Kering SA

PAR:KER

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to Kering's 2019 First Quarter Revenue Conference Call. [Operator Instructions] I must advise you the conference is being recorded today, Wednesday, the 17th of April 2019. I would now like to turn the conference over to your first speaker today, Jean-Marc Duplaix, Chief Financial Officer. Please go ahead.

[Jean-Marc Duplaix]

Good evening to all of you. We are pleased to welcome you to this call to review Kering SA in the first quarter of 2019. We provided an overall summary on Slide 4. Outperformance continued in the quarter. Total reported revenue was up nearly 22% to EUR 3.8 billion or 17.5% comparable with a significant tailwind from FX. There was no change in scope. This sustained increase in our revenue comes on top of very high comps, as you see on the bottom half of the slide. With the expected normalization in growth rate, we are delivering the same level of incremental revenue in absolute terms compared to last year.Turning to our Luxury Houses on Slide 5. Altogether, they posted sound growth of over 17% comparable. Revenue exceeded EUR 3.6 billion. The impact from currency fluctuations provided slightly more than 4 percentage points support with reported growth close to 22%. Retail, which represents nearly 80% of revenue now, was up 19% comparable. By region, Asia Pacific, up 30%, achieved the best growth with all countries contributing. So momentum was very strong in Mainland China. Both Western Europe and Japan performed well with revenue up 14% and 12%, respectively. North America, our fastest growing market in Q1 last year, posted a 7% increase, reflecting this demanding comp base. As a reminder, North America Retail grew 30% and 54% in Q1 2017 and 2018, respectively. Regarding key nationalities for all 3 main brands, the Chinese cluster was up more than 25% worldwide. Clearly, we are seeing continuing repatriation of Chinese spending, but it held firm in the rest of Asia Pacific, Japan and Europe, especially for Gucci and Saint Laurent. All other major nationality grew in the quarter with the exception of Russian and Middle Eastern customers. Online penetration further increased, and wholesale advanced a solid 12%. As you know, it is the creativity of our houses and their ability to innovate across the board that fueled their outperformance. All the Fall/Winter fashion shows held in late February, early March add a resounding impact. Day in and day out, our brands combine art and science to implement differentiating initiative, online and offline, aimed at fostering customer engagement across all touch points. And once again, we grew from a stable retail network. At March end, we directly operated 1,286 stores, a net increase of just 8 units in the quarter.A few words on our store count as we are adopting a new methodology. From now on, unit counts are based on location under one roof. For example, whenever a brand directly operates 2 or 3 corners in a single department store, we consider this 1 store. There are some exceptions like airports, where we view each terminal as a separate building. This method is more representative of the brand's actual retail footprint and provides a more relevant base of comparison with our peers. Obviously, it does not change anything in terms of square meters, sales density or self-productivity. We provided at the end of this presentation a before-and-after picture so you can assess the impact and update your models accordingly.Let's turn to Gucci on Slide 6. Gucci delivered a very strong start to the year. Revenue rose 20% comparable. Retail also grew 20% on a basis that, as you know, is almost pure like-for-like. This is all the more remarkable that in both Q1 2017 and 2018, retail sales were up 50% or more. Regarding regional trends, Asia Pacific posted 35% growth with double-digit increases in all countries. Mainland China was particularly dynamic, supported by the ongoing repatriation of Chinese spend. Trends in Japan and Western Europe remained solid, thanks to both locals and tourists. In North America, the environment was more contrasted at a time when trends normalized as expected, following 2 years of exceptional growth. Over 3 years, the average North America Q1 growth in retail is approximately 37%. E-commerce grew nicely and accounted for 6% of retail sales. Wholesale was up 16% on a stable number of those compared to the previous year. The brand creativity and fine-tuned merchandising resulted in growth across all product categories once again this quarter, driven by both carryover and newness. The teams are hard at work to maximize the efficiency of the offer in all categories, ensuring a proposition that is both balanced and dynamic. We capitalize on our iconic pillars with seasonal variations, new functionalities, materials and colors. At the same time, we inject pure newness into the line-up, tapping market segment opportunities, preparing the next generations of carryover and fueling brand desirability. This is true in leather goods, where you see the continuing strength in the best-selling lines now complemented by 3 recent successful introductions. We apply a similar approach in shoes and ready-to-wear. Gucci continues to execute its strategic plan and gain market share. The brand trajectory aims at delivering consistent and sustainable growth with a deliberate focus on improving all retail metrics across regions, first and foremost, conversion rates. The brand is investing in marketing, dynamic communications initiatives and in the continuing rollout of its store concept to realize its full potential.Moving to Slide 7. Yves Saint Laurent posted further growth and delivered another solid quarter with comparable revenue up nearly 18%. Retail was up 22% with double-digit increases in all regions and a balanced performance across main nationalities. New and existing stores both contributed to the rise in sales. In wholesale, Saint Laurent grew 8%, a sound performance against a high cumulative comp base as Q1 showed the highest growth in this channel in the past 2 years. The brand's consistent execution nurtures its momentum. Its recent Fall/Winter show in Paris was spectacular with distinctive ready-to-wear silhouettes confirming Saint Laurent's fashion leadership. Its outstanding performance in leather goods is driven by constantly renewed creative proposition. New lines are extremely well received, while carryovers continue to enjoy broad success. In the quarter, in line with the road map you are familiar with, Saint Laurent opened 4 net stores to expand market penetration and broaden its footprint. On Slide 8, some highlights for Bottega Veneta, which experienced a challenging quarter ahead of the arrival in stores of Daniel Lee's creations. The sales group of the previous designer's collections, which represented the bulk of the product offer in the quarter, was low. Daniel's 2 new handbags gathered an enthusiastic client reception, but they were introduced only very recently and in a limited number of stores. Overall, revenue was down 9% comparable, with retail further dragged down by the brand's exposure to tourism and wholesale down slightly on the phasing of the collections. Brand momentum is building up. The Fall '19 fashion show held in late February unveiled the house's new approach, fulfilling its cause in a more fashion-centric direction. Feedback as well as order books are encouraging. The first products from pre-fall will start hitting the shelves from mid-May, and fashion show pieces will be available early in Q3, allowing for a gradual shift towards newness in product assortment in the second half. The new Arco handbags from the pre-fall collection is already available online and in Milan stores on the occasion of design week. We are very confident in the brand's potential and support its rejuvenation with the investments it needs to build new skill in design teams, new capacity in the atelier and enhanced communications to install the brand narrative across all touch points.On Slide 9, we have provided highlights on our Other Houses. Altogether, they posted comparable growth of nearly 22% in the quarter. Retail sales, accounting for a growing portion of the total, now 54%, rose by 31%. Asia Pacific was up nearly 50%, but all the other regions also achieved solid double-digit growth.In Couture & Leather Goods, retail grew significantly across all geographies as both Balenciaga and Alexander McQueen delivered excellent performances. At Balenciaga, sales were up in all product categories, with particularly good showings from shoes and ready-to-wear. Increases in leather goods and men's underscore the further potential of these categories. The brand is investing in further enhancing sales density and in expanding its retail footprint.Retail sales at Alexander McQueen were also up strong double digits supported by like-for-like growth in all regions and another sharp increase in e-commerce. Shoes led the advance, while the brand successfully rebalances its ready-to-wear and deepens its leather goods offering. The international rollout of the new store concept inaugurated in London is getting base. Brioni retail sales were impacted by the ongoing rationalization of its store footprint with another 9 locations closed in the quarter. Excluding this structure, Brioni's like-for-like performance was encouraging, particularly in Asia but also in Europe. The trends in wholesale for all Couture & Leather Goods brand chiefly reflect the decision to gradually raise the contribution of retail to overall sales. In hard luxury, we had a very good performance in jewelry, particularly from Boucheron, up in all regions. The launch of the Jack de Boucheron line in the quarter further strengthens the house's jewelry offering and the extensive coverage of the reopening of the Place Vendôme store supported its visibility far beyond Paris. The development of Qeelin is progressing at a rapid pace, while retail sales from Pomellato are trending nicely.In watches, we are focusing on sell-out through an increasingly selective network of distributors. The feedback we received following the presentation of new products and refreshed collection at the SIHH watch fair in Geneva was very positive for both Ulysse Nardin and Girard-Perregaux.We are also very satisfied with the progress in developing synergies between the 2 brands, focusing on sharing all manufacturing and support functions while they each retain their separate identities in the market as illustrated by the recent impactful communications campaign.With Slide 10, corporate and other, I will provide an update on Kering Eyewear, which accounts for the major part of the segment and had an excellent first quarter. In the period, total sales of Kering Eyewear were EUR 163 million. After elimination of intragroup sales and royalties earned by the brand, net consolidated revenue of Kering Eyewear was EUR 128 million, up 23% comparable. Gucci had another very strong performance in eyewear, leveraging Chinese New Year celebrations to strengthen its positions in this key region and launching global digital campaigns. Cartier is developing according to plan as are our other key brands. Major events of the quarter also included the successful launches of the Balenciaga and Montblanc collections. With the new logistics center in Northern Italy now onstream and handling 100% of deliveries, Kering Eyewear is in a great shape to further improve customer service levels.A few words of conclusion on Slide 11. We continued to outperform in the period on top of the extremely high comps established in the first quarters of the past 2 years. We remain fully confident in our brands' capacity to leverage their creativity and market leadership. We are also adapting swiftly to the changing geographic makeup of wholesale, due in part to the repatriation of Chinese spending, and we are closely monitoring our environment. In this context, we are watchful and maintaining strict financial discipline, although the longer term, we stand by our ambitions. We are comforted by the performance of our brands in this beginning of the year and confident in our ability to continue delivering steady, sustainable and profitable growth.We are now ready to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Edouard Aubin.

[Edouard Aubin, Head of Luxury Goods]

I have 3 quick questions on Gucci and all related to geography and nationality. So my first question on Gucci is that you grew around 12% in Europe in the first quarter. I know you said that sales in Europe were up, but to what extent the increase was driven by tourists or not in Europe in the first quarter? Are we talking about low single digit? Or if you could quantify, that would be helpful. My second question relates to that. It's that if you look at European customers, they were early adopters of the Gucci brand back in 2015. And to what extent -- could it be a lead indicator for other nationalities like Chinese national or not? And just finally on the U.S., which you obviously mentioned earlier, if you could just please quantify a little bit more in terms of what your analysis is -- I get that it's a very difficult comp base, and you performed very strongly last year and the year before. But the performance was, nevertheless, below initial expectations. So could you please say a word on desirability? Social media surveys seem to indicate that desirability is down in the U.S., but what are your service saying? What is the feedback from the trade on the desirability of the Gucci brand in the U.S.?

[Jean-Marc Duplaix]

Thank you, Edouard, for your questions. As you may imagine, I won't provide detailed figures when it comes to the trend in Europe. What I can say is that it's true that for the first quarter, despite what are the figures already communicated by Global Blue, we add for our brands, and Gucci specifically a good support from the tourism. And it's clear that in almost all clusters, trends were strongly up, especially with Chinese but also still with American. American cluster was particularly dynamic in Europe. And just to summarize in a way, the growth of the tourist cluster was above the growth of the local clientele base. But still, it was up with the European clientele, reflecting in a way, let's say, also the normalization of the growth in the region. So it's clear that for that segment, our clientele, it's not a double-digit growth, but it's still very sustained. I would add also that we are still suffering in Europe from a lag with Middle Eastern and new Russian customers, even if it was declining compared to the past but on easy comp base. It's true and you're right to point out that European customers, and to such an extent also with a catch-up with the U.S. customers, European customers were the early adopters of the new static. But after that, it was a quite rapid catch-up with the American customers. I did explain why the performance has been so strong in North America in the 2 past years, and that's very interesting to compare the store growth of Europe with North America, and you see that it's quite consistent over the last 3 years if we compare only Q1. It's very difficult to say and to predict if these trends in Europe or with the European customers could be a sort of indicator of what could happen with the Chinese customers. I think that the dynamic behind in terms of economic trends are not totally comparable, and it's true that we rather see a very sound consumption base still with the Chinese cluster and more globally in any emerging markets. I think we know perfectly that we have a more mature clientele in Europe, in the U.S. and in Japan. So I do believe that we should consider this, the trends in Europe, as an indicator of what could happen with the Chinese clientele. After that, making the connection with North America. It's true that it has been a more challenging quarter for Gucci, but again, we are facing a very high comp base. It's true also that, as you may know, the North American clientele is more skewed towards ready-to-wear and shoes and handbags. And you should consider the predictions for the '19 -- for 2019 in terms of growth if you consider [indiscernible] analysis. We could expect that the handbag category should grow faster than the other categories. So it may explain also part of the trends we had in the U.S. After that, if we consider, without providing the figure, the like-for-like growth in the U.S., it was quite robust. And I think that the performance of Gucci in terms of like-for-like is not really fundamentally different or significantly different from some other brands of the group in the country. We have also some indicators showing that the traffic also in some areas on both were impacted maybe by less confidence with the U.S. customers and the macro environment, which is maybe not so supported as it was before. So I think we are working clearly on the assortment on the merchandising in order to better address the U.S. market, but there is no specific concern so far. Last point also, we have to -- on some SKUs some delivery issue in the U.S. So it may explain also that we have late deliveries. That could explain also why we have this performance. So this is a combination of factors. And there is, let's say, nothing alarming so far, and we remain confident for the remainder of the year in North America.

[Operator]

Your next question comes from the line of John Guy.

[John William George Guy, Managing Director]

I have 3 questions, please. My first question is just on Gucci in terms of the store network. I think as at the year-end, 44% of the network was in a new format, and you were targeting around 60% by the end of 2019. Could you update us as to where we are at the end of the first quarter and if there were any specific trends that you saw in terms of foot fall conversion in the first quarter? My second question is on price mix. Could you -- were there any specific increases by category or by region during the quarter that you wanted to call out? And on the CAGR, I just wanted to get a sense of how many stores Daniel Lee's collections were present in. And what was the percentage of the sales penetration in those stores?

[Jean-Marc Duplaix]

Regarding the new concept, the first quarter -- first of all, as you would have noticed, we have changed the methodology in terms of store count. So the 45% was based on -- or the 44% was based on the previous calculation method, and we are tracking still the percentage of completion based on the old method. But I think it does give, in any case, a good indication of where we are. And the first quarter is not a quarter super active in terms of refurbishment or store openings. As you realize also, understood we have opened a very limited number of stores net on Gucci. So at the end of Q1, we had approximately 45% of the network with the new concept. It does not change the ambition, by the way, to be at 60% approximately by the end of the year. Still relying on the old counting method, but it should be more or less a good proxy of where we are in terms of new concept. That said, what we see -- and it's more a general comment about the performance of Gucci during the quarter, and it will be answered partly to your second question. The performance of Gucci is once again driven principally by quantities, by volumes. What is interesting is that there is a contribution of traffic, but we start to see across the board a normalization of the traffic, especially in the more mature countries. And what we saw is an improvement of the conversion. So all the metrics we are tracking, we see globally an improvement. We are very happy with the progress made. And we see that finally all the levers we were working on for now, several quarters, starts to pay off in terms of conversion in globally retail metrics. So at the end of the day, yes, there is still another performance of the stores where we have the new concept in terms of sales growth. We look at the sales growth with analyzing the different clusters of stores. It's obvious that the stores bearing the new concepts are performing better in terms of growth. But overall, across the board, what we can see for the quarter is that the performance is not driven by an increase of the average selling price. Those are the price mix of U.S. from here and there from one region to another, from one category to another. You may have some changes, some variances up or down. But obviously, we cannot consider that it's material and that it's not worth commenting anything on that because it's just a reflection of some changes in the mix, but there is no major changes. And principally, the performance is driven by volumes and with an improvement of the retail KPIs. As regards Bottega Veneta, it's true that the Spring/Summer collection -- the Spring collection or the pre-spring were -- have been designed principally by Tomas Maier, and the remainder of the Spring/Summer offer assortment was designed by the studio. So we have only 2 handbags designed by Daniel Lee. It was a way to test the market, and there's a reason why. We had only, let's say, 10 stores where we -- the products were available. And obviously, since the mid-February, approximately, we have been able to deliver the first pieces with the ramp-up, of course. What we can say is that they have been sold out. That has been a super interesting performance. Super interesting also because we saw that in terms of clientele, we had a new profile of clients. So we had, in proportion, more new clients, and it was also super successful with the existing clients. So it's a good indication, but it's just another indication. And of course, it does not really move the needle in terms of performance because it was really a minor part of the assortment.

[Operator]

Your next question comes from the line of Antoine Belge.

[Antoine Belge, Global of Consumer and Retail Research]

It's Antoine Belge at HSBC. Three questions. First of all, regarding the performance of the first quarter. In February, you had mentioned that the trends were pretty much in line with Q4, which I think the market understood as being above 25%. So is it possible to comment a little bit on the regional slowdown that you've seen? Is it the U.S. that grew most of the slowdown? Second question, you mentioned the repatriation of growth in Mainland China, and there's still a very strong performance of the Chinese cluster in general. So is it possible for you to update the share of Gucci, say, as to Chinese on maybe the split, I think it was 45-55 in terms of local versus tourist? And finally, going back to the U.S., you didn't mention any impact of the incidents you've had during the quarter. Was it not meaningful in terms of impact? And also, with regard to the issues of deliveries, were they only impacting the U.S.? Also, has it had an impact in other regions as well?

[Jean-Marc Duplaix]

Thank you, Antoine. I think it's important to come back to what had been said by François-Henri. You're right, during the full year results presentation, he was mentioning that there was a strong start of the year, but he had mentioned and reminded that because of the anticipation in a way of the Chinese New Year, it should be analyzed after -- or at least combining January and February to have a full picture. And it's true that at the beginning or until the presentation of our ful year results, the trends were more or less consistent with Q4, and more specifically in terms of patterns of consumption, meaning the situation with the Chinese cluster and Mainland China. After that, if we combine January and February, there was in a way a form of normalization of the growth at Gucci, which was I think quite anticipated at least on our side, and I think that we have been quite transparent and vocal about what could be this normalization. And without commenting region by region, month by month, what we can say that's very interesting. And I think that ideal occasion, also to mention that is that if you look March more specifically, the trends in March were globally consistent also with the trends experienced for the combination of January and February. So we cannot say there was an additional decrease in March compared to the 2 previous months. That should be analyzed altogether because otherwise it's not meaningful. You know that at the beginning of January, you have a decrease of the euro bank consumption. After that, you have some pick-up gradually. So I think that overall, let's say, that there is no surprise on our side, and the pace of normalization is quite consistent with what we were foreseeing. Now the repatriation in China, let's say, very healthy situation we have with the Chinese. Of course, you can imagine that it has increased slightly the share of Chinese among our clients, considering also that you cannot reconsider Q1 specifically. Because Q1 generally, you have another representation of Chinese in the clientele because of the Chinese New Year. Just to remind you, if I remember well, for the full year last year, we had 1/3 of the clientele of Chinese. While in Q1 '18, it was something like 37%. So you have a 4 percentage point, 3, 4 percentage point gap between the quarter and the full year picture. So what has been said also by François-Henri that considering the very healthy trends we have with the Chinese, we could expect that for the full year, Chinese cluster could represent something like 35% of Gucci. So I'll let you imagine what was more or less the weight of Chinese in Q1 for Gucci. Your last question was about...

[Claire Roblet]

It's Claire. You want to know where they are spending? Was it part of your question? Local versus or not?

[Antoine Belge, Global of Consumer and Retail Research]

Yes. So the -- I wanted to have maybe a split between mainland and tourism, but I understand actually it's maybe not meaningful.

[Jean-Marc Duplaix]

No, no. In that sense, it's a little bit meaningful because it illustrates how important is our repatriation. And it's true that we are around slightly below 50% in terms of consumption locally on the domestic market, which is probably a very high level that we have not experienced in the past few years, and you have a big share of goods consumption in Asia. Broadly speaking, if we include also Japan, so it's approximately 35%, 36% in Asia. And the bulk of the remainder is principally in Europe. It's true that, and it's important to remind you that we have probably lost 1, 1.5 percentage point of growth in North America because of a decrease of tourism both from Chinese and Latin American in the U.S. And also, it has impacted a little bit the North American market because there was clearly a decrease of the Chinese cluster in North America. So a big repatriation in Mainland China and something which is quite well balanced. And I anticipate probably the question between the different deals in terms of analysis or clustering of the cities in China.

[Claire Roblet]

The last question was about blackface.

[Jean-Marc Duplaix]

Yes. The last question, which is a very important one about what happened in the U.S. Obviously, the priority here about the blackface issue was not to quantify the impact on Gucci business but rather to react as promptly as possible to what has been obviously a mistake. Gucci handled it without any ambiguity. That such situation was not acceptable even if it was also very obvious since the beginning that it was not Alessandro Michele's intention to inflict any pain. So we believe that Gucci, and more globally, the group has managed the situation in the best way as possible. We have some more initiatives to come in order to place diversity and inclusivity as the core of our key decisions. And I think that, obviously, we should not consider the performance in the U.S. because of that event. And what is really more important is the incredibly high comps due to the outstanding performance of the brand in '17 and '18. And once again, I think that there is a slightly less favorable environment for retail and also for Luxury in the U.S. So we won't quantify any impact on that side. And I don't believe that it had, at the end of the day, a very much of an impact.

[Operator]

The next question comes from the line of Thomas Chauvet.

[Thomas Vincent Chauvet]

I have 3 questions, please. The first one coming back to the Gucci slowdown in the U.S., and to some extent, in Europe. Could you comment a bit more on whether system product categories, price points, age groups, for instance, millennial's, have slowed down more than others in the period? When I look at the segment reporting disclosures, it looks the slowdown in the U.S. and Europe was a lot less pronounced, that's why it fell, or your other luxury brands, probably Balenciaga and McQueen so -- than Gucci. So I'm trying to understand what's really Gucci-produced specific here. Secondly, on the topic of pricing and repatriation, when you look at what's been happening for Gucci and your other brand's greater demand in Mainland China, less in foreign markets in the last 6, 9 months maybe, do you think it has a lot more to do with some very mechanical effects on pricing? So currency moves, import duties cuts, more recently VAT cuts? Or it's maybe a more serious attempt by the Chinese authorities to crack down on Daegu, which is probably quite a sizable chunk of your -- of some of your foreign markets? Or is it maybe your own ability to actually drive traffic conversion off-line, online in China? And just generally, create a brand interest. And finally, on Puma, back in February at the full year results meeting, you said or Mr. Pinault perhaps said you were very happy shareholder in Puma, but you would consider exiting that residual stake if an opportunity arise. The shares are up 15% since then, so I guess you were right maybe to wait a little bit. You're probably a happier shareholder now. That stake is worth EUR 1.3 billion. What would you do with the proceeds if you were exiting it in one way or another? And can you give us the exact date of the lock-up expiry for Artemis' 29% stake? I think it's around mid-May, but I'd like to know the exact date of that lockup.

[Jean-Marc Duplaix]

Thank you so much for your questions, and especially to have provided already the answer to the second question. First point, at Gucci, I think that it's clear, and I had mentioned is that, the fact that the European cap clientele and also the American clientele are more skewed towards shoes and ready-to-wear. And on top of that, that the European customers were among the early adopters. Of course, if you look at the overall performance by category, then it does remain robust across-the-board. It's true that the pace of growth of ready-to-wear and shoes category are below the ones of handbags or small leather goods. We have a super strong performance in handbags and small leather goods, which is not surprising considering the boost of the business was Chinese. Beside this, I mean it's very difficult to add anything. I think that here, we are not surprised to see that as what we were expecting in terms of normalization to start with these 2 categories. And I think that we are there, the Gucci teams are working in order to continue to fuel the offer with newness but also work on the carryover lines or the pillars. You know that we have mentioned that we wanted to -- not to have the same proportion of carryover in ready-to-wear and shoes as in handbags. But still, there is this ambition to constantly bring some new interpretations, new functionalities to the pillars. That's the case in handbags, that's the case also in ready-to-wear and shoes, so we are working. And what is interesting is that typically, these are not categories where we have some changes in terms of price/mix, so it means that we don't push at any price to make volumes, that's super important. We had already some discussions about the exclusivity of the brand and the good answer is this, that, of course, we could continue to grow even faster in these categories, but that's not the ambition of Gucci. The price/mix does remain quite stable. And even if you saw some categories where we had results, small variance, positive variance in terms of average selling price. So I think that typically for these categories, we are in the state of our normalization but very confident with the pipeline of products we have and also with the reception by the clientele in the stores. As regards to China, I was kidding a little bit because you have mentioned a lot of factors explaining or trying to explain why the brand is so successful in China and if it's detrimental to certain countries or certain activities. I think that I would just start with an indication. China, for Gucci, became as a shared online market after the U.S. and the U.K., with a very rapid growth. So the desirability of the brand in China is super high. We had also, as you know, a very strong success on the social media in China with a very rapid development of followers in WeChat, which has been one of the much rapid increase or the strongest -- one of the strongest increase in terms of traffic and visits and also clearly, engagement. And overall, I think that we were -- Gucci was well prepared in China. You know that we have not decided to open many stores and to add some stores or any products. We were really very happy with the network we had, and I think that we have also -- there's a right store concept. We have -- and what is also encouraging in China is that it's a country where we have the lower share of refurbished store with the new concepts. So globally, I think that all the actions, the initiative launched by Gucci in the country plus a repatriation, which is, at the end of the day, quite sound, does explain the performance. After that, the repatriation is clearly linked to the geo pricing. And you're right that -- to mention that because of different factors, FX, tariff adjustments that have been translated into prices, it has been clearly an incentive for the Chinese customers to buy rather in Mainland China. It had an impact in some countries, but you can see that in Korea, the market was too very dynamic, so we cannot really say that the Korean market was only driven by Daegu. It was also market-driven by local clientele and some Chinese customers who are not Daegu customers or buyers. And I think that all brands, and Gucci also included, had already started work in Europe to reduce or to have a tight control of Daegu. So we cannot really say that it could explain the decrease of business in some other regions. Daegu is not -- was a chunk of business, but globally speaking, we are quite happy, too, to reduce that exposure. Now regarding Puma, I confirm that we are a happy shareholder. Tomorrow, there will be the AGM of Puma, so we will confirm that we are very happy with that stake. I think that the comments that have been made by Mr. Pinault and Mr. Palus when we presented the full year results are still relevant. As you know, that was not an ambition for Kering to be a long-term shareholder for -- in Puma. To answer your question about the lockup revenues, it should not -- I should not have to answer to that question but it was very clear and announced at the time of the operations that Artemis has a 1-year lockup, so that should end in May. So nothing to add on my side. We are vigilant. We are scratching the market. And as said by the top management of Kering, we will face an opportunity in due time. When it comes to the process of -- I think that François-Henri and Jean-François made already some comments about M&A and about the dividend policy. And I have nothing new to add also on top of what has been already said by the top management of Kering.

[Operator]

Your next question comes from the line of David Da Maia.

[David Da Maia, Research Analyst]

The first one on Bottega Veneta, how do you manage the current creative transition? I mean, have you planned to reduce earlier the visibility or the volumes of the former collections in order to give more space to the new collections in late Q2? Or should we rather expect a smooth normal transition for the brand? And the second question on Balenciaga, is it still your fastest-growing brand since the beginning of the year? And do you want to apply some key drivers, not only in terms of product category, but also in terms of customer or nationality in order to better understand the current very struggle in term of this brand?

[Jean-Marc Duplaix]

Thank you, David. Your question about Bottega Veneta is a very relevant one. I think it will be key when the fall/winter collections will hit the shelf, and especially the pre-form to have a layout, a visual display, a merchandising strategy allowing to present in a proper way the new products. There are some cases with the new stores, for example, the Los Angeles one or the Tokyo one, Ginza, where we have already a concept which does help in that process. But it would be clearly challenging because you know that we cannot completely skip the old collections. So we have the chance with Bottega Veneta to have a significant share of carryover in prominent lines, which are still successful. Which are clearly -- unfortunately, they are not enough. Let's say that the sale is out. There is still desirability about the permanent collections, but if you look at the figures, really they are decreasing and are not yet offset by units. But this is clearly a basis on which we need to rely, and that's part of the identity of the brand. So we need to manage carefully how this transition will be managed, and clearly, that will be what will happen rather at the end of Q2, beginning of H1 -- or of H2, sorry, and it could be very gradual. So it's a gradual shift towards newness in the product offer. Today, we are rather -- to have met a very vast majority of carryover lines. And during H2, there will be a shift with more and more weight of the newness. That's the reason why, obviously, the -- as you see, Q1 was below some expectations, including our expectations to a certain extent. And the recovery should come rather during H2 when the transition will have started, and it should be, in any case, quite modest, a positive inflection in H2. We need clearly to manage that transition, and the carryover lines are still -- needs to be presented and exposed. Balenciaga, it has been, clearly, as we call it, the strongest growth in the ready-to-wear on Gucci on fashion -- Gucci and leather division because to be a very transparent team at another excellent quarter. So in the segment of ready-to-wear and leather, it was the fastest-growing brand. I will -- I would come back, as you proposed to what has been the drivers of growth by category even if, once again, ready-to-wear and shoes drove the growth. It was still a very robust performance in leather goods. I think that this is now a phase where, first of all, there is a focus on retail. So it means that the brand now has the maturity to focus more on retail, and wholesale was still up in Q1, but there are some conversion of some activities, wholesale activities into retail. Plus, there is clearly a strategic decision to control and then to control the wholesale channel, not in the sense that we had an issue with the wholesale channel so far because Balenciaga historically had a quite good point of sales in terms of wholesale, but just the question of shifting the activity towards more retail. The priority will be given to retail going forward. We have some new openings, so going forward, we expect a normalization of the growth also at Balenciaga but still at a very high level of growth, high pace. We will work more on retail KPIs because we had a very rapid increase of the sales density thanks to the traffic. But as usual, after a phase of expansion, there is a need to consolidate and to activate all the levers as it happened at Gucci, so we are not yet at this stage. But clearly, there is a need in the existing stores to boost even more the productivity and the density. And we have some ambitions in terms of store openings. All these factors, clearly, we will accelerate in the coming quarters. But there have been already some elements helping the performance in Q1.

[Operator]

Your next question comes from the line of Flavio Cereda.

[Flavio Cereda-Parini]

Three quick questions for me, please. The first one, again, I'm afraid I'm looking at Gucci, and following up on what was asked earlier in terms of the speed of the rollout of the new store concept or the lack of speed. So according to my calculations in the last year, you basically were looking at less than 80 stores. And I was wondering, actually, this must be a deliberate strategy. If you could help us understand a little bit more the thinking behind that because if you confirm the target of 60% by year-end, there's going to be a significant ramping up in the remainder of the year. So that was number one. Number two, could you perhaps give us the percentage of e-commerce, the rate on wholesale sales as it is today, a rough idea of what that is, and for Gucci. And this is not related to Gucci, it's not even related to Q1, but I'm going to ask it anyway. When do you think we're going to have some kind of visibility on the final resolution of your situation with the Italian tax authorities so that we are able to have a better visibility on that?

[Jean-Marc Duplaix]

Thank you, Flavio. You have not to apologize to the question about Gucci. Yes, it's true that the ramp-up should be -- is ambitious for Q2, Q3 and Q4 in terms of refurbishment, but I think that was the way Gucci had anticipated the refurbishment work for this year. I think that it was a decision to be at full speed in Q1 because of the Chinese New Year and to schedule some work and refurbishment for the following part of the year. So as usual, when you are fidgeting some work and some refurbishment work, you cannot completely be accurate because it depends on the availability of the construction company, it depends on the capacity to deliver the materials. But obviously, that's the reason why we say it should be around 60%, should it be 59%, 58%, 61%, difficult to say. But today, there is no reason to believe that there will be not an additional significant way of refurbishment concerning that as we already mentioned, we are not necessarily targeting some flagships or big freestanding stores. So I remain confident that the team at Gucci can deliver what they had in mind in terms of refurbishment for this year. It's absolutely key, and during our -- in our recent discussions with Gucci, I had not any comments or any request from changing the timeline in terms of refurbishment. As regard e-commerce and the share of e-commerce within wholesale, it's not a figure that we are providing. What we can provide you is, as usual, what is the share of e-commerce in retail, which is 5.9% for Gucci, if I remember, or around -- slightly more -- sorry, it's more than 6% overall. There was still big markets leading the way, so I mentioned China, U.S. and U.K. Some markets start to accelerate also online. For example, Germany was already high in term of share of business made online and France accelerating. Maybe it's an outcome of the difficulty in France to show up on such a day because of bigger events, but anyway. We had very good trends in online in France. For wholesale, I will make sure to clarify this comment. I think that you know that the strategy of Gucci was rather to convert some online door to operate them directly or under a concession model. It's -- we have a limited number of partners online, and you know that we are always working with the best partners as possible, be it in terms of physical distribution or online distribution. So there is no major change in terms of breakdown of sales with wholesale partners between off-line and online. And we will continue to work with these partners we have online with the ambition to reach you at more and more grip on the online distribution. As regards this question on the tax litigation, let's say that the group continues to fully cooperate in complete transparency with the Italian tax authorities in order to close that litigation. And nothing new happened since our press release of last January. And as clearly stated during 2018 results conference, we expect that the final conclusions of the tax audits may be communicated, discussed and agreed in the coming months before year-end. And as soon as we will have more precise indication of the final outcome, we will, of course, communicate comprehensively to the market.

[Operator]

Your next question comes from the line of Rogerio Fujimori.

[Rogerio Fujimori, Analyst]

Jean-Marc and Claire, I appreciate this is just a sales update, but I just wonder if you could make some comments on the margin outlook for the first half regarding 3 areas. First, is there any major impact from hedging on margins year-on-year in the first half assuming current spot rates for the balance of the year? Second, any timing factors with regards to some important investments in H1, H2 in the view of marketing and the investment to support the busy turnaround? And thirdly, is there any material margin difference for Gucci between Mainland China and the U.S. given the big geographical shifts as seen in Q1? Any qualities or color would be helpful.

[Jean-Marc Duplaix]

Well, it's always difficult to make predictions on FX rates. And therefore, it's difficult to predict what could be the impact in terms of hedging. But globally, what -- just to help you to understand, assuming that the rates stay at March '19 levels for the remaining part of the year, FX impact on sales and not hedged for the full fiscal year should be or could be slightly positive around 2% to 2.5%. I think it's -- by the way of figures, that was already -- also shared by L'Oréal and some peers. So if the FX would stay as they are today or as they were for March, and that falls for the average of the quarter. In that case, yes. The hedging policy would relaunch in a hedging loss. But which is, at this stage, too early to be quantified, and it would be too early to quantify. That is a combination of FX and hedging. Does it mean that we are concerned about the achievement of the ambitions we had in terms of profitability for our brands, and especially Gucci or Saint Laurent. Obviously, no. I think that as I already mentioned, we -- in the past calls, we are working in a way to try to offset any deviance deriving from hedging. I think considering the size of Gucci and Saint Laurent, there is clearly room for maneuvers to offset any negatives coming from hedging impact. The second question was if I remember well, yes, some events I know that could impact margin. Let's say that I don't believe, obviously, that we are in a situation today at Gucci or Saint Laurent or even Balenciaga, McQueen where we -- there are some reasons to deviate from the ambitions we have in terms of profitability. We had a roadmap and -- of initiatives for our brands, marketing, communication, events in the stores, and there is no reason today to change and to deviate from that road map. So obviously, we remain confident as regards the profitability of our brand. I think there is something more specific on Bottega Veneta. It's clear that because of the trends we have in Q1 plus the need to clearly support the brand on some initiatives that I have rapidly touched on during my speech, let's say, that there would be some more pressure in terms of EBIT margin at Bottega Veneta and that we can expect that we should be closer to 20% compared to what we had already said before. But besides Bottega Veneta, we are still quite confident about our capacities, the capacity of our brands to deliver an additional improvement in terms of EBIT margin as expected. As you know, we don't provide figures or more indications about the profitability country by country. It's clear that today, despite the slowdown experienced in the U.S., we have the level of traffic where we are in a position to absorb. We have the level of traffic and sales giving us the opportunity to absorb quite well the fixed cost we have in the U.S. Conversely, in China, the more traffic we have because of the valuable part at the end of the day. The EBIT margin is improving modestly because there is just a little share of fixed cost. So at the end of the day, today, we are still at Gucci with the level of sales and traffic we have in a situation where, of course, Hong Kongese or Chinese stores can be more profitable. But overall, the profitability across the regions are quite even.

[Rogerio Fujimori, Analyst]

That's great, Jean-Marc. And just a super quick one, what's the trend in e-commerce growth rate for Gucci in the U.S. in Q1 similar to Q4 e-commerce in the U.S.?

[Claire Roblet]

Rogerio, I think it's a bit too detailed to give you that, so we can catch up afterwards because we still have a few questions lining up, if you don't mind. Thank you, Rogerio.

[Operator]

The next question comes from the line of Melanie Flouquet.

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

So the first one is regarding the Gucci profitability confidence for the full year. When you talk about -- and in Saint Laurent, when you said room for maneuver, you're referring to price increases or tax control or both? Just that I was curious to understand what those signs actually enables you to do in the momentum of this brand and when pressing the levers. My number two question is you're referring on Gucci as the main focus, the conversion. Could you share with us whether there are some stores or some initiatives that has led to superior conversions and therefore could be invested [indiscernible] relatively easy on low-hanging fruits to improve your conversion? And how do you map this out? When you say you have big opportunities, is this against your peers? Or your best peers? Or is this against some of your offshore store operations? And my last question is on BV. Would you be able to share with us what you had shared with us at the time of the turnaround of Gucci which is a gradual penetration, percentage penetration of the new products that you're focusing. So by September and by December, and by mid next year, what percentage of your sale would be the new products?

[Jean-Marc Duplaix]

Thank you, Melanie. You know that Gucci is always very cautious when it comes to price increases, and there is not a plan to increase prices specifically besides what is a normal policy of adjusting prices collection by collection, depending on the FX moves and so on. You will have noticed that we have rather decreased the prices in China recently since the 1st of April because of the VAT adjustment. So when I was mentioning room for maneuver, it's more about the agility of the brand to address the OpEx. You can imagine that I was referring to the drag that could rise from or link to the hedging. So we are looking about some amounts with a combination of the favorable FX that would be easily absorbed at the Gucci level regarding the cost base and the capacity we have to adapt as a base of investment to postpone. And clearly here, I think, I was referring principally to OpEx control, that was the point. If it was clearly a question of phasing of the project, you know that we have, in the past few years, anticipated a lot of initiatives and projects. And clearly, we can, let's say, play a little bit with that phasing. When it comes to the conversion, I think that there is, if I may, something which is quite mechanical. At that time, we already mentioned that what was clearly outstanding at Gucci was to have both an increase of traffic and an increase of conversion. Today, with the stabilization of traffic, there is an increased conversion because also, that's -- there is a mechanical effect in a way because we have more -- there's people who are, in terms of stores, you have a lot of regain clients or retain clients who come to buy because they love the brand, they know what they want to buy. So mechanically, there is an increase of conversion. On top of that, we have mentioned, and it was what the purpose of the presentation of Jean-Francois for the full year results. We had a lot of initiatives and implementation of some tools and solutions to improve our retail metrics, not only conversion but also all the other retail metrics. And it's obvious that the rollout of the [ Luce ] solution, which is the app which is made available for our sales associates, clearly does help at the time when you stop to see a normalization of the traffic to increase the conversion, to spend more time with the customers who have a more dedicated approach, a more personalized approach. And obviously, Jean-François had already mentioned that all these initiatives are low-hanging fruits that we can grab in the different stores while we will continue to roll out the solution. Plus, we have also all the initiatives that we had mentioned about artificial intelligence and how we can have a better modernization of allocation and replenishment in order to maximize the conversion. So I think that globally, we'll start to see, let's say, the results of this initiative. And you're right to say that the more our sales associates would be trained, the more the solution will be rolled out across the network. We will be able to further improve. And I would add also that there's a full year effect of the conversion or let's say the transformation of some stores with the new concept because you start to have in the stores a full year effect of all the transformation that has been made last year also pay off for the beginning of the year. The last point, it's a good attempt, I must say, but you can imagine that it's not something that we would share specifically. I think, as we mentioned, it will be very casual. There is a shift that will be, in a way, quite material because we are talking about a lot of new product in the pipeline, especially in ready-to-wear, handbag also. You may have noticed that we have already made available a new bag, which is quite interesting and which is sold online. And also, that was present -- available in the Milan store recently during -- Yes, it was the design week. And it would be very gradual, but we won't communicate any figures on the split between -- in newness, carryover, old collection and some.

[Operator]

Your next question comes from the line of Alberto [ Daniano ].

[Unknown Analyst]

Yes. So a very short one for me, please. You mentioned in your reference document that as part of the omnichannel developments, Saint Laurent will be the first brand to benefit from Farfetchs' partnership set up with JD.com. Could you just give us some detail on the timeline for the implementation? And whether you've already maybe added some other brands to the partnership? And just touch upon how the logistics would work for the orders? And what are the key benefits for you beyond, I guess, visibility on a different platform? I'm thinking speed of delivery, customer service, et cetera.

[Claire Roblet]

Alberto, I'm going to be very straightforward on this one. You know we are planning a Capital Market Day this year about digital. So I think it's a good question for this Capital Market Day and not for a Q1 one. So if you don't mind, we're going to skip this one for next time.

[Jean-Marc Duplaix]

Yes. But I just would -- I would just add what is a priority also of the group today and our brands as the project of internalization of the e-commerce after the end of the joint venture with Yoox Net-a-Porter. That will be beginning of '20, and we are working on that, on that project, which is super important. And as presented by Jean-François during the full year results, there is a bunch of initiatives around that. One of them, which is already superefficient, is what is about customer care, which is clearly gaining traction and up to speed in some countries. And so that's also -- what is even more important for us, as you know, is to try to have a bit more control and more grip on our distribution, online distribution, and that's clearly what we are working on. Of course, what you have mentioned is another initiative. But it's one among some others.

[Claire Roblet]

So more to come about that in the digital day.

[Jean-Marc Duplaix]

Thank you all for attending our call and for our discussions, fruitful and interesting discussions. Please write down July 25 after market in your calendars for our half year results and call. And in the meantime, please call Claire and our team if you have any further questions. Thank you, again, and have a nice evening.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.