Kering SA

PAR:KER

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Kering's 2018 Third 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. Please go ahead, sir.

[Jean-Marc Duplaix]

Good evening to all of you. We are pleased to welcome you to this call to review Kering's sales in the third quarter of 2018. On Slide 4, we have summarized the group's performance. We had another quarter of outstanding double-digit growth with sustained top line gains, Kering continues to significantly outperform. Total revenue from continuing operations was up nearly 28% to EUR 3.4 billion in the quarter with reported and comparable terms converging as there were no changes in stock and virtually no FX impact in the period. As you know, Volcom, Stella McCartney and Christopher Kane, treated as discontinued operations under IFRS 5, are excluded in both last year's and this year's third quarter as is Puma's contribution. The sharp increase in our revenue comes on top of significant growth rates in the third quarters of 2016 and 2017, as you see on the bottom part of the slide. This demonstrates the tremendous momentum of our brands and their first-rate customer appeal. Turning to our Luxury houses on Slide 5. Overall, they delivered remarkable growth of over 27%, obvious across all regions and channels. Revenue exceeded EUR 3.3 billion. The impact from currency fluctuation was negligible. Retail, which represents 3/4 of total revenue, was up 28% with all regions posting high or very high double-digit increases above the considerable gains in the same quarter last year. North America, up 36%, posted the best growth with Asia Pacific close behind, up 33%. The momentum in Greater China was very strong, in line with Q2. In Japan, revenue was up more than 22%. Finally, growth in Western Europe was 19% with all countries, apart from the U.K., posting double-digit gains. Regarding key nationalities for our 3 main brands, the Chinese cluster was up more than 30% worldwide, similar to Q2. Chinese spending was partly redirected towards their home market, but it had firmed in Asia Pacific and Europe. All other nationalities also proved extremely solid, especially the American cluster, both at home and abroad. Overall, all clusters, apart from Middle Eastern clients, achieved healthy double-digit increases in the quarter. Online revenues were up more than 80% as North America and Europe, which account for the bulk of our e-commerce, experienced significant progression. Online sales also grew at a rapid pace in Asia Pacific. But of course, from a lower base, as our platforms there are more recent. By product category, growth rates in Leather Goods, Shoes and Ready-to-Wear are all in the same ballpark. Wholesale was also up 27%, a very substantial performance. The outperformance of our houses is a direct result of the creativity and innovativeness for which they are recognized around the world. Their vision is not limited to products and collections. Our houses work systematically through every step and every stage of their engagement with customers. The recent fashion shows of all our houses have gained great attention for their intensely creative content and imaginative settings. Gucci and Saint Laurent catwalk shows ranked among the very top brands in terms of web traffic this season, and Balenciaga attracted rave reviews. The digital footprint of our brands is highly scored and expanding rapidly. They constantly enhance every facet of in-store excellence to recognize their customers wherever they shop over the globe and to provide a smooth interface between physical and online shopping experiences.The CRM solutions we implement at brand level and the tools we roll out throughout our stores represent a huge step forward in personalizing and deepening relationships with our clients, raising satisfaction and loyalty. Our CRM application for sales associates should be in place in all major brand locations by the first half of 2019. In the stores where it has already been rolled out, its impact on average ticket is very noticeable. So this unique combination of art and science is really the motor of our quality organic growth. And once again, we grew from a nearly unchanged retail network. At September end, we directly operated 1,400 stores, a net increase of just 18 units in the quarter, primarily aimed at filling in gaps in selected markets or converting third-party representation. Let's turn to Gucci on Slide 6. Gucci delivered another substantial outperformance with revenue up 35% comparable. Growth was both global and balanced. Retail rose 35%, driven by like-for-like underscoring further improvement in sales density. Sequentially, the store network was stable. All regions were up from double-digit on top of very demanding comps. Asia Pacific and North America led the pack, both up more than 40%. Greater China, including Mainland, Hong Kong and Macau, grew above 40%, in line or even slightly higher than Q2. Japan and Western Europe showed further strength, up 33% and 25%, respectively. All key nationalities were up double digits and contributed to the strong performance in the quarter with the U.S. and Chinese clusters particularly dynamic. Worth highlighting and comparable to patterns in recent quarters, we saw growth across all age segments, a strong evidence of the deep-rooted appeal Gucci nurtures over the long run. In terms of product category, growth was also broad-based with double-digit increases across the board. Carryovers are gaining strength and the product offer is constantly evolving, thanks to introduction of newness. Online revenue grew nearly 70% in the quarter. As planned, Gucci continued the rollout of its e-commerce, launching in Hong Kong and New Zealand in the quarter. Wholesale increased 36% on a stable number of doors. And as expected this quarter, performance is aligned in the 2 channels. Finally, travel retail enjoyed strong momentum. You'll remember that this important channel where Gucci remains underpenetrated is a strategic lever for the brand. Gucci continues to invest to sustain its competitive advantage on top of the solid foundation it has built in recent years. Its teams around the world are working methodically and tirelessly to consolidate this position and drive Gucci to the next stages of this incredible journey. Moving to Slide 7. Yves Saint Laurent posted further growth with comparable revenue up 16%. Saint Laurent's sound trajectory is wholly consistent with its strategy and the ambitions it has set for itself. Retail was up 18% with double-digit increases in all regions and an especially good performance in North America. Overall contribution to growth is well balanced between like-for-like and new stores. In wholesale, Saint Laurent grew 14%. Taking into account some variance in the timing of deliveries as well as a high comparison base, this a very good showing. The brand's highly disciplined execution fueled this consistently strong results. Its recent Paris show was spectacular, anchoring the fashion Parisian authority of the house. New handbag lines were well received while carryovers continue to enjoy broad success. Saint Laurent opened 6 stores in the quarter either to increase its market penetration as in Australia and Mainland China or to operate directly with 3 conversions in the Middle East. On Slide 8, some highlights for Bottega Veneta. Revenue was down 8% comparable as weak tourist traffic hampered retail especially in Western Europe, and this was not offset by repatriation of purchases in Asia Pacific. Conversely, it is worth mentioning the improving penetration of the brand among local customers in the U.S. as well as the positive performance of newness in Leather Goods, also not enough to compensate for the shortfall in permanent model. Wholesale progressed for the second consecutive quarter, and the brand is carefully resuming targeted development with new partners. The brand transition is in progress. We knew the journey would take time and are very confident. Since the arrival of Daniel Lee as creative director in July, the teams are energized and new ideas are taking shape to rejuvenate the brand. The pre-Fall 2019 collection, to be unveiled around the opening of the Ginza flagship in Tokyo early December, will mark a major inaugural step. An impactful communications plan will ramp up until the first fashion show in February next year. In the meantime, the brand is selective in terms of retail expansion and closed 2 net doors in the quarter. On Slide 9, revenue at our other houses rose more than 32% propelled by a 38% increase in sales in our own stores. This accounts for more than half of the total. Across all regions, sales were up high double-digit with particularly remarkable performances in North America and Asia Pacific, both up 50% or more. In soft luxury, Balenciaga kept growing at a fast pace, thanks to the continuing success of its Ready-to-Wear and Shoes. It is also making rapid headway in its Men's business, a new vector of development. In Leather Goods, we are pleased by its ability to leverage momentum and amplify growth in this category as well. The house's recent fashion show was a masterful display of the art of tailoring, keeping up the legacy of Cristobal Balenciaga. Alexander McQueen also turned in a good quarter, notably in the key women's Ready-to-Wear category but also in Shoes and with some promising development in handbags on good success of recent introductions. Online, both brands are performing extremely well. Hard Luxury had a good quarter with all 3 jewelry houses posting higher performances and leveraging strong positions in their respective home markets to expand further. New collections as well as additional items in existing lines were key drivers. Innovation aligned with brand DNA was also an important factor in watches, where recent introductions supported visibility and top line. Patrick Pruniaux, CEO of Ulysse Nardin with long-standing experience in the sector, has been given the additional responsibility of managing Girard-Perregaux. We believe that unifying the leadership of our Swiss watch-making houses will enable us to step up the pace and generate even more synergies. Turning to Corporate & Others on Slide 10. As you know, Kering Eyewear accounts for the bulk of that line. In the quarter, its total sales amounted to EUR 99 million. After elimination of intra-group sales and royalties earned by the brand, net consolidated revenue of Kering Eyewear was EUR 76 million, up 48% comparable. The business is performing well across all regions and is driven by the strong result of Gucci, the highly successful rollout of Cartier and accelerating trends at Saint Laurent. Next year, Balenciaga and Montblanc will further enhance the portfolio, and all will take advantage of the new fully automated logistics center located in Italy. Before we take your questions, a few words of conclusion here on Slide 11. We are more than pleased with this excellent quarter and confident that our brands will continue achieving superior performances on top of the high comps accumulated in the past couple years. For the most part, their strong momentum and intense creative energy enabled them to deliver sharp top line increases in absolute terms, even if related growth rates are obviously narrowing. Year-on-year, our Luxury houses have created more than EUR 700 million of incremental revenue in Q3, commensurate with earlier quarters. In addition to each of our brands' own dynamics, our success is also attributable to the way in which we manage them together. With solid fundamentals, both our intrinsic strengths and the positive secular dynamic of our sector, we are confident in the prospects of each of our houses as well as those of the group as a whole. This being said, we know that we are operating in a fast-moving environment. This means that agility and strict discipline are required to ensure optimal financial performances and continue creating value regardless of circumstances. You can be assured that this is our top priority. We are now ready to take your questions.

[Operator]

[Operator Instructions] We will now take our first question from John Guy of MainFirst. We will take our next question from Aurélie Husson of Kepler.

[Aurélie Husson-Dumoutier]

Three questions from me, please. You mentioned several times in the past, the progress have returned to normalized growth at Gucci. It seems to me that plus 35% is not really normal, is far above normal. So should we expect a big step downwards toward normalization in Q4? Or will it be more gradual? My second question regards the price index. Could you remind us the price index of Gucci by region at end of September? Are we still around 134 in Mainland China for 100 in Europe? And if you also can also give us what is it in Hong Kong? And finally, is it possible to give a rough estimate on how much Daegu sales would represent in total Gucci turnover?

[Jean-Marc Duplaix]

Thank you, Aurélie, for your questions. Let's start with your question about the normalization. I think that what I can say is that we are so far on par or maybe slightly above the growth rate we had in mind when we were mentioning normalization and what has been presented by Marco Bizzarri during the Capital Market Day. But by the way, if you look at a 2-years stack growth, overall maybe this quarter was overall more positive than the last one or the 2 last one. But I think that globally, we are on par, and we don't expect and we don't see so far any deviance in terms of normalization. To make it simple, if we look or if we could anticipate what could be the stack growth, the 2-year stack growth for H2, I would say that it should be close or slightly above the one we have delivered in H1. So, so far, I would say that there is no good or bad surprises, rather good surprises in terms of normalization. And again, I think that the brand is doing everything which is possible in order to be on par with the trajectory that has been presented. And I think it also demonstrates that all the levers we have mentioned in order to monitor and to manage this normalization, this landing, are performing well and are doing well. So we are very pleased with the execution of the plan at Gucci. Now your question about price. In fact, if you look at the price difference, we are -- between Europe and Mainland China, there is a 26% gap to be compared to 29% 1 year ago. If we consider Hong Kong, it's 115 -- sorry, 15% gap, which is quite close to what it was 1 year ago. It was 16%. As a reminder, you know that we had adjusted the prices for the Fall/Winter collection in Europe. And then -- which had reduced the price gap with China. After that, you had somehow weakness of the renminbi. But following the price adjustment we passed at the beginning of H2 to reflect the custom duties adjustment, we came back to this gap. Regarding your last question, I think there is an obsession now about Daegu and what could be the impact on the business of Luxury brands. And I will, of course, elaborate on the -- about our brands and especially about Gucci. I will be very straightforward. If I look at the performance of Gucci in the past quarters, you can imagine that the growth has been driven, first of all, by the appeal and the attractivity of the brand. I will remind you that the success of Gucci started to materialize first in Europe with European customers. If I look also at the performance of Gucci in Mainland China, definitely, we see that Daegu is not a driver of the performance. We have some rules in our stores to contain as much as possible the Daegu business. And globally, I would say that we are very pleased to see that there is repatriation of the purchases in Mainland China. We have always said that we prefer to have a more sound consumption in China. And I think that the focus on Daegu is probably a little bit over-exaggerated. I think that we tend to forget now what has been a good measure, which was to reduce the custom duties. And I think it's normal that the flip side of that measure taken by the Chinese government is also to control more the Daegu, and I think that the rule have not changed regarding Daegu. There is probably more a strict application of the rules. We see that -- we know that there is a preparation change regarding e-commerce. And here again, we are welcoming very favorably this new regulation that will favor our business directly operated online in China. So Daegu has always existed in that business, will continue to exist. But we can say it's not a big chunk of our business, including with the Chinese clients. I'll remind you that when I look at the Gucci performance, we have almost 50% of the Chinese customers buying on the domestic market. It's 45% to be accurate. And I think that it would be completely foolish to consider that among the 55% remaining, it's only about Daegu, so it doesn't present a very -- a nonsignificant part.

[Aurélie Husson-Dumoutier]

Maybe just a quick precision on what you said as an answer to my first question. So if we assume no particular slow down versus H1 on a 2-year basis, that would lead us to -- in Q4, 25% to 30%. Are my calculations correct?

[Jean-Marc Duplaix]

I think that your calculation is roughly correct. Once again, it's difficult to predict, but we consider that the brand is in a good -- has a good trajectory and it should deliver something quite robust in terms of 20s growth. So let's say that your assumption around 25% is something which is correct.

[Operator]

We will now take our next question from John Guy of MainFirst.

[John William George Guy, Managing Director]

My first question is really just looking at the -- well, the growth rate of Gucci obviously in the third quarter. On that multiyear stack, anything over 25% highlights an acceleration. And surely, that should give us confidence and reassurance going into not only 4Q that you just talked about, but going into the first half of 2019 in terms of growth on what is a very challenging multiyear stack. So that's my first, I guess, quasi question/observation. My second question is around the store refurbishment program. Could you maybe give us some indication as to where you are now in terms of the rollout with Gucci and where you think you'll be by the end of the year relative to previous comments? If you can provide any incremental around full on conversion uplifts of the new stores, that would be most helpful. And also, with regards to maybe the exit rates on Gucci, thinking about October, I appreciate that this is about Q3. But when we look at our Baidu proprietary search tracker, we see a very strong acceleration again so far at the beginning of the fourth quarter, which, I guess, underpins your confidence around the fourth quarter. And my final question, apologies for 4, is on Saint Laurent. You've been talking about maybe a normalization of growth around maybe into the low double digits going forward into Saint Laurent into next year. I mean, you've had 7 consecutive years of double-digit growth. Could you maybe sort of give us an indication of where you think a sensible growth rate for Saint Laurent is going forward?

[Jean-Marc Duplaix]

Thank you, first of all, for coming back on the call and for all your questions. Regarding your first question/observation, I will confirm that it's more an observation that when it comes to confidence and reassurance, I think that we have always been not overconfident but confident about the relevance of the strategy we have. So I think that I won't comment, of course, what are our expectations for '19. I would just say that the figures for Q3 confirm that once again, all the initiatives launched by Gucci management, by Gucci teams are working well, are bearing fruits and will continue to pay off. And that's the reason why that there is no reason so far to consider that the trajectory presented by Marco, or what was the underlying trajectory based on the midterm ambition should be challenged so far. Regarding refurbishment, that was your second question, if I remember well. There was slightly -- we were during Q3 slightly below our expectation in terms of refurbishment. We have postponed some refurbishment around -- Q4 so that we add 14 additional stores under the new concept so that we are now at 196, which represent something like 36%, 37% -- 37% of the total directly operated stores. Nonetheless, it's just a question of postponement, so we are still confident that we can stick to the plan we have for '18. So that we could have 45 additional stores under the new concept during the last quarter if we combine openings, relocations and refurbishments. So that we are still aiming at reaching something like 45% of the total network with the new concept by the end of the year. Both concepts are still performing very strongly, but we are still -- if we look basically at the figures, the new concept stores which are outpacing the non-refurbished stores in terms of sales growth, we know that the gap will gradually narrow depending, of course, on the maturity of the market. For example, in Europe, now the growth between the 2 concepts is more or less similar even if the new concept is still performing slightly above. And just as a reminder, I think that we have already mentioned the fact that depending on the regions, depending on the cities, all the stores are not yet at the level we are expecting in terms of sales density. So there is still room for improvement there. And you know perfectly that it's one of the levers for next year, additional improvement in terms of sales growth and in terms of profitability. As regards the exit rate, of course, I will come back to the comment I just made for trying to answer your first question. I think that, of course, the comps are very challenging. But I think if I look at where is the consensus for next year, I think that you have quite listened carefully to the comments made by Marco Bizzarri during the Capital Market Day or to the comments we made in the past calls. We have still the ambition to grow faster than the market. And I think again that we have some confidence there, considering the performance of Q3. You can imagine that I won't elaborate too much on the current trading. What we can say is that globally, all the events especially in China we had in September or in October, we saw quite good figures. I think that underlying trends are still very, very, very solid. And I think that globally, growth is not moderating more than the comp base would suggest. Now finally, regarding Saint Laurent, that was your last question. I think that obviously, once again, we had a very transparent and comprehensive presentation by Francesca of the strategy in June '17. We have delivered so far on par with the plan. So I think that for next year, we have already mentioned that the growth would be driven both by still an improvement of the like-for-like performance -- or will be driven by the like-for-like performance but also as well by some stores opening. We have mentioned some opportunities here and there. I think that the growth could be still driven by like-for-like growth and by store openings. So that it's quite reasonable to consider that next year, Saint Laurent will continue to grow double-digit.

[Operator]

Our next question is from Helen Brand of UBS.

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

Just firstly, on Gucci's EBIT margin, I think consensus is at 38.5% for this year. But given obviously the strong trends in Q3 and it sounds like the beginning of Q4, where could that go to? Do you think is a level above 39% achievable? And how should we think about FX hedging into H2 and next year? Secondly, we're talking about 2019. And I know you highlighted a lot of initiatives at the Investor Day in June for the midterm. But I was just wondering if you could talk a bit about the priorities into 2019, specifically for Gucci. So how should we think about the percentage of additional stores moving into the new concept next year and perhaps also some trends in the licensed business? And finally, I think Balenciaga has a target of EUR 1 billion of revenue. Where are we annualizing on revenue for that brand over the last 12 months? And what are the plans here for 2019?

[Jean-Marc Duplaix]

Thank you, Helen. As you can assume, we don't provide guidance for the profitability of Gucci for the full year. Q3 was above our expectations and we have over-performance, so it's clear that even if Gucci keeps investing to sustain its future growth, it will deliver strong operating leverage again in H2, probably not to the same magnitude as in H1. I will remind you that during H1, we had a 620 basis points of improvement. But it's clear that the EBIT margin for the second half should be closer to 40%. So we can improve an operating or an improvement of the EBIT margin for H2 that could be materially above 300 basis points based on what -- the comment I've just made. Of course, now if -- and just -- you had mentioned the FX and the hedging impact. Considering the current situation or the spot rate compared to the hedging rate and what we saw in Q3 in terms of a currency mix with limited impact or limited variance between reported and constant currency, we can assume so far that the bulk of the impact has been taken during H1, even if there will be also some impact during H2 but very limited. And it has nothing to do in terms of significant or in absolute terms with all the operating leverage we have. So it won't have an impact in a way in terms of improvement of the EBIT margin. And in any case, of course, we could see some other variances of currencies, of FX in the last 2 months. So, so far, it's not an issue regarding the profitability. For 2019, you can imagine that it's probably surely too early to comment for what are the initiatives or the strategic initiatives for '19. I think that once again, the strategy has been very clearly and comprehensively presented by Marco. There is no reason to deviate from that strategy. You know that there is a focus on store productivity, with still the refurbishments. So we will continue some relocations. There is no plan to expand massively the store footprint in terms of numbers of units. There will be some but very limited. Still, the ambition to have more directly operated e-commerce business or at least some more travel retail. But you have also all the actions and initiatives we have started to work on for now 2 years as regards CRM, all the tools regarding allocation and replenishment at [ S & OP ] (sic) [ sales and operations ]. So we will continue basically to roll out all the different tools we have created and developed. And I think that, of course, we'll have the occasion during the presentation of the 2018 results to elaborate more on what will be the priorities for '19. But in any case, I think that, once again, what we tried to convey as a message is that whatever the turmoil on the market, whatever the fears of the market, we continue to implement in a very disciplined way our strategy and we don't want to be influenced by this anticipations and speculations. As regards Balenciaga, of course, I could make more or less the same answer in the sense that it's not the time to comment or to elaborate on what could be the development of Balenciaga for 2019. I think that here again, we are implementing the strategy in a very disciplined manner. You will have noticed that the fashion show was a good example of how the brand also can present more formal Ready-to-Wear with a great legacy or a tribute paid to the legacy of Cristobal Balenciaga in terms of tailoring, in terms of cut. So I think it was part of the journey to enter that segment and to have -- to broaden the offer. So I think that the strategy is clearly and properly executed by the team. You know that there is a potential of further growth in several categories, including the main one, which is Leather Goods. We will continue to open stores, and this is typically a brand where we plan to invest. And what I can tell you is that the milestone, which was EUR 1 billion of sales, is not so far.

[Operator]

Our next question is from Louise Singlehurst of Goldman Sachs.

[Louise Susan Singlehurst, Equity Analyst]

Just 3 relatively short questions for me, if I may. Firstly, Jean-Marc, I wondered if you could just clarify the comments you made earlier regarding the Chinese cluster and whether that was obviously for Gucci brand. I think it was for the group actually as a whole. And then secondly, in the presentation, you mentioned around the carryover versus the newness across the brands, particularly at Gucci. I think when we think about Gucci brands, we think obviously about a lot of newness, but I wonder how we can think about the development or the progress of the carryover as a proportion of the total product offering. And then thirdly, just given the strength that we're obviously seeing in the online development and e-concessions or virtual concessions that were talked about by Mr. Bizzarri back at the Capital Markets Day. I think Mr. Bizzarri spoke more recently talking about using potentially third-party platforms but is currently in a wait-and-see situation. I imagine given the growth that you're currently seeing, you don't need any help from third-party platforms. The volume is clearly very high. But what is it that you probably need to see from third-party platforms that help the dialogue there?

[Jean-Marc Duplaix]

Yes, I will try to clarify -- thank you, Louise. I will try to clarify what we commented on the Chinese cluster. What we said is that if we consider the Chinese cluster as a whole for the 3 major brands of the group, the growth of the Chinese cluster in Q3 was very close to the one delivered in Q2 and above the one delivered in Q1. And of course, you can imagine that this comment is the same for Gucci if we look at Gucci specifically. So now, once again, I think that there were a lot of questions and concerns about the situation with the Chinese cluster. Again, we don't want to -- we have not a crystal ball and we don't want to elaborate on what could happen. But what is very clear and obvious, if you look at the figure, is that the Chinese cluster was very positive in entering the quarter with, of course, and that's not a surprise, a repatriation of purchases in the domestic market. That's the reason why we also said that in terms of growth, Q3 was the strongest quarter if we look at Mainland China compared to Q2 and Q1. And once again, my comment is about the 3 main brands and for, first of all, about Gucci. I think that it does clarify completely. As regards the carryover, I won't spend too much time on that. I think that we have already mentioned that today, if we look -- it was the case in Q2 more or less. It's still the case in Q3 for Gucci. Carryover lines represent approximately 70% of the sales across the board. So of course, with differences between categories. But even in Ready-to-Wear and Shoes, I think that we have, on the brand, Gucci has been very strong and very talented in styling carryover lines with some seasonal interpretations, new colors, new functionalities. But overall, the product mix is this one, 70-30, with some very positive drop of newness along in the new collections, in the new shows. But you will have noticed also that during the show, you'll see some lines which were existing with new interpretations. Overall the growth is very well-balanced across the different categories. And if we really look at newness and carryover, so carryover lines are performing still very well. And we don't see so far here again any sign of slowdown if we consider the carryover lines. Your last question was about -- yes, online platform. So overall, if we consider the online, the digital strategy of the group and for Gucci specifically, but I think that what I could -- what I would say is the same for the other brands. We are fine still to collaborate with some e-tailers of our marketplace with different models. It can be wholesale but optimizations as long as the brand integrity is preserved. And what has been said by Marco very clearly is that's the priority. And I think that we have been always very clear about the fact that the priority is to develop the business that we are controlling and that we are operating directly. That's the reason why we have invested massively in our digital penetration, in our digital tools and the online platform of Gucci. And there was some new steps in the rollout of the platform with New Zealand and Hong Kong during the quarter. So clearly, the priority is to develop the directly operated business. It's true that the development with some platforms is not at the level we could have expected, and it's demonstrated in a way that where we find the growth and where we have the growth is on the business that we are operating directly. It does confirm that to a certain extent, online distribution is very similar as physical distribution. You need to have a certain knowledge and to have certain skills to choose your assortment, to propose products, to showcase products. And I think that all the retailers have not necessarily this capacity. It depends also on the quality of service. So overall, there would be gradually also a sort of polarization among the e-tailers and we will be probably, going forward, more selective. But once again, the priority is to develop our online business, and we have mentioned what was the growth rate for Q3. Now at Gucci, for the Luxury houses, but it's more or less the same for Gucci, we have 6% of the retail sales made online, which is very encouraging and which continues to develop very rapidly.

[Operator]

We will now take our next question from Antoine Belge of HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

Three questions. The first one regarding the 40% growth in Gucci in the first 9 months, how much was price and volume? And how are you thinking when you think about the next collection and the pricing of those, I mean, what type of average price increases now you're anticipating? Second question, I think on Reuters, you were quoting that the priority was organic growth. Having said that, with your Gucci exceeding your own expectations, it's now representing an ever-increasing share of your profits. So maybe could you update us on the M&A strategy, especially in terms of maximum size? I think there's been different views on this in the market. And also, what are the priority categories? And finally, I've got an ESG ISR question for you. With Gucci growing at 40% in the first 9 months, what are the challenges for you to make sure that the supply chain is safe in terms especially of making sure that the environment is protected and that -- so your workforce is also [ fresh ], is what I would say, in terms of, I imagine there must be challenges in terms of increasing the number of auditors, et cetera?

[Jean-Marc Duplaix]

Thank you, Antoine, for your questions. I think that -- so Q3 sales, obviously, were once again driven by like-for-like because we have not extended the store footprint; driven once again by full price sales, which clearly I like the ability of the brand to combine growth and increase in terms of exclusivity at the same time. It's clear that today, since the beginning of the year, globally, sales have been driven principally by volume, which is a combination of traffic but also improvement in terms of retail KPIs like the conversion and also the retention. I think that overall, it's across the board very positive if we look at the different retail KPIs. The price mix or the price effect is more limited and varies by region and product, especially if you remember that we did not back price adjustments to the same extent in all regions. We had for the Fall/Winter '18 a low single-digit increase on selected items in the Eurozone. But conversely, we had a price decrease of 5% in Mainland China following the custom duties adjustment. So overall, the price effect is more limited. So the growth, I think, is principally driven so far by volumes. Of course, regarding the dependence on Gucci and M&A, I think that it's a core focus on Q3. I think that once again, the priority is about organic growth. I love to have this dependence on Gucci so far, which is because we are confident that Gucci will continue to grow. I think also, if you look at the contribution of brands like Balenciaga, Saint Laurent or McQueen to the growth during the quarter, it has been also significant. So going forward, without adding any brands to the portfolio in the long run, I think the share of Gucci should normalize in the total sales to come back to something which is very comparable to what is the situation of some competitors. So I think that if we are executing the strategy and we are focusing on organic growth going forward, the share of Gucci should gradually normalize and come back to something which is more on par with what we had before the disposal of Puma or something which is comparable to our main competitors. So again, the focus is on organic growth. You have some speculations about a possible consolidation in the market. Let's see what happens -- what will happen. You know that we have a very sound financial position. But M&A is not at the top -- is not a top priority short term and midterm. Your question about the supply chain is a very good one because it's clearly an obsession within the group to be sure that we have a supply chain which is the best-in-class in terms of quality, in terms of working conditions, in terms of supply. But you know how difficult it is because of the multiplication of vendors in the value chain. Nonetheless, I think that when Gucci started to rationalize and to reorganize its supply chain, I've already mentioned that there was an objective to sort of have a first -- to build a sort of hierarchy among the vendors, the suppliers, with the first row of suppliers with whom we are used to work and which are very close to the Gucci people so that we have a quite certain degree of confidence in the quality of the work done there and the respect of all the rules and working conditions. That said, it's true that we have decided to increase massively the budget in terms of audit. It's not only about internal resources but we are also using external resources to audit as regularly as possible, and we have increased the frequency of the audit of our suppliers. We have imposed strict rules in terms of trustability of the schemes, in terms also trustability about the value chain and where is our sub-suppliers, sub-vendors. So I think that zero risk does not exist. But I think that we have implemented a lot of rules and guidance within the Kering organization to improve and to try to have the best-in-class governance into that respect. It's also the reason why we have a more centralized organization with all the industrial operations which are under the governance of Kering so that we can roll out all the best practices within the group. I think that we have built throughout the years a suppliers database in which we can track if a supplier is working for one brand, several brands of the group to try also to mutualize as much as possible the audit and the check in terms of compliance.

[Antoine Belge, Global of Consumer and Retail Research]

Maybe just regarding what you said about volumes. So is it fair to say that at least 3/4 of the 40% growth in the first 9 months was volume related?

[Claire Roblet]

It's Claire. It's probably slightly more. It's probably really the bulk of growth is volume.

[Jean-Marc Duplaix]

Which was not the case, just to remind you, in 2017 when there was at the end of the mark-down activities, which has contributed to a substantial price impact.

[Operator]

We will now take our next question from Zuzanna Pusz of Berenberg.

[Zuzanna Pusz, Analyst]

So I have 3 questions, please. First of all, generally on the Chinese consumer, as you probably are perfectly aware, everyone is quite worried about the potential slowdown. You don't feel like anything like that is happening. So I mean, at this stage, I know you can't really share anything on current trading. But can you maybe tell us when you look at the consumer, and I think you've been one of the first companies to really flag the different behavior of the millennial consumer the way that Gucci was really able to nicely capture that consumer cluster. Would you say that there is something in the behavior of the millennial consumer, especially in China, that makes them slightly less reliant of the, let's say, usual macroeconomic factors? I mean, any thoughts around the -- why the entire market is expecting a big slowdown, but it looks like no company in the sector has mentioned it at this stage would be very helpful. And secondly on Bottega Veneta. So I remember you were guiding previously to the margin maybe staying around 25%, 24% EBIT. Now given the deceleration we've seen in Q3 and all of the plans regarding, let's say, the relaunch of the brand's turn around, would you be able to maybe share some comments around the level of margin you see as sustainable at Bottega Veneta? And finally, also on e-commerce, so now that you've had the online site, gucci.cn, in operation for over a year, would you be able to tell us a little bit more around the current penetration you see of the online business for Gucci in China?

[Jean-Marc Duplaix]

Your first question is not an easy one because we consider we are not the most qualified to comment about macro trends and the behaviors of consumers. Once again, I don't want to be overconfident. What I'll just say is that the figures are what they are and they don't show so far a massive deceleration. And conversely, it's more, as I mentioned before, something which is completely coherent in terms of stack growth. What we can say also is that globally, as I mentioned before, recent events in China, if we consider the different events we had like the Golden Week and so on, we didn't see any sign of, once again, massive deceleration. To consider that -- or to explain how the millennial behavior could impact or change the modelization of the Chinese consumption patterns, it's obviously very difficult. What we know is that you have such -- you have so much money still available in China if you consider the level of savings in China, which represent 2 years of deposits, right. Because they are just deposits, it does represent probably something like 2 years of GDP to be compared to 30% of a year or let's say 3 months in the Western countries. You remember that you have the one-child policy so that each child has 4 grandparents with less issue compared to Europe or the America to rent or to have a flat or an apartment or a house. So it's clear that in terms of spending power, the situation is still quite sound in China. The demographics should help as well. And what we see also and, of course, it's difficult to predict. But overall across the board, we see that the retention rate with millennials is not deteriorating. It's rather improving, quite on par with the improvement we see with the other clusters of clientele. So I think that the comment I would make is that as expected, it does require a different way of doing business with more engagement with the millennials, with the customers, with more touch points which is more demanding in terms of content, in terms of actions, in terms of initiative. That costs more and I think it's a different way of doing business. But to predict what could be the evolution of the Chinese market or the Chinese cluster base on the behaviors of the millennials, obviously, I'm not the best qualified to comment. When it comes to BV, it's true and it's important to flag this that we don't expect much improvement in the short term in terms of top line trends, so this could lead to some more pressure on 2018 margin. So I think that the ambition to reach or to protect the EBIT margin around 25%, 24% is no more relevant concerning the evolution of the top line. And I'm sure that in 2019, the brand will invest more in communication but also in designs, in samples in order to fuel the growth and the injection of newness in Ready-to-Wear and Leather Goods. We have also a program of refurbishment and modification of stores that will require some additional CapEx with additional depreciation. So as a result, profitability should not improve materially next year.

[Claire Roblet]

Income in China?

[Jean-Marc Duplaix]

Yes, income in China. Obviously, we cannot provide figures. What we can say is that it's developing well, globally on par with expectations. But once again, I think that what the market sees as a half empty glass regarding some possible regulation in e-commerce, we see that rather favorably as a half glass because clearly, it will avoid and reduce the possible competition of some, let's say, parallel online platforms to -- or directly operated platform. So I think that it could be a booster for online business in China, which has developed by the way so far quite on par with expectations. And in terms of starting -- sorry, Zuzanna, starting from a low base, of course, I could tell you that we have a triple-digit increase, which is very satisfactory. But we are starting from a very low base. So...

[Zuzanna Pusz, Analyst]

Okay, perfect. And just sorry sir, one follow-up on the millennial consumer. I mean, would you or can you confirm whether this is the right estimate, more or less? I think, based on some of your comments in the past, we kind of try to calculate what more or less could be the Chinese -- the millennial consumer as a percentage of your Chinese cluster. Is 70%, 80% the right estimate?

[Claire Roblet]

Hello, Zuzanna. You already asked me that question. And I said -- so maybe you hoped to be able to get the answer more from Jean-Marc than from me, I guess. You have to make your own estimate. I think we have provided sufficient elements for the equation so you can make your own estimate.

[Operator]

We will now take our next question from Omar Saad of Evercore ISI.

[Omar Regis Saad]

Three questions. I wanted to ask on the North American business, it still seems to be very strong, especially when you look at the 2-year trend. What you see, if anything, is driving that business? Is it tourists? Is it locals? Do you see a change in behavior, kind of more of a longer-term shift in behavior in North America? I also wanted to ask about the sneaker category, not just for Gucci but for the broader group. Is that becoming a much bigger category for the company? And how do you -- what's your longer-term view on sneakers across the different brands? And then lastly, my last question is on the Met Gala. It was recently announced that Gucci is going to be a corporate sponsor. Of course, Mr. Michele is going to be one of the key cohosts. Maybe what you're thinking around that event early next year, what it means for the brand and if you think it will be a big deal.

[Jean-Marc Duplaix]

Well, regarding North America, to be very clear, the growth is principally driven by locals. With tourists -- with quite a satisfactory trend with tourists, especially from South America and also some Europeans. Not so much with Chinese. Chinese cluster is okay in the U.S. but not really driving the performance. So it's clearly linked to the local customers. And I must say also that if you look at Europe, the performance in Europe has been really sustained thanks to American tourism, which has been very positive and very dynamic in Q3. So across the different geographies, the U.S. consumers have clearly supported the business. The reasons behind this, I must say that it's a question of, once again, consumer confidence. And also, I think the relevance of our communication strategy in the different brands with the U.S. customers. The fact that we have a dedicated approach by region in terms of communication, in terms of initiatives, in terms of events, and I will rebound on that when I will come to the Met Gala. I think it's working well and it's clearly another sign and another demonstration of the agility of the group and the agility of our brands to have a dedicated approach by region. Sneakers, as you know, is a key category among the Shoes, especially for the Men's shoes. It's not so relevant or so true for the women's shoe, especially at Gucci where it's more balanced between sneakers and the other subsegment in shoes for the women. I think that the U.S. is not specific as regards the sneakers. It's a key market, of course. It's historically the first market for sneakers. But when we look and when we try to analyze with this level of granularity by splitting the sales of sneakers by nationalities, we don't see specifically another representation of the American cluster. Regarding your last question, I think that obviously, it's clearly linked to the strategy of Gucci to have a 360 approach, to have -- to be relevant with all different profiles of customers. I've already mentioned in the past calls and I reiterated that during that call that the brand is relevant with all the different clusters in terms of ages or in terms of nationalities. I think also, it's a brand which is clearly a fashion authority, which is a strong brand in the street-wear but also in the more formal part in terms of evening dresses. And I think it's a good occasion, once again, to demonstrate that Gucci is a very global brand able to tackle all the different profiles of clients and all the different categories. And I think also, it's an occasion for Gucci to demonstrate its leadership when it comes to communication and to communicate around an event. And I'm sure that I am very confident that Gucci will do a great job by promoting the brand around the event. And that's it.

[Omar Regis Saad]

Jean-Marc, can you -- the sneaker comments are interesting, being able to see the similar trends kind of across all the different geographic clusters. Can you say how big a category this has become for the company maybe versus 5 years ago? Is that possible?

[Jean-Marc Duplaix]

What I can say is that if you look at the shoe category or if you look at the product mix, especially for Gucci, the share of Shoes has not changed dramatically. It was explained by Marco Bizzarri during the Capital Markets Day that overall, if you look at the product mix between different categories, it has not changed dramatically in the past few years. Maybe we had a slight increase in terms of percentage of sales of the Shoe category, but it's not overrepresented compared to what it was a few years ago. Within the Shoe category, of course, at least for the Men's category, the sneakers have a predominant share. I mean, I think it's true across the board. For some smaller brands, of course, the Shoe category has expanded more than some other categories. So that probably for the small brands, you have another representation of the Shoe category. But for Gucci at the end of the day, it's just a shift within the Shoe category from some formal -- or from the formal offer to the sneaker category. But in terms of product mix, it has not changed materially.

[Operator]

We will now take our next question from Luca Solca of Exane BNP Paribas.

[Luca Giuseppe Solca]

Maybe one question to try and understand a bit better the operating leverage dynamics that you see at Gucci. I appreciate you were indicating that the previous guidance for Bottega Veneta considering the lower growth, is not relevant anymore. I was just wondering, given that Gucci is growing this fast, what could potentially be the cost segments in terms of events or in terms of investments dedicated to newness and surprise and excitement to consumers that could hold you back? My naïve hypothesis was that one of the most difficult parts of Marco's job would be to keep the operating margin in check given the brilliant organic growth Gucci is producing. On that point, I wonder about Gucci's initiatives to continue to excite consumers and bring traffic to stores. I noticed that you launched a capsule collection, or at least I saw one during the Fashion week in Milan. I wonder if you anticipate more of that or any other initiative that could potentially take consumers by surprise in terms of communication, product newness and anything that could potentially help also on the retail front. I appreciate that you focus on like-for-like growth, but I wonder, for example, if temporary stores or pop-up stores could be part of your approach going forward. And then lastly, where do you anticipate we are on Bottega Veneta? You say you're expecting to have a patient recovery there. It's probably just the beginning of the new creative director. If you could tell us a bit more on that front, I would really appreciate it.

[Jean-Marc Duplaix]

Just before answering your 3 questions, just I will mention the fact that we will take one question after this one. Obviously, Luca, I don't want to elaborate more on the operating leverage dynamic. I think that -- and it's clearly also linked to your second question. We have already mentioned the fact that it's obvious, it's clear as demonstrated if you look at the figures but also at the initiative of many competitors: to do business today in Luxury is more expensive. It's more expensive not on all the lines of expenses but on some of them. Store expenses have not decreased. They have conversely rather increased because our rent have not decreased across the board globally because of scarcity of locations. You need more cash to animate the brand, to improve the quality of your sales associates, to provide them some tools to make clienteling, to use CRM data. You have more animations in the store with some drops of special products, products made for one region. So maybe what you saw in terms of what you called core capsule collection. But it's true that even if it's not a major part of the business, it's a way also to keep excitement. We have some stores which are obviously not so profit -- not profitable as some other ones. I think that the Wooster concept is very interesting, but it's also a marketing tool. It's a store where we have clearly a very high level of sales and a good sales store productivity. But overall, it's more also to create or to show what is the universe of the brand and all we can propose in terms of products. And you know that in terms of information systems and in terms of communication, we need more to fuel the growth. And that's, I think, it's something we see in almost all the brands. So for sure, what -- where we see some operating leverage is more in terms of organization because a brand like Gucci has already a good set up in almost all regions. But that's the reason why we have been always very cautious when it comes to improvement of the EBIT margin. It's very gradual because also facing maybe some more challenging times, it will require more initiatives and more investments to create that excitement. So for sure, as regards the initiative, all the windows, animations, the store animations or some special drops in terms of products, that will be part of the strategy of Gucci. But nothing new in a way compared to what had been presented by Marco during the Capital Market Day. I think that if I come to the -- to your question on BV, I think that we mentioned that it would be -- it should be a long journey for BV in the sense that you have a lot of things to manage today, not only in terms of merchandising and collections, but also in terms of distribution with the need to add to the store footprint some more flagships or to extend the average size of the stores in order to present the full collection, the full offer. Because if we want to -- it's good, if we have the products, it's a good start. But we need to have also the stores to show them and to sell them. So a lot of different initiatives also in terms of communication to foster and to put one-on-one adds in many regions and especially with the local consumers. So far, the digital communication of Bottega Veneta was clearly, let's say, not the best in class, and we have not allocated so many investments to that area. So I think it will be a long journey. We are very encouraged by the dynamic we see within the brand with Daniel Lee working very closely in Italy with the teams. He did already a very good job by editing the last collection and trying already to make a selection or to try to bring something new. But of course, the collection is not his collection. So the first one will be -- or it's not really the collection, but the pre-fall collection. The pre-fall will be shown during the -- in Japan during the time of the opening of the new flagship. So it means that especially if we consider that the first fashion show will be the one of February, we can expect that we should start to see the benefits of this during the second quarter -- the second half of '19 with, as I mentioned before, a lot of investment in terms of stores, in terms of communication to go along this and to support the introduction of new products. So we are very encouraged by what we saw and what has already been achieved by Daniel. But clearly, it will take some time and 2019 will be another year of investment in the brand.

[Operator]

We will now take our next question from Thomas Chauvet of Citi.

[Thomas Vincent Chauvet]

Three questions. The first one, a follow-up on Bottega Veneta. Jean-Marc, you said there's a need to add some stores. I see this is the first time in Q3 that you're actually closing stores on a net basis. It's only minus 2, but it's the first time ever that we're seeing that at BV. If I extrapolate the minus 10 of Q3 into Q4, you're going to do about EUR 900 million of retail sales at BV this year over 272 stores. Is this the right size, do you think? And would you consider more significant store closures before maybe rebooting the operating system of the brand under Daniel Lee next year? Secondly, just on Gucci, if you could explain the realignment between wholesale and retail, is it effectively wholesale returning to a normalized growth rate? I remember there were some one-offs in Q2, I think travel retail conversions. There were 4 doors. And you had also product shortages, or at least deliberate decision to limit deliveries into the wholesale channel. So are these effects basically faded into Q3, that's why we're back to over 30% growth in wholesale? And just finally, a quick word on watches. We've seen through the summer months weaker Swiss watch exports growth into Europe and Hong Kong in particular, and particularly in September. More cautious comments from some of your watch peers. How does your order book look like? What are your key wholesale partners saying on the replenishment plans in the run up to Christmas and Chinese New Year?

[Jean-Marc Duplaix]

Thank you, Thomas. In fact, once again, before taking -- before answering, in fact, we will take a last question after that -- after your question. BV, I think that I will let you elaborate on the figures and do your math. The plan is not to downsize drastically the store footprint. I think that we have already a quite good footprint. We are quite happy with the locations we have. The point is more about the size of some locations and the need to add some more flagships. You know that Ginza is a very important step, and the point is more to reshape and to optimize the store footprint. So the plan is not to reduce the store footprint. It's a fact that we had minus 2 in the quarter, but it's not a sort of objective and it should not be extrapolated in the future. So I would rather anticipate somehow a form of stabilization or a slight increase of the store footprint but with some changes and some modifications. Some refurbishment as well. You can imagine that at Bottega Veneta, it won't be necessarily a question of a new concept short term, but maybe more to continue what has been started to make the store lighter and so on. So when it comes to Gucci, I think that basically, that's the reason why we have been a little bit surprised by the comment and the reaction when we communicated the Q2 figures. There was a question of phasing of deliveries and conversion. So it's true that in Q2 -- in Q3, sorry, it's more aligned with retail, but going -- and it's exactly what we have mentioned. So I think that once again, we are very transparent and very candid about our figures and balance of business. The fact is that going forward, as we already mentioned, the wholesale was the first channel to react very positively to the new aesthetic of Alessandro Michele. It was the first channel to start to accelerate, so we should see also here some normalization. And you cannot extrapolate here that the wholesale should be -- will be completely aligned with retail in Q4. Wholesale figures will be very good, very solid, but not necessarily completely aligned with retail. I think that obviously, and sorry to disappoint you maybe once again, Thomas, on the watch business, but we are not the best positioned to comment about the situation on the watch market. You know that we have niche brands on which we are working in order to create and to implement more synergies between the 2 brands. They performed quite nicely during Q3, thanks to some launches, some innovations especially at Ulysse Nardin. So -- and also, you know that maybe compared to some other big players, the regional mix is not exactly the same. So I'm not sure that the comments I could make would be the most relevant ones. I just remember that several times, I've mentioned that there were some maybe phasing in terms of deliveries. After that, some phase of where the market was consolidating and there was some disconnect between sell in and sell out. So I think that there is nothing new here. And my priority as regards the watch business is to focus on our brands and to push and to help Patrick Pruniaux to execute his strategy by creating more collaboration, more synergies between the 2 brands.

[Operator]

We will now take our final question from Flavio Cereda of Jefferies.

[Flavio Cereda-Parini]

Very quickly, it's late. I have a very quick question on Gucci to pick up one of the questions that Thomas just asked, actually, specifically on the channel mix at Gucci. Not necessarily how you're seeing it now, but how it's likely to evolve, say over the next 2 to 3 years as the brand so-called normalizes as it were. I'm assuming that the channel mix isn't changed also because you've got strong -- reasonably strong performances from multibrand online retailers as well. But fundamentally, as the brand normalizes in terms of growth, is there a strategy in place here in terms of managing this channel mix, in terms of fewer accounts maybe generating more revenues for you? What are you thinking, not in the next couple of quarters, but I'm trying to look a couple of years out?

[Jean-Marc Duplaix]

I think that we -- I think that clearly, it's not completely reflected yet in the figures even if there are some trends. But the objective, as you know, is to reduce the share of wholesale by being more selective. Wholesale should represent going forward -- it was the ambition set by Marco and presented during the Capital Market Day, slightly less than 10% of the sales of the brand considering that within that, you have still the watch business of Gucci. So directly operated sales should represent 90% with some conversion, of course into concessions, be it on the physical distribution or the online business. And within this 90%, you should have something like 10% midterm, let's say, for the online business directly operated by the brand. So I think that the way we are working with our wholesalers, be it in terms of e-commerce or physical distribution, is exactly this one. It's to be more selective, maybe to start to shrink the volumes to certain wholesalers. But once again, it will be very gradual. And that's the plan, clearly. 90% of the exclusive distribution is so far the target.

[Flavio Cereda-Parini]

Okay, that's clear. If I were you, I would just ignore the market and go out and celebrate. These are very good results.

[Jean-Marc Duplaix]

Thank you very much, Flavio. And thank you all for your attention and to have spent so much time with us tonight and for all your questions, always very relevant and inspiring. Once again, we are very pleased with our performance and with the work of all our teams in all our houses. We expect that its efforts will continue to pay off, and we are very confident as we enter the final months of the year. We will see you in Paris in mid-February for our full year results. In the meantime, as you know, you can rely on Claire and on the IR team. Thank you again and have a nice evening.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.