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Kering Chief Prepared to ‘Rebound’ From China Virus Disruption

Following a solid 2019 performance and positive start to 2020, Kering Group’s strategic plans for the year haven’t changed, other than the need to reallocate inventory and rethink production launches as the company shifts to Plan B while waiting out the health crisis in China.

In a Nutshell: “I don’t need to tell you that we live in a complex and fast-changing world, but our solid 2019 performance has reinforced my strategic resolve. In the past few weeks, after a very positive start to the year, our environment has changed significantly with the coronavirus outbreak,” François-Henri Pinault, chairman and CEO, said during a conference call to investors on Wednesday.

“Due to the developing nature of this situation, it is impossible at this time to fully evaluate its impact on our businesses and how fast they will recover. We are hearing lots of different theories on the speed and shape of the rebound, but the reality is that it is too early to predict,” Pinault added. “I don’t want to engage in guesswork, but based on past experience and knowing how dynamic and resilient the Chinese people are, we expect things to return to normal promptly once the emergency is over. And we are already working on the next steps.”

Like other luxury firms, 50 percent of Kering’s stores have halted operations due to mall closures, and the balance have reduced operating hours. “In Macau, the situation is very simple. All stores have been closed. In Hong Kong, no stores are closed. They are all open on reduced hours. So yes, we have a a strong drop in traffic and in sales over the last 10 day,” Pinault said.

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The luxury firm is postponing events, refurbishment and store openings. Pinault told investors that Kering has “already received some rent reductions from landlords,” adding that the company is prepared to “seize the opportunity of the rebound” whenever it starts.

The luxury conglomerate is also looking at production for the pre-fall collection, which hasn’t yet been manufactured. Kering, Pinault said, is looking at what to “launch” in balancing newness and carryovers, while keeping in mind that the latter “might be delayed” because the company can produce during the season, if needed.

Pinault also noted that one of the company’s strengths is its budgeting process, which requires each brand to have a Plan B in place in case of a downturn. “We are actively working with all brands on … short-term action plans to be taken to protect the profitability of the group,” he said.

That means rethinking inventory allocation for goods already produced.

“As you probably know, in our supply chain, at the beginning of the season, we send just part of what has been ordered by the regions, Pinault said, noting the remainder of the inventory is stored at worldwide level in Europe. “So we are now brand-by-brand reallocating that inventory to the other regions of the world to make sure we’re not too heavy on stock in China. So this is down.

“And we are reviewing also production launches,” he added. “And as you know, [with us] being very much producing in Italy, we have a production organization that is very flexible.”

With its current replenishment process, “we are able to redirect what has been already produced for China,” Pinault said.

Kering is interested in acquisitions but not in a hurry to make any deals.

“I don’t want any brand competing face-to-face with my existing brands,” Pinault said. “That would be destroying value in doing so. So in terms of product category, price segment on the market or style, we are always assessing the opportunities that could come on the market based on that.”

Net Sales: Revenues for the year rose 16.2 percent to 15.89 billion euros ($17.28 billion). The company said gross margin was up 15.5 percent.

Gucci saw a 16.2 percent gain in revenue to 9.63 billion euros ($10.48 billion), helped by “balanced growth across distribution channels,” the company said. Fourth-quarter revenue rose 10.5 percent, while North America posted a revenue growth of 6.2 percent in the period on a comparable basis in company-owned stores.

At Yves Saint Laurent revenues were up 17.5 percent to 2.05 billion euros ($2.23 billion), with revenue from company-owned stores and online up 15.7 percent on a comparable basis. Fourth-quarter revenue rose 14 percent.

Bottega Veneta’s revenues rose 5.3 percent to 1.17 billion euros ($1.27 billion), while comparable sales through the wholesale channel rose 6.8 percent. Fourth-quarter sales rose 9.4 percent.

Revenue at its other smaller fashion houses saw a combined sales gain of 20.3 percent to 2.54 billion euros ($2.76 billion). Balenciaga, which plans to re-enter haute couture, and Alexander McQueen both recorded sustained sales growth throughout the year, Kering said. Fourth quarter sales were up 17.2 percent.

“Sales in directly operated stores and online advanced 14 percent on a comparable basis, propelled by very strong performances from Gucci, Yves Saint Laurent, Balenciaga and Alexander McQueen,” the company said, adding that “online sales surged 22.6 percent year-on-year.” Wholesale revenue from the group’s houses rose 10.4 percent on a comparable basis.

By geographic location, sales were up 20.4 percent in the Asia-Pacific region, despite Hong Kong turmoil in the second half of 2019. Western Europe posted a 13.7 percent gain for the year, while North America and Japan were up 6.7 percent and 5.9 percent, respectively.

“Kering delivered another year of sustained profitable growth in 2019, as total revenues significantly exceeded the 15-billion-mark and our recurring operating margin topped 30 percent for the first-time ever,” Pinault said.

Earnings: Net income was down 37.4 percent to 2.31 billion euros ($2.51 billion) due to a non-recurring tax expense, but up 15.1 percent to 3.21 billion euros ($3.49 billion) as restated for 2018 using the first-time application of IFRS 16, the new accounting rule for leases.

The company said it is proactively investing to develop cross-business growth platforms in the areas of e-commerce, omnichannel distribution, logistics and IT infrastructure.

“The group’s operating environment remains unsettled with regard to macroeconomic and geopolitical uncertainties, national trade policies, and fluctuations in exchange rates. These uncertainties may be temporarily heightened during major events and crises, such as the recent coronavirus epidemic, given the impact on consumption trends and tourism flows, and their ability to affect economic growth,” Kering said.

CEO’s Take: “We are pursuing the implementation of our strategy–we are focused on developing our houses, executing flawlessly and creating value,” Pinault said.