The latest spate of financial reports by the major luxury goods groups indicates that the high-end market for leathergoods, shoes and other fashion products continued to grow in the second quarter of this year. However, as pointed out in the report released last Friday by PPR, parent company of Gucci, the bulk of the growth is shifting from the more mature markets to China and other emerging markets.
In analyzing the situation, PPR said the global economy got off to a fairly buoyant start this year, as shown in the first-quarter reports of luxury goods majors, but then it ran out of steam in the more developed countries, partly due to a structural weakness of the economy, the inflation in raw material prices and a series of convulsions such as the March tsunami in Japan. The slowdown also reflected higher tensions in the sovereign debt of some countries.
However, emerging countries held up well against these recent events and continued to grow at a steady pace. Addressing financial analysts, François-Henri Pinault mentioned the fact that Chinese consumers are still looking for the most expensive items, independently of the brand although an executive of PPR confided his belief that the relentless heating up of the Chinese economy will lead to a series crisis sooner or later.
Gucci and the other luxury brands of the group have not encountered any problems in reflecting the higher raw material costs in their prices, partly because they represent a small percentage of their total cost structure and partly because they have been engaged in a continuous trading-up process over the past couple of years. Pinault said the process of raising average selling prices has been accelerating at Gucci lately, with savy adaptations to each product category and to each market, and with very significant impacts on sales and margins.
In the first half of 2011, the recurring operating income of PPR's luxury goods operations jumped by 39.4 percent to €557.8 million on 22.6 percent higher revenues of €2,237.0 million. Currencies had a slightly favorable impact on the gross margin of the Gucci brand, whose operating margin before amortization (Ebitda) grew to 34.0 percent from 31.3 percent in the corresponding period of 2010.
Yves Saint Laurent turned around to an operating profit of €6.6 million in the first half from a loss of €6.4 million in the year-ago period as the brand's sales grew by 29.5 percent to €152.7 million during the period, with a 30.3 percent rise at constant exchange rates. The brand's retail sales grew by 32.2 percent, with an increase of 39.8 percent in the second quarter, and orders for the next autumn/winter season are up significantly.
Leathergoods represented 57 percent of sales for the Gucci brand and 56 percent of sales for PPR's total luxury goods segment. Company officials declined to break down sales results further by product categories, but indicated that those achieved with shoes and leathergoods were in line with the general results posted by Gucci and YSL. Shoes and leathergoods represented almost two-thirds of sales at YSL. In particular, the management pointed to the success of the brand's Tribute, TribToo and Palais shoe collections and of several permanent and new collections of leathergoods.
YSL's growth accelerated in the second quarter in the Asia-Pacific region (+44.1%), in Western Europe (+41.3%) and in North America (+51.8%). YSL's development potential is regarded by Pinault as being very strong, and PPR will accelerate the opening of new stores for this brand, particularly in emerging markets. During the first half, YSL closed three stores in mature markets and opened five new ones, two of which are in the Asia-Pacific region.
The group's other luxury brands had a combined 22.0 percent increase in revenues to €318.1 million in the first half, and their operating margin moved up by 2.7 percentage points to 9.5 percent. Balenciaga posted a very high sales increase in leathergoods. Sergio Rossi generated higher sales in the second quarter, but while its sales were off for the first half, its operating income edged up thanks to a significantly higher gross margin.
At comparable exchange rates, Gucci's sales grew by 21.6 percent for Gucci in the first half of the year, and by 23.4 percent in the second quarter, including a 24.6 percent at company-owned stores. In the emerging markets, Gucci's sales climbed by 29.3 percent in the first half and came to represent 42.9 percent of total revenues. The brand's sales went up by 35.6 percent in Greater China in the first half and by 39.1 percent in the latest quarter.
Significantly, Gucci's sales in Japan were up by only 2.5 percent on a currency-neutral basis in the first half, but they recorded an impressive rise of 14.5 percent in the second quarter, testifying to the resilience of the Japanese market to the March tsunami.
Gucci's sales in North America improved significantly, posting increases of 24.4 percent in the second quarter and 29.5 percent for the full six-month period. In Western Europe instead, which still represents 29.5 percent of the brand's total sales, the turnover went up by only 14.4 percent in the quarter and by 15.3 percent in the full first half.
Overall, the PPR group enjoyed a 7.3 percent increase in total revenues to €7.2 billion in the first half, and the operating margin from its continuing operations (Ebit) went up to 10.4 percent from 9.7 percent. The Ebitda margin went up to 12.7 percent from 12.1 percent.
Pinault is determined to continue to invest in the luxury goods and sports & lifestyle segments, which together delivered an 18.2 percent Ebit margin on 18.2 percent higher revenues of €3.68 billion in the first six months of the year. By contrast, Fnac, Redcats and other retail operations saw their total sales decline by 2.0 percent during the period. They represented 56 percent of total revenues and 10 percent of the group's operating income. Mainly through Redcats, e-commerce represented 16.3 percent of the group's total revenues, up from 15.6 percent.
Puma's sales improved by 11.4 percent to €1,446.9 million in the first half, and PPR's sport & lifestyle segment is going to get a major boost in the second half through the consolidation as of July 1 of an American action sports brand from, Volcom (more on this segment in Sporting Goods Intelligence Europe).
The group's net income from continuing operations reached €466 million in the first half, up by 23.8 percent from the same period a year ago. The management is confident that sales and profits will continue to grow in the second half.