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Kering executives: Chinese demand for Gucci remains strong

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Kering executives: Chinese demand for Gucci remains strong

Kering SA executives said they expect continued margin growth in the second half of the year as demand for its core Gucci brand in China remains strong.

Kering delivered 37.6% sales growth in its Asia Pacific region in the first half ended June 30. Its main profit-driver, Gucci, depends on the Chinese market to boost sales growth among younger, millennial consumers, Jean-François Palus, director and group managing director of Kering told analysts on a first-half earnings call July 26.

When asked about that consumer's vulnerability to macroeconomic factors — including a recent slump in the Chinese yuan due to fears of a looming trade war between the U.S. and China — Palus said that the brand has not yet seen any slip in demand. Gucci has a "solid" base of stores and a strong online presence in the country that grew rapidly and above expectations in the first part of the year, he added.

Kering's CFO Jean-Marc Duplaix also said that the brand has not yet seen any hit to the Chinese market.

"There is no negative side on the Chinese demand so far," Duplaix said.

The analyst call came after Kering delivered a 185.7% jump in net income for the six months ended June 30. Part of this surge came from a capital gain from the spinoff of its Puma division. During the first half of the year, Kering also announced that it would sell its stake in a number of its brands, including Christopher Kane, Stella McCartney and Volcom.

That selling-spree is over, Palus said on the analyst call. The company will, instead, continue to put the focus on its fully-owned fashion houses like Alexander McQueen.

"The common pattern of those brands is that we did not fully control them, and that's why we prefer to part ways," Palus said. "So this means that we do not intend to dispose of any other brands."

Meanwhile, Kering executives also told analysts to expect continued margin growth at the company in the second half of the year compared to the same period of the year. In the first half of the year, Kering posted a recurring operating margin of 27.5%, up 470 basis points.

Part of this future margin growth comes from the company's Gucci wholesale strategy. The brand will continue to pull back from its wholesale partners, giving the company more control on the pricing of Gucci merchandise and reducing promotional activity. Gucci's recurring operating margin hit a record-high 38.1% in the first half of the year.

"We are even more selective in regards to the partners we have, so it's all about the exclusivity of the brand to be very selective and to target who are the good distributors," Duplaix said.