Kering SA

PAR:KER

Earnings Call Transcript 2018-Q1

[Operator]

Good day, everyone, and welcome to the 2018 first quarter revenue conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean-Marc Duplaix, CFO. Please go ahead, sir.

[Jean-Marc Duplaix]

Good evening to all of you, and welcome to this call to review Kering's sales in the first quarter. Slide 4 provides a group summary. This quarter, under our pure player profile, Kering delivered superior growth. Revenue was up 27% reported and 36.5% comparable to EUR 3.1 billion. FX represented a significant drag about 9 percentage points. Let me start by diving into the scope of consolidation. As announced this quarter, Puma, Volcom and Stella McCartney are treated as discontinued operations in accordance with IFRS 5. It means that they are no longer included in our reported revenue from continuing activities. To make comparisons easier, we have posted on our website since last week a full pro forma revenue table for all 2017 quarters. The EUR 3.1 billion in revenue we report for Q1 2018 must be compared to EUR 2.4 billion pro forma in Q1 2017. As you can see on the chart, the 36.5% comparable growth reported in the first quarter this year is all the more outstanding that it has been achieved on top of a very challenging comp base of plus 37% in Q1 last year. For reference, you can see here the amount of revenue from discontinued activities. On Slide 5, our Luxury houses delivered a remarkable Q1 across all regions and channels. Revenue was EUR 3 billion, up 37% comparable and 27.5% reported with an FX drag of EUR 160 million. Retail, accounting for 76% of revenue, was up an impressive 40%, all regions being up high double-digit on tough comps. Performance was led by North America and Asia Pacific, up 54% and 42%, respectively. In North America, predominantly a market for locals, trends were very good across virtually all our brands. In Asia Pacific, the highly positive dynamic was further confirmed with all countries up solid double digits. The most notable feature is the acceleration in Hong Kong and, to a lesser extent, Macau while Mainland China remained sustained as were Korea and Singapore. Japan improved again sequentially with a substantial 33% increase fueled by strong momentum in tourist purchases especially from Mainland China as well as good local consumption. Western Europe advanced by a healthy 30% despite high comps, strength of the euro and the resulting softness in tourism with contracted impacts, depending on each brand exposure. Local consumption remained robust overall. As [ regards ] combined spending in our 3 main brands by the Chinese cluster, if you compare it to last year's Q1, it was directed more towards APAC and Japan than at Western Europe and the [ home ] market. Retail performance was also supported by online with buoyant revenues more than double last year's level. Wholesale rose a solid 30%, reflecting broad-based appreciation of the collections by our partners and clients as well as a good quarter in watches. The other revenue stream, which includes royalties, was up 2% with a different [ phasing ] of Kering Eyewear deliveries compared to Q1 last year, which marked the beginning of Gucci's internalization. The remarkable performance of our Luxury houses was carried out on virtually unchanged footprint. We continued to enjoy a supportive demand environment. But once again, it's our model grounded in creativity and innovation at all levels that clearly makes a difference and bolsters organic growth. Creativity and innovation are at the core of our brands. They build and nurture emotion and attractiveness. Spread across all touch points, they are even more powerful, ensuring engagement with new and existing customers. Our houses are delivering healthy organic growth, well balanced across regions and nationalities, driven by strong like-for-like and a few selected store openings. At the end of March, our directly operated network comprised 1,347 stores. That's a net increase of just 11 units compared to December focused exclusively on these brands like Saint Laurent that continue developing market penetration. Let's turn to Gucci on Slide 6. Gucci delivered another outstanding performance. Revenue rose 49% comparable, the fifth consecutive quarter above 35%. This healthy growth was driven by an impressive 50% increase in retail achieved on the basis of like-for-like full price sales. Gucci's unique positioning enabled its rising exclusivity with superior sales growth. Equally important, its performance was particularly well balanced across the board. Whether you look at it by region, nationality or product category, all were up double-digit. The unabated success in all product categories, both men's and women's, reflect Alessandro Michele's powerful creative narrative, consistent collection after collection. In Leather Goods, growth is driven by the continuing success of iconic carryover lines as well as by newness. Similarly, in Ready-to-Wear and Shoes, both new collections and style launched in earlier seasons show the house's outstanding and unwavering momentum. Regarding regional trends in retail, the first quarter faced a materially higher base of comparison. Nonetheless, North America reached an exceptional 64% growth. APAC was also particularly strong with high double-digit growth in all countries and a marked acceleration in Hong Kong and Macau. Trends in Japan further accelerated. Western Europe remained solid, thanks to both local interests despite facing the most challenging comparison base in Q1 last year when sales were up 66%. Online revenue grew triple digit in the quarter, driven by the U.S. and confirming the strength and the consistency of the brand's proposition across all touch points. Wholesale grew 44%. Considering that it has been achieved on a slightly lower number of doors compared to the previous year, this is truly remarkable. Gucci continues to drive healthy and consistent growth across product categories and customer age groups. The brand is investing in marketing communications and in the continuing rollout of its new store concept to realize its full potential. The house has regained its leadership, leveraging a unique brand of art and science. This is evidenced by the -- by its unrivaled product proposition as shown again by the acclaimed Fall/Winter '18/'19 fashion show while its carryover base also continues to gain strength. Gucci's commitment to continuous transformation and innovation spread across the whole organization. The brand recently introduced a new organizational model to reinforce and deepen customer relationships and embrace advanced technologies. This commitment is also at work in the ongoing development of its supply chain. Gucci recently inaugurated its ArtLab, a new center of excellence for leather goods and shoes located in Florence. Moving to Slide 7. Yves Saint Laurent posted further solid growth with comparable revenue, up 20%. Retail was up 15%, with increases of more than 20% in North America, Asia Pacific and Japan. Western Europe was hampered by slower tourism spending from the brand's key nationalities in addition to a particularly demanding comp base. In wholesale, Saint Laurent posted a strong 32% growth driven by Western Europe with further sound performance in the U.S. The brand continues to deliver on its strategy. Its fashion leadership and Parisian aura are firmly rooted. They were brilliantly displayed at the winter fashion show Saint Laurent staged at the Trocadéro in late-February. The launch of new handbag lines such as the Niki was particularly well received while carryovers continue to show strong performance. In line with its selective retail growth strategy, Saint Laurent opened 6 doors in the quarter, mainly in North America and Asia. On Slide 8, you see the highlights for Bottega Veneta. Revenue was up 1% comparable with retail up 2% on a tougher sequential comparison base. Trends in North America were well oriented, thanks mostly to locals. Asia Pacific improved, driven by Hong Kong, Macau and Korea on the back of increasing tourism flows, which also benefited Japan. Western Europe faced a difficult base of comparison and suffered from the deceleration in Asian tourism. With wholesale rationalization behind us, the brand starts from a lower base but should benefit from a healthier environment in the coming quarters. Sell-out trends are also gradually improving. Bottega Veneta has achieved a number of important milestones in terms of store network, new product launches and visual merchandising. This is supported by a more impactful communication strategy, including increased digital presence and by hallmark openings in New York, Madison Avenue and the Dubai Mall. The journey continues with new initiatives planned throughout the year. The brand is deepening its newness proposition and rebalancing the architecture of certain collections in selected categories to raise its appeal with a broader customer base. On Slide 9, you will find details on our other brands, which altogether were up nearly 38% comparable. As a reminder, the 2017 figures have been restated to exclude the contribution of Stella McCartney. Retail sales, which account for precisely half of the total, were up an impressive 57%. High double-digit growth was achieved in all regions led by Asia Pacific with a very strong performance in North America in the quarter. Wholesale also rose significantly, up 24% comparable. In Couture & Leather Goods, the sharp increase in revenues was fueled by the outstanding performance of Balenciaga. In retail, Balenciaga sales were buoyant in all regions with e-commerce experiencing an amazing quarter. Replicating its success in women's lines, Balenciaga is extending its men business, which should act as an additional pillar of growth in 2018 and beyond. To support this, the brand converted 4 points of sales in Paris and London department stores into directly operated stores. Growth was strong across product categories, notably Shoes and Ready-to-Wear for both men and women. Alexander McQueen sales accelerated in the quarter with solid double-digit growth. This was largely driven by retail, including a near doubling of e-commerce revenues. All product categories were up with Shoes in the lead while the rebalancing of Ready-to-Wear collection is making rapid progress in women and starting to gain traction in men. As a result, the share of full-price sales was up significantly. The new year retail sales were impacted by lower tourism spending from Russian and Middle Eastern clients but recorded good trends in North America and Japan. The brand is actively adapting its retail footprint with 5 closures in the quarter. Wholesale started to recover this quarter. With regards to Brioni's production facilities, we are seeing some encouraging signs in terms of capacity utilization. In hard luxury, our investments in the positioning of our major jewelry houses are yielding very positive results. Boucheron's iconic lines, Quatre and Serpent Bohème, led the charge. Retail sales in Western Europe were impacted by certain store refurbishments, primarily the Paris flagship in Vendôme. This was mitigated by a very robust jewelry performance in Asia Pacific. The Pomellato brand also posted good growth, notably in retail while Qeelin's momentum intensified in Q1. Watches showed solid trends in the quarter, benefiting from impactful presence at SIHH 2018 in Geneva in January and effective communications aimed at sharpening their brand image. Girard-Perregaux extended its Laureato collection, now the main pillar of the brand. And Ulysse Nardin presented a new flagship product, Freak Vision, which was well received. Let me give you a few words of updates on Kering Eyewear summarized on Slide 10. As you know, Kering Eyewear is accounted for under corporate and others and account for the bulk of that line. In the first quarter, total sales of Kering Eyewear amounted to EUR 127 million. After elimination of intra-group sales on royalties earned by the brands, net consolidated revenue of Kering Eyewear was EUR 101 million. For the first time, sales include the contribution from Cartier who launched under the new umbrella, was very successful. The business is now fully operational in terms of organization, and it has continued reinforcing its global infrastructure. It is well regarded in the industry and has rapidly established itself as a reliable partner with retailers and consumers in terms of distribution, service quality and after sale. With the addition of Cartier, Kering Eyewear has reached a nice scale to fully activate the potential of the brand and its portfolio. This will be further boosted by the future partnership with Balenciaga announced earlier today. A few words of conclusion on Slide 11. Our outperformance in the quarter reflects the heightened intensity and clarity of our strategy and execution now that we have completed our transition to Luxury pure-play. This transformation should become fully effective after our Annual General Meeting. We are confident in the success of the Puma spin-off transaction. As you saw from the first quarter numbers, Puma's operational and financial metrics are definitely on the right track. Momentum remains positive in the world luxury market in the early part of the year. We are facing increasingly high comps in addition to foreign currency headwinds but we are confident that creativity and innovativeness will continue to set our houses apart and show Kering healthy, consistent organic growth. We will maintain a strict financial discipline to drive value creation. We are now ready to take your questions.

[Operator]

[Operator Instructions] We'll go first to John Guy with MainFirst.

[John William George Guy, Managing Director]

I've got 3. If I just start with overall sales. Retail for the group running at 40% and e-comm more than doubling. I mean, irrespective of a negative FX translation impact, clearly, the scope for positive operating leverage looks high relative to where consensus sits today. I appreciate this is just a trading update but could you maybe comment about where you might see relatively healthy operating leveraging opportunities? Secondly, on Gucci. Clearly, we've seen a phenomenal performance in the first quarter and acceleration. Do you think looking forward, starting point now for 2018 should be around EUR 8 billion in revenue or maybe even slightly higher? I appreciate again that's a forward-looking comment but the start that you've had, any acceleration quarter-on-quarter is -- or year-on-year is actually quite impressive. And then finally, on -- within the other brands, obviously, stripping out Stella, which is, I think, around EUR 65 million of revenue for the quarter last year, the Balenciaga weighting has clearly increased. Where does that weighting for Other Luxury brands now stand? It looks like Balenciaga clearly outperformed the 57% or so growth in retail that you just flagged within the other brands as well. So I just wanted to get a sense of where Balenciaga stands.

[Jean-Marc Duplaix]

Thank you for your question. I think that regarding your first question, it's not so easy to answer because you know that we have a different situation depending on the different stages of maturity of the different brands. For sure, in the case of Balenciaga, because of the rapid acceleration in terms of growth, there will be some operating leverage, quite substantial but at the same time, we'll take this opportunity to reinforce the structure at Balenciaga to sustain growth in the coming quarters because we are still an organization which is the one we have still a few years ago. So we want to make some investments but for sure, there will be some operating leverage. As regards Saint Laurent, you know that we have already mentioned that in terms of EBIT margin improvement, there will be, of course, some improvement because the like-for-like growth is still very solid. But we have also some store openings because you know that we have some growth in the store network we need to fulfill. We have also some refurbishments to be made with some dilution. So at the end of the day, we should see some operating leverage also but to a lesser extent compared to the past years. As regards Gucci, of course, you can imagine that considering the pace of growth we have, despite the fact that we want to reinvest part of the gains of gross margin we have in absolute terms because we have already commented on the fact that we need to sustain the growth for the long run and we have some investment to make, and I mentioned some of them during my speech. Of course, we [ can ] assume that there will be significant operating leverage at Gucci but maybe I will come back to that during this -- during the Q&A. Regarding maybe the big brands, there's a lot of big brands, which is BV. It's clear that the drag of FX, and that will have an impact on the top line, will weigh on the overall profitability. So you know that we are -- we have a strict financial discipline in order to protect the EBIT margin. The EBIT for sure, it will be more challenging concerning the trajectory of the top line. Concerning your question about Gucci and the outlook for the year, because it's a question about the outlook, as you can imagine, we won't provide any guidance. But it will give me the occasion to remind that Gucci started to accelerate at the end of Q2 '16 and then more specifically in H2 '16. So the comp base will start to be more challenging from the end of Q2. For sure, concerning the trends we see and how healthy is the development of the Gucci business, of course, the regions, the categories and the different clusters of clientele, we are confident for the remaining of the year. We have also very positive signs when we look at the wholesale orders. So overall, the performance should be very strong, probably above our initial expectations. But of course, as a comp basis, we will start to be careful from the -- starting from -- with H2. It's true that once again that it was a case in Q4. In Q1 '18, Balenciaga delivered its strongest performance across the portfolio, across the brands. But if we look at the overall performance of the other brands, as I mentioned before, McQueen is improving and is delivering a very solid performance, very healthy in the sense that we have an increase of the full price sales and it's quite well balanced across the different categories with a very interesting development in Ready-to-Wear. Of course, it does not grow at the same pace at Balenciaga but it's very encouraging. We mentioned that jewelry brands and watches brands have delivered also quite a solid performance in the quarter. Again, not exactly at the same pace because, of course, we are not in the same stage of maturity as Balenciaga. We have also major refurbishment ongoing at Boucheron with the flagship store in Paris in Place Vendôme. Of course, the overall performance, there is a little drag coming from Brioni. Brioni suffered in retail from the lack of Russian and Middle Eastern tourism in Europe plus the fact that we have closed some doors also directly operated. Wholesale was okay but overall, of course, it has contributed to the drag to the overall performance of other brands.

[John William George Guy, Managing Director]

That's great. Maybe just on Gucci, and I think last year, you had 517 stores opened. You've moved to 533, so sales contribution on space would be around sort of mid-single-digit level. Is that fair when you're looking at the organic number?

[Claire Roblet]

John, this is Claire. I think that you can assume that all growth of Gucci is purely like-for-like, more or less.

[Operator]

Our next question will come from Antoine Belge with HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

It's Antoine Belge. Three questions, if I may. First of all, regarding Western Europe, you had quite a contrasting performance especially the minus 1% at Yves Saint Laurent compared with 44% at Gucci, and that's why I'm leaving Bottega aside intentionally. So could you maybe explain that substantial gap in Western Europe? The second question relates to the -- what you mentioned about the margins. There are a lot of [ new ] factors at play, a lot of operating leverage, intention on your part to reinvest part of that but also FX impacts. And I think you were mentioned, you were quoted on Reuters. I think that prices have been increased by 5% on average except the Eurozone. So maybe at least some qualitative comment about all these factors. And finally, maybe an update on the account and tax investigation. I think at the last -- most recent analyst meeting, you commented about the Italian investigation but you also had some comments that the French authorities were also looking into your tax organization. So could you elaborate on this as well?

[Jean-Marc Duplaix]

Thank you, Antoine, for your 3 questions. Starting with Western Europe. As you will have noticed, looking at global data from Global Blue or some other indicators, the tourism flows have been softer for -- overall in Europe in Q1. It was already the case at the end of Q4, by the way. It started a little bit from November, let's say. It was obvious in the Eurozone but also in the U.K. The U.K. has been severely impacted but it's true that also, we have to look at the comp base. If we look more specifically at Saint Laurent because it was principally your questions, I'll remind that in -- we have behind us several quarters of very, very strong growth in Europe for BV -- for Saint Laurent, between 29% and 46%, if I look back at the 3 past years. So the combination of very high comps plus the impact of tourism clearly explain the performance of Saint Laurent. The performance has been very solid and encouraging with local clientele still. But it's true that we saw, let's say, the shift of the purchases by Chinese tourists in some of the destinations. So if I look now more specifically at the Chinese cluster for Saint Laurent and even if now we are looking at the Japanese cluster, all the other clusters, it's overall very positive. And that's the reason why the performance of Saint Laurent is still very solid overall in retail plus 15% after several years of strong growth. I think it's quite still remarkable, so I think that we should not focus too much on the European performance. But it's true that it does raise the flag on the situation in Europe with clearly some shift in tourism flows. As regards the margin, it's true that -- just like I will come back on the price increase to clarify. You know that the price increase had been posted on the Cruise and, let's say, the Spring/Summer collection across the board, so meaning almost all the categories with an average increase of 5%, excluding Eurozone. So if we combine now with the Eurozone, it's an average per increase of approximately 4%, let's say. This increase had been posted on the collection, so it means that it had an impact in Q4 and still in Q1. So in fact, in terms of explanation for the growth of Q1 for Gucci, the contribution of the price increase is very marginal compared to the impact deriving from the traffic. Regarding the gross margins, of course, it had a positive impact. But also clearly, if we look at the gross margin in percentage points, there will be also some benefits coming from the hedging. So all in all, you know that it's always very difficult to make the math on that. It will contribute clearly to health in terms of improvement of the EBIT margin of Gucci. And I think that clearly, again, with the leverage we are benefiting from the dynamic of the top line plus the impact on gross margin, you can expect that we should deliver an EBIT margin, let's say, above what is the consensus today. Regarding your question about the tax investigations. I wish to reiterate very simply what I said during the presentation of fiscal year '17 results. Since according to us, nothing happened since then. That does change materially the tax situation of the group. You are aware of the audit by the local tax police that had been conducted in November in Milan and Florence. We had the occasion to comment on that. I will repeat that the inquiry by the Italian authorities is still at quite an early stage and we have not received any notification of tax adjustment so far. And we are collaborating -- we're just collaborating with the authorities. It's true that more recently, a French online media, Mediapart, has relayed some information regarding the tax situation of the group. The figures mentioned in the article are not supported, so I won't comment on that. And to be very clear, we are not aware -- there is no further criminal investigation in other jurisdiction be it France or Switzerland or concerning other brands of the group. Of course, like other groups of its size, Kering is regularly audited. I want to be very accurate. I'm talking about tax audit by the tax authorities. But again, there is no criminal complaint filed against the group in France or in any other country. So if you are well aware of the day-to-day life of the big group, almost all the fiscal years in Europe or in the European countries and probably in the U.S. as well are audited by the tax authorities. So it will be the case for the Kering brands. We will be transparent in our communication as we have been always -- we have always been. And we will communicate in due time if there is something to mention. So obviously, I have nothing to add on that. And then what we said about the gradual increase of the tax rate is still valid in terms of comment and in short term, let's say. I mentioned that we should reach something around 25% of recurring tax rate, and we are maintaining this form of guidance.

[Antoine Belge, Global of Consumer and Retail Research]

Maybe just 2 clarification. One, what is the consensus for 2018 margin at Gucci? Is it 36%? And then maybe could you -- you mentioned the Chinese cluster for Saint Laurent being still quite healthy. So what was the growth with the Chinese cluster overall for Saint Laurent in Q1?

[Claire Roblet]

Antoine, this is Claire. So for the Chinese cluster, we don't disclose it by brand so I am going to be -- I'm not going to be answering directly your question. And then the first question you had was on the consensus margin for our Gucci. No, it's not 36 currently. It's 25.4.

[Operator]

Our next question will come from Thomas Chauvet of Citi.

[Thomas Vincent Chauvet]

I have 3 questions. The first one, a follow-up on pricing for Gucci. Could you just explain why you didn't increase prices in the Eurozone but only in the other regions? And what are you thinking in terms of the Autumn/Winter collection? I vaguely remember a comment at the full year results that you were not decided yet whether you would pass on price increases. Has it been already confirmed, decided at Gucci or at any other brand given the evolution of FX? Secondly, on Saint Laurent. Looking at the significant number of openings or acceleration in openings you've had over the last 12 months and the slowdown in retail growth, it seems the retail same-store sales growth slowed down significantly in the period, maybe to low mid-single-digit. Can you please explain this beyond the slowdown in Chinese tourism in Europe? I mean, I guess, that tourism slowdown has been partially compensated by repatriation of demand into Asia. I also see your wholesale business for Saint Laurent is still very, very strong. So what is exactly the same-store sales growth at Saint Laurent? Is it slowing down a lot and why? And finally, just clarification on the tax and your P&L. Can you confirm at the end of 2017 that there is no financial impact provision for tax litigation or at least no material amounts? I think that's what you had said back in February. Are you still, secondly, comfortable with 25% tax rate for the group? I don't know if it's this or next year. And still on that topic, what is the progress you've made on the adaptation of your supply chain and logistics organization?

[Jean-Marc Duplaix]

You know that in the last year -- so just maybe to come back to the overall architecture of pricing at Gucci. In the past years, Gucci had leveled the price differential across the various countries of Western Europe so that's very consistent from one country to another. And it's true that regarding the desirability of the brand and concerning also that there were some price gaps between regions where we were not completely happy and then we decided to increase the prices for the Spring/Summer collections. And it was again an average of 5% recovering different frailties country by country, category by category. Because of the evolution also of the currencies, it's true that in some cases, not all the products, but it's true that we may have reached in some cases a gap, which was too significant. We were rather in the high range of the gap especially now in China for some products and especially in handbags was a very marginal impact, I would say, on the business. But still, it is considered for the Fall/Winter '18 that would be -- that is currently introduced in stores. And moreover, in Q2, we plan some actions depending on regions and products with a low single-digit increase on selected items in Europe to slightly reduce the pricing gap between Europe and China. Also, of course, the pricing of the new collection of the seasonal items will aim at reducing further the gap between the regions. So indeed, there will be some selective actions, initiatives to increase the prices principally in the Eurozone. But again, there's -- let's say low single digits.

[Thomas Vincent Chauvet]

And only at Gucci?

[Jean-Marc Duplaix]

Only at Gucci. I'm talking about Gucci. Concerning Saint Laurent, I think that it's fair also to recognize the fact that we'll always say that there will be somehow the sort of normalization of the growth after years of growth, which had been driven principally or for the large part by the like-for-like growth. So overall, again, I think that we should consider the growth for the quarter. It's quite well balanced between retail expansion and like-for-like growth. Again, it's true that you have to consider it at the global level. It's true and it's fair that it was somehow repatriation of Chinese consumption in other countries and principally, in APAC, to a certain extent in China. But principally, in several APAC regions, you have to look at the Global Blue data. For example, in Japan, it's huge. So again, I think it's very well balanced between like-for-like growth and retail expansion. We -- [ François-Henri ] had been very clear and transparent during Investor Day that the growth for Saint Laurent in the future will be also driven by store expansion, concerning that there are some areas, some regions where the penetration of Saint Laurent is not at the level that we expect. And you can count on Francesca and her team to be very careful about what's going on in the different regions and to take action to sustain the like-for-like growth by animating the stalls, by working on the visual display, on the products, the assortment, also by, sometimes, reorganizing the team. So we are not really concerned by this situation, and I think it's a very normal evolution. Yes, to clarify about the tax. Let's say that last year, we ended '17 with a tax rate which does correspond to the tax to be paid. And also, of course, this amount does include some provisions. No provision has been directly accounted for, for the risk we have in Italy because as we mentioned during the fiscal year '17 presentation, we have not sufficient elements today to accrue accurately and precisely an amount for that risk. But we say that we had accounted for consciously all the tax liabilities we have. So the 23% that has been released for '17 is a combination of the normal tax rate plus some [ cautious ] accruals regarding that tax liabilities. To predict what could be the evolution of the tax rate is not something easy. We believe firmly today that short term, let's say, in the 2 coming years, we could be at around 25% of current tax rate. I think that we are making good progress regarding the reorganization of the supply chain and the logistic organization. But as you know, because I think that you visited the facilities a few years ago, we have a very large organization today in Switzerland, a very big platform performing not only logistic tasks but also a lot of various functions. And it's not something that can be deployed very rapidly. So we have to rethink the full organization. It would take several years and we are working on that but we are quite happy with the pace of progress we do.

[Operator]

Our next question comes from Omar Saad with Evercore ISI.

[Omar Regis Saad]

Great job as always. You guys continue to really perform excellently. I wanted to ask about the Gucci store productivity. It's obvious that you're comping the comp, and it looks to us that the productivity essentially doubled in the last couple of years. How do you think about -- and you made some comments around low single-digit 5% pricing. How do you think about that price unit volume mix for that brand? From the outside looking in, it almost looks like you're not raising prices enough and driving units volume more than driving the total revenue growth rather than the pricing. Have you thought about that? Is there a way -- maybe you can share what your thought process around how you should be pricing Gucci given the demand for it?

[Jean-Marc Duplaix]

It's a very interesting question, Omar. And I said, because you know that we have been quite cautious in the past when it comes to price increases. I think that we have to be very smart when it comes to pricing just to have the right pricing to maintain also the attractiveness in the sense that you know that there was, in the past years, a dramatic price elevation for Gucci. I think that now, overall, if you look category by category, product by product, I think that we have prices which are quite comparable to the competition. I think that it's very consistent. I think that it's -- first of all, what is important is to have a relevant offer in all the price clusters, in all the category. We have recently launched some new products with some pricing around EUR 1,500 for some handbags, some others, above EUR 2,000. We have big success with some entry price products. So the first priority, it was a relevant offer in all the different price clusters and also to have a relevant offering in the different categories. It has been clearly the recipe to attract new clients and especially the millennials. You know that the average basket of millennials is not exactly the same as the average of the older clients. So I'm not sure that the most -- it's probably the easiest way to increase the productivity of the sales density to increase the prices. But you never know what is the reaction of the client. I think that our clients are quite happy now with the price architecture. We had some complaints, to be fair, about the pricing of some Ready-to-Wear products. We have not decreased Ready-to-Wear average price. We have rather played with again the assortment in order to be sure that we have a relevant offer for all our clients. And I think that we have still work to do in order to increase the sales density. It's true that we have made rapid progresses. We are now working with the Gucci team to update what could be the next milestone in terms of sales density. We need to make -- work in depth in order -- and a very bottom-up approach to see what is the real potential of each store. And I think that we have still levers to activate regarding clientele-ing, store animation and I think that we will rather play on that. I think the attractivity of Gucci, the desirability of Gucci is more linked to all the animation we have around the brand or the innovation we are bringing in the products, all the -- the new wave of communicating and engaging with the different touch points. So I think it's more the way we are working with our clients, and pricing is probably -- is clearly an easy way but not the smartest one.

[Omar Regis Saad]

If I could ask one more question. On your conclusion slide on Page 11, you mentioned with the Puma spin-off coming, the pure player kind of new profile of the company you think will enable significant outperformance. Maybe you could elaborate there what you see ahead for the company ex Puma and why it's leaner, more effective operating platform for the Luxury brands.

[Jean-Marc Duplaix]

I think that we have set up an organization at group level, and a way of collaborating and working with the brands and with the CEO of the brands and the management team of the brands, which is particularly efficient with the Luxury brands. Probably because of the lack of synergies, we have not been able to have the same dynamic with the Sport & Lifestyle Division. I think to refocus all the energies of the group and also to share all the best practices to invest at group level for the benefits of our brands when it comes to new technologies, new ways of buying, new ways of selling our products are things that clearly, it will be very beneficial to our brands. So that's the reason why I think that we focus on the [ trendy sites ], what could be the reaction of the market to other pure players in this industry, and I have not comment on that. It's not my role. My role is to be sure that we are empowering our management and our people through very efficient and lean organization at Kering level and I think that was clearly the proposal of this move besides the fact that strategically, Sport & Lifestyle was [ the more ] core concerning the growth of the Luxury Division, the scale and the profitability.

[Operator]

Our next question comes from Melanie Flouquet with JPMorgan.

[Melanie Anne Flouquet, Head of European Luxury Goods and General Retail]

I have several. Sorry. The first one is on North America. Clearly, you've had an amazing performance pretty much in every single brand in North America. Even Bottega Veneta that had a tougher quarter was up 11% in North America. I was wondering whether you could share with us what Kering is doing that's really hitting with the American consumer particularly strongly. I mean it seems to have been better overall for North America in Luxury that you seem to be outperforming, so I wanted to understand the specific data across all brands. The second thing is on Gucci. I wondered whether you could share with us whether the product mix has changed at all. I see historically, there was around 57% of sales in handbags. Has this mix changed? My third question, and I'm sure this is more the object of your Capital Markets Day but I'll try it anyway. Is there a reason why Gucci wouldn't be able to reach sales densities of EUR 40,000 per square meter? And my last question, sorry, how long does it take for you to commit to your supplies at Gucci? And how did you manage to commit to this sort of growth and to deliver this sort of growth from a supply perspective?

[Jean-Marc Duplaix]

Thank you, Melanie, for your questions and especially the first one, which is not an easy one, I will say, because you're right. I think that overall, the environment or the consumer sentiment in America improved. Wholesale, I want to say that perfectly that in North America, it's principally a market of locals. It's true that we start to -- we had some improvement with tourism, so sales to tourists were up again, maybe with some shift from Chinese consumers to the U.S. So overall, the environment was more favorable. I think that also what we see, and which is maybe more relevant for America, is the sort of polarization of the market. And I think that the brands, which are the most attractive and most desirable are performing better in the U.S. be it in retail or in wholesale, even more obvious in wholesale and how wholesale distribution in the U.S. is conservative considering the difficulty they are going through. So they are more selective. So overall, I think it has helped. It's true also that after years of soft consumption, I think there was clearly -- the more fashion-forward brands gain some traction with the more sophisticated U.S. customers. The adoption of Alessandro Michele [ style ] when it comes to Gucci came later compared to Asia Pac and Europe. So that's normal also to see somehow an acceleration. I think also that we had, at Gucci, a more relevant offer for the Men's category and you know how it's important in the U.S. to have the right offer. For BV, I think that many actions in terms of communication in Q4 had targeted the U.S. in order to anticipate the opening of the new Maison, the new flagship in Madison Avenue. So we see here also the benefits of these actions seen in Q1. And what is encouraging regarding Saint Laurent, to rebound on the question of Thomas, it's also that the -- we had some soft trends in '17 and especially in H1 '17 in the U.S. And Francesca decided to tackle this by taking some decisions in terms of organization in the U.S. and we see now the benefits of having taken some tough decisions sometimes in order to put more under pressure the network and the team. So that's the reason why it's also encouraging for Europe. I'm sure that we can regain some growth on the like-for-like business in Europe at Saint Laurent. So I think that the combination of all these factors explain why the performance of the group has been buoyant in the U.S.

[Claire Roblet]

Yes, Melanie. Regarding your question around the mix of Gucci, I think, compared to the full year '17 where we have disclosed the figures, Leather Goods were at 55, Shoes were around 19, Ready-To-Wear [ 13 ] for the 3 key category. I mean, Q1 is not very different. There is a bit of seasonality in some categories. So maybe the weight of Leather Goods is slightly higher in Q1, the 1 in 2, slightly lower. But all in all, I mean, the mix is quite stable overall.

[Jean-Marc Duplaix]

Yes. So I think that you tried with your third question. It was really a try because yes, it's clear that -- it's totally obvious and we mentioned that we have set it, the initial ambition to increase the store productivity of the sales density according to our definition. So we are now above the initial target. As I told you, we are working hard to redefine what could be the next milestone. And I will let the Gucci management elaborate on that in the next Capital Markets Day in June.

[Claire Roblet]

Regarding the supply.

[Jean-Marc Duplaix]

Yes, regarding the supply, I think that we have mentioned -- we have explained what has been the progress made by Gucci in terms of organization of the supply chain and logistics. You know that we had doubled in '17 compared to '16 the capacity of production by adding some new suppliers but also selecting a first row of preferred suppliers. We have also added in '17 and '18 some additional lines of productions. We are increasing the share of internalization, so we -- it's a continuing journey. And I think as regards the ambitions for the midterm and the long term, I will let also Gucci elaborate on that in June.

[Operator]

Our next question comes from Erik Karlsson with Industry Equity Partners (sic) [ Industrial Equity Partners ].

[Erik Karlsson]

It's Erik from Industrial Equity Partners. I had a question specifically on Gucci. Truly, a phenomenal performance across regions and product categories. I would love to hear a little bit how your newest bag model, Ophidia, is doing so far.

[Claire Roblet]

Well, above the lines, we don't communicate [ preference ] line by line. But what we can say that the recent introduction has been successful. So one of the lines you mentioned is more about, I would say, rather vintage shapes and they are all performing -- I mean, they are performing very well. We had also recently an introduction of soft bags, which was probably the [indiscernible] listing in the offer so far at Gucci. And this line also is performing very well. So I think the betterment of Gucci is strong here in Leather Goods and to be fair, in all the subsegments of the Leather Goods and is driven clearly by the strong base of carryovers and successful introduction of some key lines, including the one you mentioned. I think -- just so you know, we are running a bit out of time. So maybe we're going to take 1 or 2 additional questions and then I think we'll have to end up the call.

[Operator]

That next question will come from Zuzanna Pusz with Berenberg.

[Zuzanna Pusz, Analyst]

I'll be hopefully quick, and so I just have 2 questions. First of all, on Gucci and the drivers of growth, I mean, I remember you were mentioning at the end of last year that there was still many areas of growth where you could improve Gucci's business. I mean, I think some of them were like menswear, including luggage business also improving sales of Eyewear and on-store. So can you tell us a little bit more about what has been implemented so far this quarter? What can we expect for the remainder of the year? Second question is a bit more general on the capital structure. Now given your financial discipline and also assuming that maybe not necessarily the Q1 level of growth continues but something still healthy, I think it's reasonable that you'll probably see another year of really impressive free cash generation. So this combined with the 15% stake you have in Puma, at least until the end of the year, I guess, the question about the potential use of your balance sheet will be difficult to avoid, so I'll just give it a go. And I mean, if you were, at any point, looking maybe for some brands to add to your portfolio, given the impressive job you've done with Gucci, do you think you will be maybe looking at other brands that you can turn around or maybe some smaller brands you could help to grow? Any ideas about that will be very helpful.

[Jean-Marc Duplaix]

Okay. Thank you, Zuzanna. Yes, it's difficult to answer your first question because I think that now, we are more or less at full speed at Gucci in terms of organization, in terms of revamping or reshuffling of the offer. So almost all categories, even if we are not commenting in detail category by category, are performing very well. So the reason why we are insisting on the fact that the growth at Gucci so far very sound, very healthy because it's across categories, it's across the different clusters of clientele, nationalities or ideas. And it's principally driven by full price sales. So overall, it's very difficult to say if there is something now contributing more or less more than another 1 to the growth. I think that the merchandising is still doing its job to be sure that we have the right offer corresponding to the different clusters of clientele we have. Claire mentioned the fact that the recent launches in handbags received a very good response from the market. I think that we saw, for example, just to illustrate that an acceleration in small Leather Goods and luggage, which is very positive because you know that these -- with these 2 categories where we needed to improve. So clearly, they are now outperforming handbags but on an easier comparison base because it took off later compared to the handbags. Ready-to-Wear and Shoes are posting very strong double-digit growth. And you know that we have, of course, some potential here because you know that Gucci is leveraging more and more in some products that have become somehow carryovers in order to propose to its clients a wardrobe with some consistencies throughout the collections. We are also [ profit dealers ] on which we are continuing to improve. It can be watches, jewelry or fragrances. And as regards to the organization, you know that we have announced recently a new organization. It's a way also to continue to have a very sound and healthy pressure within the organization to stay awake and to react very rapidly to be agile. So I think that the management of Marco and the work done by the team clearly is contributing to that. And of course, we already mentioned this, we are in a phase where we are continuing to gain clients. The retention of the clients is improving, which is very positive in all the different clusters still. So I think that we start also to activate the levers of clientele-ing and working on the different clusters of clientele we have gained. So I think -- I think now, we are full speed, the organization [ is there ]. The merchandising is efficient. So it's very difficult to highlight something specific. I'm not surprised by your question about the capital structure. You won't be surprised if I don't answer you directly on that. We said during the presentation of '17 results that we are not obsessed by the bracket we gave in the past years as regards to the leverage. We said in the past years that we wanted to stick to 1 to 2x EBITDA in terms of debt, and we can be above certain years. We can be below also. So if I look at the short term, I think that at the end of '18, we should be slightly below 1x EBITDA, below the 1x EBITDA, we won't be cash rich. But I think that it would be a question for the next years. I think we will take the last question.

[Operator]

Our final question will come from Helen Brand of UBS.

[Helen Michelle Brand, Executive Director and Equity Research Analyst]

A couple of questions from me, actually. The first one just around the Gucci margin again, sorry. I was wondering if you could break down how you're thinking about your OpEx base this year and perhaps split the percentage that you're thinking about that running on a more inflationary basis versus the amount that you're probably growing and investing to drive Gucci further. Second question just around the outperformance in the U.S. and just to come back to Melanie's point. So you obviously flagged that online sales to Gucci growing very, very nicely in that market. Is that perhaps -- that increased online penetration perhaps driving some of that outperformance? And how should we think about the margin accretion for this -- margin accretion of that online growth as well?

[Jean-Marc Duplaix]

Yes, you can imagine that I won't develop further the point on the EBIT margin at Gucci. I think that I said that we should benefit from a positive impact deriving from hedging. I think that we keep the discipline at Gucci in terms of investments to make some investments with a quite high return. But it's true that at the end of the day, the drop through of incremental gross profit should be at least at the same level as last year. So you will make your math and it should be something quite consistent with last year. The objective is still to be ready and to keep the agility at Gucci by investing in the areas where we believe it's important to invest. I will just take one example is the increase -- the continuous increase of investments in digital media. It has increased dramatically in the past years. And if we add also the cost of production of content, it becomes something, which is quite significant in the communication expenses. So we know that success is also driven by all the initiatives taken by Gucci and you need to fuel the growth with such investment. So my only comment will be about the drop through that should remain consistent. You're right to point out that online sales are contributing, of course, to the growth in the U.S. It's not the only one driver but it's clear that this is a market where the penetration of online is the highest, probably with the U.K. So it's true that during the quarter, Gucci continued to deliver amazing performance online. But again, I think that online performance generally a good proxy or a good indication of the success of the brand. So generally, there is a multiple compared to the off-line growth. And it's true that Gucci is doing very well in the U.S. with a lot of initiative. And I think also, the fact that the site is very efficient with some very good [indiscernible] in terms of design. There's a lot of animation. This contributed. It's also clear that today, concerning the scale of Gucci online and the scale of Gucci overall, it's a channel, which is definitely very accretive. After that, you have to consider what is the share of sales made online overall. Clearly, it's a tailwind in terms of improvement of profitability but it's not yet completely substantial for the improvement of the EBIT margin. But overall, it's clear that it's accretive at Gucci level.

[Helen Michelle Brand, Executive Director and Equity Research Analyst]

Great. And if I can just squeeze in just one final question just to understand as it's almost the end of April, if you've seen any material changes to trading? And then I'm done.

[Jean-Marc Duplaix]

Yes, okay. So you know perfectly that we don't comment on current trading, so I won't answer your question. So I want to thank you all for attending this call and for your questions, for your good questions. We had another very strong performance quarter and hope our answers will help you better understand why we remain confident that our houses will continue outperforming the market. Please mark Thursday, July 26, on your calendars. That's when we will announce our half-year results. Once again, thank you for your interest in Kering, and have a nice evening.

[Operator]

That does conclude our conference for today. Thank you for your participation. You may now disconnect.