LONDON, United Kingdom — Kering has reported its Q4 and full-year 2015 results, with the conglomerate’s luxury division significantly beating expectations on Q4 constant currency growth.
Kering’s emphasis on improving return on investment capital is to be welcomed. In a lower growth luxury goods market environment, higher capital efficiency discipline will be crucial if luxury players want to provide good total shareholder return. Kering’s emphasis on retail space productivity is exactly what is needed — as is its focusing on organic growth, rather than mergers and acquisitions.
Innovation and creativity also become crucial in a more competitive market. Kering beat top-line growth estimates, proving that Gucci's management is on the right track and François-Henri Pinault’s courage in moving to a new creative leadership at the brand has paid off. Gucci’s Q4 revenue rose 4.8 percent compared to the same quarter in 2014 (beating analysts' expectations of 1.5 percent).
It is clear that Alessandro Michele is moving Gucci in the right direction, and his creative vision is translating into excitement in stores that hasn’t been felt for quite some time. Gucci has released a significant number of new styles that are starting to turn heads and, at the same time, is benefiting from promotions on older collections (something the brand also did in Q2).
Yves Saint Laurent outpaced analysts’ expectations, posting Q4 revenue growth of 27.4 percent compared to the same quarter in the previous year. However, the possibility that Hedi Slimane may exit the brand is cause for concern, as it has reached new heights under his creative leadership.
At Bottega Veneta, it is reassuring that new styles are being well received by consumers, as its stores’ assortment of “evergreen" products was beginning to cause déjà vu. That said, Bottega Veneta was Kering’s only miss, with Q4 revenue falling 3.1 percent on the previous year (analysts had forecasted a 3 percent increase). Eyes should be on this brand and its plans to revive demand momentum for the first half of 2016.
Luxury and lifestyle
At Puma, senior management may be tempted to "sail the tailwinds" and excite further momentum in the brand, which could prompt a long-awaited separation of the conglomerate’s Luxury and Sport & Lifestyle divisions and see the company extract the highest possible value for this asset. Focussing Kering on luxury goods would also have the beneficial effect of expanding its trading multiples, benefitting shareholders.
Operating profit at Kering was €1.65 billion, a touch below the €1.66 billion expected. However, this was anticipated, as Kering has clearly guided for a step-by-step return to profit margins for Gucci.
Rebuilding margins will be possible starting in FY 2016, as operating leverage and the removal of currency headwinds work in tandem. This is good news for our "self help" investment thesis (which would see Kering continue to Gucci and, ideally, divest Puma) and should continue to support valuation — even in what we expect to be a continuing difficult luxury goods market.
Luca Solca is the head of luxury goods at BNP Exane Paribas.