. We are extremely sorry for this technical issue. Apparently, the line was very bad. So I'm going to resume from the start. Good evening to all of you and welcome to Kering 2024 Third Quarter Revenue Call. Starting on Slide 4, our revenue in the quarter was close to EUR 3.8 billion, down 15% reported and 16% comparable. Creed provided 2-point positive scope impact while FX was 1 point negative. Third quarter was challenging, marked by a worsening macro backdrop weakening on consumer sentiment. This translated into persistently weak traffic. By region, we saw deceleration coming mostly from Japan on the back of the stronger yen and from Asia Pacific. At the same time, we have not yet seen any inflection in North America and in Western Europe overall, the summer was soft. In this context, we continue to focus on the execution of our strategy, sustaining efforts to elevate and broaden the relevance of our brands across segments and categories. This is coming together with weakening quality of sales from both a product and a distribution standpoint. The gradual streamlining of outlets, including an additional closing at Gucci in the quarter, further penalized our performance as did the downsizing of wholesale. At the same time, we pursue our plans to support the enrichment and rejuvenation of our houses' product offer as well as brand desirability. Moving on to our quarterly revenue in more detail on Slide 5. By segment, there are not many changes in the big picture with Bottega Veneta still the bright spot, Kering Eyewear and now Beauté providing resilient growth while other segments remain in negative territory. By region, our revenue changed quite substantially year-on-year. Asia Pacific accounted for 29% of the total, down 5 points. Western Europe gained 2 points, North America and Japan each gained 1 point, respectively, at 32%, 23%, and 8% of revenue and Rest of the World at 8% of revenue was up 1 point. On Slide 6, let's review Q3 top line by channel and region. Retail, accounting for 75% of revenue was down 17% comparable. In Q3, traffic once again was subdued across most regions and particularly weak in Asia Pacific. Online performance didn't provide much support, notably due to the winding down of our presence in certain e-concessions. Online accounted for 10% of retail revenue. Our footprint at 1,816 stores, showed a limited net increase of 15 units compared to June end. More than ever, our brands are focused on optimizing their networks, concentrating on fewer but higher-quality locations. Gucci store count decreased by 3 net units while Saint Laurent and Bottega Veneta increased by 1 and 2, respectively. For their part, our jewelry brands as well as Creed continue to selectively expand their reach. Wholesale and other revenue accounting for 25% of the total was down 12% comparable in the quarter. This is a result of somewhat different situations. At our luxury houses, wholesale was down 27% as we continue to downsize this channel on top of order reduction. This drop was partly offset by the performance at Kering Eyewear and Beauté, up 5% and once again, a sharp increase in royalties and other revenue, up 18%. On Slide 7, let's have a look at retail performance by region. Western Europe and North America were down respectively, 11% and 15% comparable, a slight deterioration compared to the second quarter. This being said, there was no noticeable slowdown when looking at the spending by nationalities. In Western Europe overall, the summer tourist season was lackluster with some discrepancies by country, brand and nationality. To some extent, our houses were impacted in France by the Olympic Games. Contribution from Middle Easterners and, to a lesser extent, U.S. citizens were resilient, while all major Asian nationalities were down. In North America, polarization based on brand positioning persisted and Bottega Veneta in the higher-end segment continued to perform very well with Q3 retail up 22% comparable in the region. As previously mentioned, the bulk roughly 3/4 of the sequential slowdown came from Japan and Asia Pacific. On the back of multiyear high comps and the recent yen strengthening, Japan was up 3% comparable. Tourism was still up nicely but decelerated, while trends with locals were much in line with Q2. The price gap between Japan and other markets is gradually becoming less attractive. Asia Pacific declined 30% comparable. The slowdown is driven by Mainland China, while trends in Hong Kong, Macau and Taiwan showed a very slight improvement compared to Q2. Broadly similar to Q2, 1/3 of spending by the Chinese cluster took place outside of its home market. Close to 80% of their overseas spending remain in Asia, including Japan. All in all, revenue from the cluster was down close to 35% with differences from brand to brand. And finally, Rest of the World was up 2% comparable, driven by the Middle East. Let's now move to our houses, starting with Gucci on Slide 8. Q3 revenue stood at EUR 1.6 billion, down 26% reported and 25% comparable. The same decline applies to the retail channel, you will find, as usual, detailed by region in the appendix. Gucci, still in offer ramp-up mode, was overly impacted by current market conditions, especially in Asia Pacific. On average, newness represented about 35% of revenue as the seasonal products started to hit the shelves. This was reinforced by introductions, especially in handbags from September. Ready-to-wear, supported by injection of newness outperformed as a category. Novelties in handbags meeting a broad range of functionalities, styles, and segments had a good early performance. The Blondie launch since late September is supported by an extensive communications campaign, blending fashion authority, luxury settings and storytelling. Gucci's iconic Jackie line also posted a solid performance. While newness is moving in the right direction, it is not yet enough to offset the performance in carryovers, especially handbags. Wholesale was down 38% in the quarter as the house is ever more selective and prioritized deliveries of novelties to its own retail network. At the same time, in certain regions, wholesalers have to deal with their own difficulties in the current environment. Royalties and other revenues were up 9%. We recently announced that Stefano Cantino will take the helm as Gucci CEO, replacing Jean-Francois Palus. With fundamentals now secured, it was the right time to install new permanent leadership for the brand. Turning to Saint Laurent on Slide 9, revenue in the quarter was EUR 670 million, down 13% reported and 12% comparable. Wholesale was down 20% as the brand continues to raise control over its distribution and the challenging business conditions. Retail was down 12% comparable, dragged down by Asia Pacific and deceleration in Japan. Against this background, Saint Laurent further enriched its collection, introducing both seasonal variation of its bestsellers and entirely new lines. There is a solid array of launches scheduled between now and the end of the year across all segments. Saint Laurent Spring '25 fashion show was widely acclaimed, exploring many facets of the house women silhouettes and cultivating even stronger desirability. On Slide 10, Bottega Veneta, which continued to perform consistently. Revenue was close to EUR 400 million, up 4% reported and 5% comparable. Growth was fueled by retail, up 9%. Beyond the market's appreciation for top-end brands, Bottega Veneta's healthy momentum benefits from its iconization strategy, the resonance of its fashion shows and its highly successful leather goods proposition. AUR was up and Bottega Veneta continues its expansion on the most exclusive client segment. Finally, the brand is also extending its product offer with the recent launch of fragrances. Ongoing rationalization of third-party distribution resulted in a 10% decline in wholesale. On Slide 11, you see that revenue of the other houses was down 15% reported and 14% comparable at EUR 686 million. The quarter was still substantially penalized by wholesale, down 28%, while retail was down 10% comparable. Trends were challenging for our soft luxury houses. Balenciaga was impacted by weak traffic but posted solid growth in leather goods due to highly successful recent handbag launches, such as Le City, Rodeo and Bel Air. At Alexander McQueen, the first new creative collection just started hitting the shelves. Brioni posted steady growth with increased penetration of its leisurewear offer. Our jewelry houses were more resilient but not fully immune to the overall regional trend. Kering remains impacted by its exposure to China. The jewelry houses continue to animate and complement their offer, enhance visibility through events and campaigns and selectively expand their footprint. In September, Boucheron unveiled a magnificent boutique on New York's Madison Avenue, its first in the U.S. On Slide 12, Kering Eyewear and Corporate segment, which also encompasses Kering Beauté. I'll say a few words about both of them. Sales at Kering Eyewear were up 4% comparable in the quarter. Growth was fueled by improvements in key house brands. Kering Eyewear, now celebrating the tenth anniversary of its creation, is actively supporting the growth of all its brands through an intense schedule of marketing activities around the world. Turning to Kering Beauté, Q3 was a busy period for Creed, delivering solid growth with strong performances in the Americas, Europe and the Middle East and in travel retail. Here also, newness is a key performance driver. Creed introduced 2 unisex amber fragrances in September, Centaurus and Delphinus. And in another major development, Kering Beauté put the final touch on the launch of Bottega Veneta's collection of 5 high-end fragrances. They hit the market on October 2 and for the moment, are available exclusively through about 100 stores in the brand's network and on its website. We are very pleased with the reception of Kering Beauté's very first launch for one of our houses. Before Claire and I take your questions, I would like to share a few words of conclusion. We are keenly aware that we are implementing a radical transformation at Gucci and in the group in an environment that is far from optimal for the whole luxury industry. This affects the pace of our execution and it definitely adds to the pain we endure in the near term. But it doesn't change our determination to achieve our goals. At each of our houses and at group level, we have clear strategies to elevate the desirability of our brands, covering every aspect of their business, from creativity to communications. This plan has been developed over the past year or so in close cooperation between the management teams of the brands and the executive leadership at Kering. Their implementation is monitored step by step. The top priority is quality of sales in every house and in every segment, regardless of the clientele target and the price point they occupy. Products are, of course, central to success. Throughout this presentation, I have insisted on what we are doing to enhance quality to bolster both newness and carryovers and to ensure a sound product offer architecture. These actions cannot come without an impact on top and bottom line dynamics, all the more at a time when consumer demand is fragile around the world. This is why under the current circumstances, we expect full year 2024 recurring income from operations to amount to approximately EUR 2.5 billion. With the goal of protecting our performances as much as possible, we have tightened scrutiny of every aspect of our operations and put in place stringent programs targeting OpEx as well as CapEx. The impact of our cost optimization initiatives like our efforts to rebuild healthy, sustainable top line growth will not materialize overnight. But we are all pushing in the right direction and we are all committed to a successful outcome. As I told you in July, we take no shortcuts. We want to make 100% sure that top line growth, when it returns, is based on absolutely sound premises. And now we are ready to take your questions. Operator?

[Operator Instructions] The first question is from Aurélie Husson-Dumoutier from HSBC.

Yes. Several questions from me, please, 2 on Gucci, 1 on Bottega Veneta. On Gucci, could you please give us a bit of color on October trends, especially as the new handbags have been launched? Are you seeing some improvement? Also on Gucci, the consensus expects currently 1% top line for full year '25. What is your view on this number? And finally, maybe on a more positive note on Bottega Veneta, how do you explain such a nice performance in the U.S., which was up 20% organically in Q4? And also on 9 months, it's like plus 22%. So what is happening in the U.S. that could be maybe replicated in other regions?

Thank you, Aurélie, for your questions. So regarding October trends, I would say that at group level, September was slightly better than the average of the quarter and October is starting quite on the same trend. So I would say that October is quite in line with September but was a touch better than the quarter. Regarding your second question regarding 2025, it's a Q3 call so I will not comment on 2025, sorry. And regarding your third question on Bottega Veneta, yes, first, I would like to highlight that the very good performance of Bottega Veneta in the U.S. is also very good in Europe with the same performance actually and even better if you consider Middle East. So we have an extremely good performance of Bottega Veneta in the U.S., in Europe and in the Middle East. Why? How can we explain that? Certainly, I think, yes, of course, Bottega Veneta is positioned on the high-end segment that is more resilient but it's also the result of its creative proposition. This is, I think, blending a very strong creativity with a very good quality and cost matching of the products with a very good reception, especially in the handbag category, where we see a very consistent growth quarter after quarter.

The next question is from Ben Rada Martin with Goldman Sachs.

I just have 2, please. My first is just on the moving parts for the FY '24 operating income guidance. I wonder if you can maybe talk about the deleverage both on gross margin and OpEx just for our thinking to how it flows through those 2 cost lines. And then secondly, just on the appointment of Stefano, interested whether this is a sign that the organizational and operational changes at Gucci are now complete. And should we think about the brand now positioning more in a growth territory despite the near-term macro weakness that we're seeing?

Thank you very much. So on your first question on the moving parts, as you know, considering the performance of the Q3, that was quite challenging, we have to be more caution of the top line category for Q4. We still expect some headwinds on gross margin. And at the same time, we are making some efforts on the cost to offset part of it. But as you know, it will not offset completely the deleveraging coming from the gross margin. Regarding your question about Stefano and the team at Gucci. So I would say that the team is quite complete now at Gucci at the top level with all the different change that you've seen recently. There will be some further change in the organization, especially in the communication organization. We will be happy to welcome some new senior executive to lead the communications function. And that should be announced in due course. But we expect the new leadership structure in communication to be fully operational by the end of 2024.

The next question is from Oliver Chen with TD Cowen.

As we think about the Gucci brand, what are the launches in terms of the handbag launches and the percentage of total that we should be excited about in the next quarters? Also, Asia Pac was worse than you expected it sounds. Do you expect that trend to continue, the oversized negative impact from Asia Pac and for that region to be -- to continue to be more negative than North America? And how might you compare what you're seeing in North America, which seems less negative relative to Asia Pac? And then finally, as we think about variable versus fixed cost to the earlier question, maybe you could speak to which of these elements are more variable. At the same time, I know you're protecting the brand and seeking a long-term elevation strategy.

Thank you very much. So answering to your first question, so you know we have introduced, in September, 3 different lines of handbags, the Emblem. That is a line that is priced around EUR 2,000. We launched, that is, I would say, very functional, that is resonating very well with our customers, both existing and new customers, especially in EMEA and in China. We've also introduced Blondie. Blondie is a bag that is positioned a bit higher. And that has been very much pushed also by the communication, the nice Blondie communication campaign I mentioned in the script. And then we launched the Gucci, the B Bag, which is this oversized bag that is more of a fashion statement but it's where we are not looking for large quantities but it's a strong image bag for the brand. We -- there is another launch that has been sort of prelaunched but that you will see more over the holiday season, which is the -- an bit soft. And so that are the main lines that we launched. Of course, in the coming months, you will see also some rejuvenation on the carryover lines that will come because, as you know, it's very important that we rejuvenate our offer, both in newness but also in the carryover category. What can I say about the reception of those launches? I would say that the new offer is resonating very well with existing customers, both regarding the style, the design, and the functionality, which with a much higher perception in quality, both in terms of materials and craftsmanship. Of course, this is early stage. And this introduction, we know occur in a difficult market environment. However, it confirms that customers are welcoming innovation and creativity, which is good news. Regarding your second question about Asia Pacific and is it going to continue? I'd like to know also. The context in China is not easy. We know it's very much a question of consumer confidence because we have some headwinds in the macro. And at the same time, we can -- we know that the saving rate is very high at the moment in China. There's been a few announcements in China recently of measures. It's a bit early for us to know what would be the effect on the consumption of luxury products and when. So we will see in Q4. Regarding the U.S., I would say the U.S., it's -- we will see what will be the impact of the cuts of the rate. And also, we know that there could be some impact of the U.S. elections. So we will see going forward. What we noticed in Q3 was still that the high-end segment is more resilient than the most aspirational segments. And then coming back to your third question. So it was on variable and fixed costs. So I would say our structure, as you know, is especially due to the retailization that we've done over the past years. Of course, the fixed part of cost is quite important. But we are working on both. We are working on being more efficient in the production while raising the quality of the product and we invest in the quality of the product very much. And we are trying to decrease the cost. I can give you some example. We've done a lot of efforts on the transport costs that are, for example, variable. But we also did some efforts in some costs where we did a lot of investments in the past like IT, CRM, digital, where we tried to leverage on our previous investments. So we are chasing cost in every area. Now as you know, considering the cost structure, it can only offset part of the deleveraging coming from the top line.

The next question is from Zuzanna Pusz with UBS.

Just 2 for me. First of all, I was wondering if you could maybe tell us a little bit about your plans on the retail front. So it was interesting, you mentioned that Gucci actually closed some stores. I presume they must have been the outlets, given your prior comments. But given the rather big drop in revenue this year, I'm guessing that probably densities are very much lower than they were a few years ago. And you probably must be thinking really about some retail network rationalization. So if there's anything you could maybe share at this stage, how many stores you may have to close, which regions would be most impacted, that would be very helpful. And secondly related to that and I completely understand you can't comment on 2025 but given the rather challenging context, we are trying to really understand how we should think about the margins for Gucci for next year. So I mean, given that you mentioned you'll be investing in the quality of the product and you continue to, I presume gross margin could be still a bit under pressure next year. You continue to invest in the brand, which is the right thing to do. And that's why I'm asking about the retail network because I presume unless you reduce your rental cost, I don't know, it's -- I don't know, it's difficult to really see the margin going up next year, sort of keeping the sales component constant. So these are just my 2 questions.

Thank you, Zuzanna. So yes, regarding the store network, what is our priority, is to make sure that we have the right store network in terms of quality but of course, also in terms of size and to make sure we are in the best location with the best footprint. That means that we are reviewing, of course, as we generally do but probably more importantly, this year, our footprint with a focus to optimize the locations. So avoiding dilutive and fragmenting presence but also very important to upgrade the store presence. So doing that, it maybe -- so I mentioned already the closure of some outlets, especially in Asia Pacific. In terms of outlet closure, that will continue next year and will be amplified. In terms of those network, we are going to consolidate our footprint, especially in Greater China in 2025. But at the same time, we will size opportunity to upgrade part of the locations. So to be clear on your questions, yes, there will be some evolution of the store network. The idea is to close the smaller stores or the ones that are not in the best location and probably extend the size of some of the best stores in order to get the right footprint without -- because it happens that in some Tier 1 cities, we have many stores, sometimes very close, one to the other. And it's probably a better idea to concentrate on very nice stores but not that many. Regarding your second question on '25, I'm going to disappoint you again but I'm not going to talk about '25. Yes.

So I totally understand. But just maybe to follow up then on the retail network. So would you say that it's fair to assume that next year, your total selling space for Gucci is going to decline?

It's -- I mean, it's not too much of a question of selling square meters because it's a question also, some stores, smaller stores are going to be closed and probably some of the stores are going to be extended. So I'm not going -- I cannot be very precise in terms of square meters. But of course, the idea is to adapt to the demand but while being sure that we have -- we keep the right network for the rebound.

The next question is from Luca Solca with Bernstein.

A question about Japan. We saw quite a significant deceleration there. And we know that in Japan, you had the common tourists buying products but you also had -- that was my understanding, professionals, daigous arbitraging the price differences between Japan and China. As you see the data, do you have a sense that the very significant deceleration is coming from the professionals sitting on the bench and pausing their activity, given the very significant ForEx exchanges? Or do you have a sense that it's actually the actual tourists that are now coming and spending less in Japan from China? This would be my first question. I also wonder about your inventory situation. You were talking about gross margin pressures as we take into account the EBIT prospects. I wonder how you stand on finished products inventory, especially when it comes to Gucci. And if not, that's been a potential area of concern as far as the speed of introduction of new products was indeed concerned. And then last but not least, I remember you were talking about having partners or co-investors for your real estate recent investments. Apologies if you confirmed that, that has been already put in place but I was wondering whether you had any update on that.

Luca, it's Claire. So I'm going to take the first one. And once again, I want to apologize for all the technical issues and we are now from a mobile phone but it looks like it works well. So let us know if it's not the case. So for Japan, yes, deceleration clearly coming from the tourist component because locals were, in fact, improving a bit, I would say, sequentially in Q3 compared to Q2. Now within the tourist component, we know the nationality. About daigous, they're always resurging where when you have some price gap and interesting price gap. So now we have control and the quotas in place in all regions to make sure that we limit -- well, we identify and we limit as much as possible, #1 action. And #2 action is obviously to and that's what all our brands have been doing, is to have some price increases regularly on the price in Japan and especially on some SKUs that are more, I would say, skewed towards the tourist purchase. So I think that's the comment we can make for Japan.

So Luca, regarding your second question on inventory, inventory is really an area where we can celebrate great progresses that we've done and we've discussed that already in July. But this is really the result of the new approach that we have in terms of planning, in terms of buying, in terms of production agility and time to market, where we've done some great progress in terms of logistics and supply chain and in terms of sell-through. As a result, we are very satisfied with the fact that the inventory that was done in June versus December, even in the context of decelerating sales, is again lower at the end of September. So this is also, as a result, we are not -- we don't feel any pressure in terms of inventories. And this is also what is allowing us to continue our strategy in terms of outlet reduction. In terms -- for your second question, in terms of real estate, we are making some good progress in welcoming some partners in some financial vehicles to deleverage our real estate. We are quite confident that we will close a deal on part of the total by the end of the year with the signing by the end of the year and a closing that would occur end of the year or beginning of next year. And then we will continue to work on other parts in 2025.

The next question is from Edouard Aubin with Morgan Stanley.

And Claire, I can confirm that the audio is perfect. So don't worry about this. So 2 or 3 small follow-up for me. Armelle, so you talked about your willingness as a group to continue to invest behind your brands and build up brand desirability. How are you -- you were asked about some of the fixed cost variable. In terms of A&P and clienteling, how are you thinking about it? Because obviously, the size of your brand in terms of -- some of your brands in terms of euros has been shrinking. So in terms of are you looking at keeping A&P constant as a percentage of sales or in absolute because it would seem that you're going to have mathematically less firepower to invest behind this brand. So that's question #1. Question #2 is on your net debt and dividend policy. Am I right in kind of thinking that your net debt should be around EUR 12 billion, excluding any real estate transaction before the end of the year? And if you could confirm, Armelle, that you still have in mind a payout -- dividend payout policy of about 50%? And then sorry, last one, small one on Creed. Could you please comment on your expectation for sales and EBIT versus last year? So is sales of -- and EBIT of Creed going up or down or flat? So if we could have an idea, that would be very helpful.

Thank you, Edouard. So regarding A&P, yes, we continue to sustain investment in communication in 2024 behind our brands. This is, of course, we have also worked on optimizing their A&P spending to maximize impact. So all in all, I would say, A&P should be sort of flat which means, of course, that as a percentage of sales, it will be around -- it will be high single digits. We are working on A&P not only -- it's not only a question of how much we spend, it's also a question of how we spend the communication budget. And Stefano, for sure, is -- and what I was mentioning about the communication team at Gucci is that we are working on making the communication at Gucci even more efficient. As you've probably seen the last campaign for Blondie, you see that it's a campaign that, at the same time, is promoting a new product, which is a Blondie bag but it's also a brand campaign because it's very well reveals the soul of Gucci and also referring to its heritage and the fact that it's rooted in London. So we think that we are also going to make much progress in the impact of our communication strategy, also in the way we diversify between the different media that we use. You've seen probably more print and billboards on Gucci recently. But that's the way we look at communication going forward. Regarding your second question, net debt, I would say that our forecast is more around EUR 11 billion for the end of the year and outside any real estate evolution. And in terms of dividend, our payout policy, you're right, we are going to follow our payout policy, which is 50% of net recurring income. And we will apply that this year.

And sorry, Creed?

Yes, yes, sorry.

Yes. [Technical Difficulty] for the confirmation that the audio is good now. Well, Creed, you know we don't disclose it stand-alone for now, at least. So it's in the corporate segment. The only thing that we can tell you is that is developing very well. Top line in Q3 was very strong in terms of growth rate and that we still expect quite a very high contribution from Creed this year. The other thing you have to take into account is that Creed is in Kering Beauté. Kering Beauté is a business where we have some cost in terms of startup cost. So we will help you doing the math when we report the full year. But in any case, the contribution of Creed is very high and perfectly in line with our plans when we did the acquisition.

Okay. No, that's very clear. Sorry, just one small clarification on the -- Armelle, you talked about the inventory being down in September versus June. You're talking in terms of euros, not number of days, right? Sorry, I couldn't hear you.

Sorry, I'm talking in number of units.

The next question is from Charles-Louis Scotti with Kepler Cheuvreux.