Kering SA

PAR:KER

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Kering 2020 Third Quarter Revenue Call. [Operator Instructions] I must advise you, the call is being recorded today, Thursday, the 22nd of October 2020. I would now like to hand the conference over to your speaker today, Jean-Marc Duplaix, Chief Financial Officer. Please go ahead.

[Jean-Marc Duplaix]

Good evening, and thank you for joining our third quarter revenue call. I hope you are all in good health and keeping safe. Starting on Slide 4. Group revenue reached EUR 3.7 billion in Q3, down 1.2% comparable and 4.3% reported, implying a 3-point FX headwind. Our Q3 comparable revenue is virtually unchanged year-on-year, a notable achievement in the current environment. Sequentially, we are showing a very material rebound of more than 42 percentage points from the Q2 trough. I'll focus on our Luxury Houses in a minute. For its part, the corporate segment mostly includes Kering Eyewear, which posted a good performance, up 14% comparable despite very weak conditions in travel retail, more than offset by a bounce-back in North America, some improvement in Europe and a healthy demand from online partners. Moving to Slide 5. Our Luxury Houses had revenue of EUR 3.6 billion, down just 1.6% comparable, reflecting the strength and complementarity of Kering's brand portfolio. Retail, accounting for 77% of sales, recovered sharply and matched last year's level. During the quarter, an average of 95% of our stores were opened. Wholesale was down 5%, and royalties and others by 27%. While both channels improved significantly, the regional patterns deferred, leading to substantial changes in our breakdown by geography. The improvement was driven by Asia Pacific and North America with respective weight increased by 6 and 5 points. Conversely, and as expected, Western Europe was heavily impacted by the absence of tourist, losing 10 points in our revenue mix. Japan's weight dropped slightly due to a softer recovery. This leads me to Slide 6, where you can see that the overall stability we achieved in retail is the result of geographical discrepancies requiring plenty of agility and speed in logistics, clienteling and systems. In Western Europe, the disruption from tourism was particularly severe during the high season as inbound tourists represented 70% or more of European sales last year for some of our brands. Domestic demand could not offset this drag in such a short period of time. We are satisfied with our brand initiatives to reengage with local clients, which showed very positive results. North America grew 44%, an impressive shift compared to Q2 fueled by sustained demand throughout the quarter. While traffic remained below last year's level, this was more than offset by a surge in conversion and further progress online. Japan improved sequentially but remained in negative territory, down 23% in Q3. A soft recovery in local demand could not fully mitigate the absence of tourists who accounted for around 25% of sales in the same period last year. In addition, the third quarter of 2019 has benefited from anticipated purchases ahead of the VAT increase. By contrast, Asia Pacific extended the trajectory begun in Q2 as sales rose 18% with continued strength in Mainland China, up 80%-plus. The rest of Asia was mixed, with Hong Kong and Macau down 50% or more from an already depressed base. Singapore and Australia were still negative, while Taiwan and Korea were supportive. In Korea, where the relative exposure to tourism and duty-free led to disparities across brands, the overall performance with locals was very strong until new COVID-related restrictions were imposed. Turning to Slide 7. You see that the acceleration of our online sales is continuing. E-commerce revenue more than doubled in Q3, with particularly sharp increases in North America and Asia Pacific. On a 9-month basis, online penetration reached 13% of retail sales. In Western Europe and in North America, where the base was already quite high, we made significant progress and e-commerce now represents 19% and 24% of retail sales, respectively. Online penetration doubled in Asia Pacific and obviously, there is plenty more potential in that region. I'll come back later on our progress with the internalization of e-commerce. A few words on wholesale on Slide 8, down 5% comparable. There are many moving parts here as short-term impacts, combined with the effect of long-term strategic decisions. In the quarter, we've had some support from phasing as part of the deliveries of fall/winter collections shifted from Q2 to Q3 after lockdown. Conversely, the pandemic continued to take its toll on certain orders, notably in travel retail, though this was partly mitigated by the surge of Chinese Duty-Free operations in Hainan. From the longer-term strategic perspective, we are tightening our brand's control of our distribution. All of them are moving in the same direction, but they are not all at the same stage. Gucci is leading the way. And in Q3, you're starting to see material impacts from downsizing the number of doors. Saint Laurent is focusing on its key partners. Bottega Veneta is upholding its highly exclusive distribution strategy, while regaining market share with existing doors. Our other fashion brands are on the journey of increasing the contribution from retail, combining store openings and buybacks to increase direct market penetration together with development of e-concessions. I'll now make some rapid comments by House, starting with Gucci on Slide 9. Q3 revenue neared EUR 2.1 billion, a 9% comparable decrease. Retail was down 4%, whereas wholesale and royalties dropped 32% and 34%, respectively. In retail, Gucci's rebound was achieved with a stable number of stores. And despite its high exposure to tourism in Western Europe and, to a lesser extent, in Asia Pacific. Western Europe, where tourists accounted for over 70% of revenue last year, was down 47% in Q3 as the brand successfully reengaged with local clientele, especially in France, Germany and Italy. In Asia Pacific, Mainland China was again the bright spot, further accelerating on a demanding multiyear comp base, considering that Gucci was already quite advanced in terms of repatriation. In Korea, the brand performed very well with locals, but was negatively impacted in its directly operated duty-free operations by the absence of Chinese tourists, as was the case in Hong Kong and Singapore. Asia Pacific was up 11% in the quarter. Excluding the drag from retail duty-free in the region, the increase would have been twice as high. In North America, Gucci posted an impressive performance, up 44%, clearly regaining market share. In both Asia Pacific and North America, retail trends were supported by substantial online growth, up triple digits. All in all, e-commerce nearly doubled in the quarter. A quick word on product categories, just to say that the improvement was broad-based, driven by carryovers, introductions in existing iconic lines and Fall Winter newness. The decrease in wholesale reflects the strategy mentioned earlier, which we will continue implementing for another couple of years. This allows for greater control over prices, inventory and clienteling and contribute to further enhance brand equity. As you see, Gucci is working actively on its strategic initiative aimed at reinforcing the exclusivity and desirability of the brand to nurture sound and steady growth in the future. They encompass a very disciplined approach to open-to-buy, focus on a smaller number of SKUs and strict management of its expansion for temporary as well as for permanent stores. On Slide 10, Saint Laurent posted a solid 4% increase in revenue in the quarter, driven by both retail and wholesale. Retail, up 6%, benefited from the house's well-established positions with local clientele in North America and Western Europe, where it partly offset the absence of tourist. In Asia Pacific, Saint Laurent has been steadily building broad awareness and expanding its retail footprint and these efforts paid off in the quarter. At the end of Q2, Saint Laurent successfully launched its e-commerce site in Mainland China. And very recently, Saint Laurent fully internalized its own e-commerce platform, ysl.com, a critical step towards a seamless omnichannel experience for all its customers. This migration, ahead of the important holiday season, went very smoothly. In the meantime, e-commerce revenue more than doubled year-on-year in the quarter. Iconic products enjoyed good traction with local customers in all markets, while well-received newer collections confirmed the attraction of the Saint Laurent silhouette. Wholesale was up 3% on the appeal of the Fall Winter collections. In a nutshell, during the quarter, Saint Laurent continued to execute its strategy with determination. The health confirms that its brand equity and offer are supportive of its development, both in its historical markets and as it expands into new geographies. Turning to Slide 11. Bottega Veneta had a great quarter with revenue up 21% on top of a positive Q3 last year. It is also worth pointing that the House's sales were up in the first 9 months. Its very strong momentum continues, fueled not only by the recognition of the collections, but also by highly effective initiatives to engage with existing and new clients. Retail was up 12%, as a very positive dynamic across women's categories was complemented by growing traction in men's, where there is still plenty of potential for growth. Bottega Veneta leveraged this successful offering through tailored clienteling initiatives to enhance retention and cross-selling. In Asia Pacific, the nearly 50% increase in sales was driven by Mainland China and Korea. Focus on locals helped Europe turn in a resilient performance and fueled the rebound in North America. E-commerce achieved triple-digit growth. Wholesale, for its part, was up an impressive 63% as Bottega Veneta rebuilds its position with a highly exclusive community of partners. On Slide 12, our other Houses also achieved a solid recovery and were up 12% comparable. The improvement was driven by Balenciaga and Alexander McQueen, posting significant double-digit growth in both channels. Their product offer is highly desirable and they are performing extremely well in North America and Asia Pacific, further boosted by recent retail expansion. Both brands showed further muscle online. Alexander McQueen became the first brand to fully migrate its online operations to our internal platform early July with great success and improvement in all key metrics. Boucheron and Pomellato had a more contracted quarter, notably in relation with their exposure to Western Europe and tourism. Boucheron was also impacted by its strong position in Japan, but is doing very well in Asia Pacific, where it gradually enhances penetration and brand awareness. Qeelin is taking advantage of the strength of Mainland China to post outstanding growth. Finally, our watch brands suffered from depressed market conditions but are not deviating from their strict focus on prime distribution. A few words of conclusion on Slide 13. We are very pleased with our recovery in the third quarter which stems directly from the complementarity of our Houses, their creativity and the commitment of all our people. While delivering robust short-term performances, we keep our focus on our strategic initiatives. We are continuing to proactively reduce our Houses' wholesale footprint. Our e-commerce platform is gaining power and migration is going smoothly. At the same time, our logistics, IT and innovation initiatives are proceeding globally according to plan. The recent sell-down of our Puma stake was perfectly timed and executed, and further reinforces our financial position. Our priorities are unchanged. We will continue to invest in our Houses and in our growth platforms to nurture their development over the long term. In an uncertain environment with limited visibility, we remain determined, nimble and vigilant. Claire and I are now ready to take your questions.

[Operator]

[Operator Instructions] The first question we have today comes from Thomas Chauvet from Citi.

[Thomas Vincent Chauvet, Research Analyst]

They're all about Gucci and I have 3. The first one on the retail performance improvement quarter-on-quarter. Could you discuss perhaps, through the quarter, through the third quarter, how Gucci performed? This September turned positive compared to July, August. And could you comment perhaps qualitatively, at least in terms of the mood, about October? Secondly, on wholesale for Gucci. So the headline that you're expecting 10% of contribution for wholesale for the brand next year. Would that imply some further closures of doors into next year, whether that's multi-brand or travel retail? And thirdly, on the brand positioning, equity style. At the previous call, you commented on the need perhaps to tone down the flamboyant aesthetic of the Gucci brand to try to recruit an older demographic, so the 40% of customers that are not millennials. Can you maybe share some qualitative comments or even numbers on that rebalancing exercise? Are you seeing new customers coming in, buying more maybe classic pieces of ready-to-wear, handbags and jewelry with higher ASP? And which markets would you expect to respond more positively to a slight change in style maybe in the years to come?

[Jean-Marc Duplaix]

Thank you, Thomas, for your questions about Gucci, not very surprising, by the way. I will start with your question about the trends over Q3. And my answer will be about more globally, all the brands in the group because the trends we observed, we are very, very coherent across the board. So as you may remember, we ended the Q2 with an exit rate, which was around minus 15%, minus 20%, if you remember the comments we made. And then with, of course, a material improvement compared to April or May, and then there was clearly a very material sequential improvement in July compared to June. August further accelerated and September was very consistent with August. August being marked, by the way, by some events in China that had boosted the sales in China. So globally, very consistent across the board, across all the brands with a sequential improvement. It's very difficult to comment because month-by-month, week-by-week because you may have some weeks where the trends are positive, some weeks where you have less events or less animation in the stores. And where the trends are not so positive. So -- and overall, so Gucci followed that trend like the other brands. And when it comes to October, you can imagine that I won't comment on current trading. There is nothing specific to call out on October. I think we continue to observe globally, trends which are very clear with what we saw in September. Now coming to your question to wholesale. Yes, definitely, we have a multiyear program to rationalize the wholesale. We had the ambition very clearly stated by Marco already in 2018 during the Capital Market Day that wholesale should represent less than 10% going forward in terms of contribution to the sales. We will be already there probably next year in 2020 to '21, and not so far at the end of 2020. So you can imagine that we will have further closures going forward [indiscernible]. We have 2 actions, in fact, one which is about retailization and the other one, which is about, let's say, a more exclusive distribution and some closures. The first step was about closing some doors, and we will continue to do so. But we expect also some retailization at a point. But of course, you can imagine that discussions may take some time, and we have not yet finalized this discussion. So that, at the end of the day, there is not yet any significant transfer of business from the doors we are closing to the retail part. But we are very confident that it will happen at a point. As regard the merchandising and the style of Gucci, I think that François-Henri Pinault had been already very vocal about the evolution during the 2019 results conference call. And I would not add so many things to the comments made at that time by Francois-Henri because it does illustrate that Gucci has a clear strategy that we continue to execute. I think that there was an inflection, which was also materialized by the team of the last presentation of the collection, epilogue. So you can imagine that we are opening a new chapter at Gucci. We had already some introduction of new lines or new -- or a reinterpretation of iconic lines, for example, with the orbit of the Jackie 1961, which is, as you know, a more classical bag. So I think we are just at the beginning, and it will continue. And I would also add that perfectly that in the stores already, if you go into a store, a Gucci store, you have already quite a broad range of products, including classical pieces in shoes, in ready-to-wear and in terms of handbags. But of course, we continue to rebalance the offer. We are just at the beginning. And there is no specific markets which is targeted. We know that the consumer mood in Europe or in America, clearly, is more keen to accept or to welcome this type of offer. But when it comes to style and merchandising, there is not something which is designed specifically for a certain target. It's a broader approach, and we are working on it and I'm very confident that what you will see in the coming weeks will demonstrate that we are going in the right direction.

[Operator]

The next question today comes from the line of Zuzanna Pusz from UBS.

[Zuzanna Pusz, Head of European Luxury Equity Research]

I have three questions, please. First of all, on Gucci, of course. So if I remember correctly, I think you have a relatively high exposure to travel retail, which is not within wholesale for Gucci, but within -- on retail. I could be wrong, so please correct me if I am. And if I'm not wrong, then would you be able to comment on the performance of Gucci retail, excluding travel retail? Second is, again, on Gucci. Is there any chance -- I understand that you're not too keen to comment on current trading for the obvious reasons. But I guess just looking at results we had from some of the peers recently, I think it would be just useful to understand if -- especially what you've mentioned, some of the new initiatives with the local consumer in Europe, which clearly will be key to sort of closing the performance gap versus peers, if that sort of started getting some traction, if you started seeing a notable improvement in October. So at least any color on that would be very helpful. And my third question is a little bit broader this time. Just tell me about growth by nationality and any trends you've been seeing, I think, especially the U.S. consumer has been very strong. So do you think that these trends are sustainable? What was maybe the fastest-growing nationality? Any comment on that would be very helpful.

[Jean-Marc Duplaix]

Thank you, Zuzanna. So I will start with your first question. You're right to mention travel retail. I didn't mention it particularly in my speech because when you are managing a business, you are managing a global business and you have to cope with certain facts, certain decrease of some businesses. And definitely, travel retail was a drag for Gucci because you're right to mention that travel retail compared to the other brands of the group at Gucci is predominantly operated under a retail model. It's more than 50% of the travel retail sales, substantially more than 50% of the travel retail sales, which are made under a retail business model. And especially, in Korea, where the bulk of the duty-free operations of Gucci were classified as retail because of the risk and rewards associated with the contracts, while it's 0 for the other brands. So you can imagine that the drag is very significant. And I can help you to quantify the impact because we made -- so I mentioned that first, Asia would have grown by more than 20% without travel retail. And if we look on a worldwide basis, my estimate is that Gucci would have been positive in retail, slightly positive, close to 2% probably, something around 2% -- plus 2% in retail without the travel retail contribution, negative contribution. So that's the answer to your first question. And the -- as we -- and it does make a link with the second question, which is all the initiatives we have to reengage with local clientele. It's true that the development of Gucci -- and I remember, it's important to remind that the growth of Gucci has been outstanding in the past few years, both with local, but also with tourist. And clearly, the outperformance of Gucci was driven by tourism. And it's true that we have some work to do compared to some peers to reengage with the local customers in Europe or elsewhere. Globally speaking, we are very pleased already by the achievements made by Gucci with the local clientele in almost all regions. We are positive with our local clientele. It's true in Europe, especially in some key markets like Italy, France or Germany. It's also true, for example, in Korea, where Gucci is delivering the strongest performance among our brands with local clients. We have -- encouraging also performance of Gucci in Japan, even if the trends are not so good because of the context in Japan. But compared to the other brands of the group, here again, Gucci is doing extremely well in Japan. So I think that we are gaining some traction, definitely, but it's important to remind that in Europe, in Q3 last year, we had 70% of the sales made with tourists, and it was still almost 2/3 in Q4. So it does remain a drag in any case. And so I will make also how the link with the third question about the growth by nationalities. At the end of the day, it's true that we have -- and you can imagine that considering the repatriation of the U.S. demand on the domestic market that concerns the growth we have in the U.S., the American cluster is growing massively. With the other nationalities, another strong performance is made with Korean, where we are very pleased with the job done by Gucci in Korea. If we put aside travel retail, as I said before. In Europe, in the key markets, as I said before, we have very positive trends with local clientele, thanks to all the initiatives we have in terms of distant sales with local consumers, animation in the store, special events, virtual sales, virtual so on and so on. I think we have a broad base of initiatives that should pay off. However, without giving any specific color to current trading, I think that we are still going through a very uncertain environment. It's very difficult to predict what will happen after the U.S. elections and what will be the impact of all the new measures, sanitary measures, we start to see in many regions. So it's difficult to say. We are very confident that what we are doing with local clientele will, in any case, pay off, especially for the year-end period and all the sales we are making in December. I think we are also very positive, very encouraging KPIs in terms of retention and animation with the existing base of clientele in many regions, in many domestic markets. But once again, it's very difficult to predict. Europe, in terms of tourism should not improve. So even if we are delivering a solid performance with local clientele, it won't be enough, of course. US, a question mark. In China, we start to have a very tough comp base. Even if October is still doing quite well so far and quite apparent with what we saw in September, still we should start to face a very demanding comp, especially considering that Q4 last year had been quite strong in Asia Pac and in China.

[Zuzanna Pusz, Head of European Luxury Equity Research]

Can I -- just -- sorry, I'll just follow-up very quickly, I promise. So given that -- it was very helpful, you said that Gucci was actually plus 2% in retail, and if we exclude travel retail, which for all other brands goes to wholesale. But given that, if I remember correctly, September has a quite a big weight to locals versus tourists. Would you be able to say if that number, which you mentioned, plus 2% ex travel retail was higher in September? Would it be like -- was there an acceleration? So was it sort of like exit rate September more than plus 2% if we exclude travel retail?

[Jean-Marc Duplaix]

I won't to enter into that level of detail, especially because of the current volatility of the different markets and all the moving pieces, it does not make sense. We are managing a group in the -- for the long run, and we are not looking at the daily figures. It does not make sense. So I won't answer your questions, Zuzanna.

[Operator]

The next question today comes from the line of Antoine Belge from HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

It's Antoine Belge at HSBC. Three questions. First of all, regarding Gucci. I'd like to have your view about the level of engagement with consumer and maybe especially versus 2 other brands, LV and Dior, which had a very strong performance. So it seems that these 2 brands have been a bit more engaged, especially in terms of numbers of fashion shows and even during the period of lockdown. So isn't it fair to say that maybe especially in the initial phase of the recovery, Gucci was a bit less present? And if that was the case, is the brand near catching up in terms of investment? My second question relates to Bottega, much higher than I think the market expected, plus 21%. Can you maybe comment a bit about the product categories which did well in the region? And also, if you think that there were anything exceptional in that quarter, i.e., in other words, should we be more prudent for the next quarter? And finally, on margins, we say only down 1% at the group level. I mean do you think that margin in H2 compared to H2 last year could be only -- or still down, but not that much?

[Jean-Marc Duplaix]

Your first question is not an easy one because there are a lot of elements to say, to comment. Of course, I won't comment with the performance of our peers. But it's true that, as I said before, the growth of Gucci has been outstanding in the past few years, supported largely by the success of the brand with Chinese tourists. And it's true, there is a lot of room for improvement for Gucci with local clientele. So of course, it could be perceived as a weakness. I think we see that rather as an opportunity because we have more to do with our local clientele. It's true also that some of the peers you have mentioned are well-established brands for many years. The work, the clientele base for many, many years. And you know that with Gucci, we went through a massive transformation, and we have not shared this level of maturity with certain clientele. However, it's true also that, as we mentioned during the H1 call, we have probably been a little bit late in reinvesting on certain markets. And it's true that we are in a phase of acceleration in terms of investments. You should see more events in the coming weeks as regards to Gucci and especially with the presentation of the next collection that will be an event that would be very interesting with, of course, a lot of initiatives than in the stores in the regions to, let's say, support this new collection. So however, when I look at the reception of the new collections or, let's say, the level of engagement on social media, I think the brand hit is still very strong. And I think that what we try to do is to balance -- to find the right balance between protecting the profitability, making the right investments. I think also that there was a risk you have raised all about the massification of Gucci in the past few years. We have decided to work on the exclusivity, the desirability of the brand going forward. And we don't want to deviate from that strategy. Whatever the situation with COVID, I think, we are -- by the way, we gained market share, for example, in North America for Gucci. So I think that, clearly, we are heading in the right direction. And as I said to Zuzanna, the work we have started with local clientele will pay off in the long run. As regard BV, I think it's not -- it's very simple. The brand is very successful with very strong momentum of the brand, both in terms of merchandising, but also in terms of communication around the brand. Daniel Lee did a great job in reinventing, rejuvenating the brand. All categories are doing extremely well at Bottega Veneta. Of course, leather goods, but maybe more important because it was part of the strategy, all the other categories are progressing very well. You know that we were a little bit late in, let's say, reintroducing the new collections in the men's segments. I think that during the quarter, we started to see a very good reception of the newness, especially in ready-to-wear and shoes. There is some progress to make still in -- or sorry, in leather goods for men. But here, again, it's an opportunity, and we have further room for growth at BV. I think the only one comment I would make is about wholesale. There is nothing exceptional in the performance we have posted so far at BV because we are in the phase of regaining market share. With a limited number of doors, there is not any difference with Gucci or the other brand. There is still the strategy to be very concentrated on a limited number of doors, but it's true that we have regained market share there. But I think that we should start to see a normalization in terms of growth in wholesale. And I think that the retail growth should take the relay in terms of contribution to the growth of the brand. The last question about the margin. I think that there is -- and it's good to be optimistic and to be in a good mood. But I think the market is underestimating the need for the brands and for the industry to reinvest after a phase where we have frozen a lot of projects. We have postponed a lot of projects. You see that to gain market share, you need to increase your investments. You have mentioned some peers which are very active on the market and which are investing massively. So I think there is a need for us to resume a phase of investments in terms of communication, marketing, animation in the stores, but also we have still the project in terms of clienteling information systems. So it will continue. So it will have an impact on the profitability. So of course, there will be an improvement compared to H1, which is not a surprise. In terms of percentage points of dilution compared to H1, we should improve, but still, there will be some dilution in H2, but not to the extent we observed in H1.

[Operator]

The next question today comes from the line of Edouard Aubin from Morgan Stanley.

[Edouard Aubin, Head of Luxury Goods]

So three questions for me. The first one, sorry to come back on the U.S., but clearly, you had a blowout number in -- for Gucci and Saint Laurent. So Jean-Marc, if you could just tell us what you think are the reasons for these trends in the U.S.? That's number one. Number two, just to follow-up on Antoine's question on BV, which, I guess, the growth being driven by recruitment. If you could comment a little bit on the new customer profile of the BV customers. And lastly, on your balance sheet. As you reminded us, you placed some Puma shares recently. What's your sense of your net debt at the end of the year because obviously, you're going to have a very strong balance sheet. And maybe it's a bit premature, but what are you thinking in terms of either returning cash or deploying capital basically?

[Jean-Marc Duplaix]

The trends we saw in the U.S. in Q3, first of all, were across the board, meaning that all the brands have benefited from a rebound of the demand in the U.S. and it benefited to all channels we are operating directly. The fact that we have reopened the stores and not -- has not impacted the performance of e-commerce. Conversely, e-commerce accelerated. I think there was globally sort of consumer confidence in the U.S. due to a lot of different factors you know perfectly: repatriation of demand, especially from wealthy American tourists; stock market; reallocation of wallets; some subsidies also helping the performance for sure. So you have a lot of different factors explaining that in the U.S. the performance was very solid, globally speaking for the industry. Having in mind that while we have some exposure in Asia to travel retail, we have not so much exposure in Hawaii. And it does explain why on the West Coast, we have a relative good performance maybe compared to some others because we are not the drag of Hawaii, where we have not a lot of stores, and we are not so active with Japanese travelers. On top of that, I must say that America, North America is a strong region for Saint Laurent. Saint Laurent has acquired a substantial presence and a good penetration with local consumers. Typically, Saint Laurent has capitalized on its strengths with local clients in some markets, North America, but also Europe. And in the case of Gucci, you may remember that we had a quite complicated year in 2019 for the reasons you know. And I think that we started to resume a lot of marketing activities at the time of back-to-school '19, so in September, October. It started to pay off at the end of 2019. And clearly, now we are benefiting from that. And we can say that Gucci has regained a lot of market shares in the U.S. And I have probably the right offer to address all the clients coming to the stores, thanks to the agility of the supply chain. We have been able to allocate the right products to the North American market. As regards BV, I can give you some more color, definitely. What is -- first of all, what we can say is that the segmentation retained by BV is not the same as some other brands. We are not looking necessarily at millennials, Gen Z and so on. We are looking more at some clusters in terms of age. And it's true that there was a rejuvenation of the clientele. The clients below 40 years old now represents something like 60% of the sales, which is more coherent with the average of the market. It was 47% already last year for the full year. So clearly, first, we have rejuvenated the brand, both in terms of offer, but also in terms of clientele. But what is also very interesting is that we had a [ varied ] career in growth if we look at existing clients and new clients. And this growth and this performance of BV is not made only with new clients. We have very strong performance with existing clients, and it's even stronger compared to 2019. This year, we have really an offer a broad range of products, so that we are able also to perform very well with the existing base of clients. What is also encouraging, if we look at the nationalities, I think the change of style initially was not resonating so well with the Chinese clients. And since the beginning of the year, we see an acceleration of the sales with the Chinese cluster, which is very positive. And then, of course, BV continues to perform very well with local clients in the U.S. and in Europe. The only 1 market where we may have some room for improvement is Japan. And I should not forget to mention Korea where also BV is doing extremely well. It was probably the first country to react very positively to the new style of Daniel Lee. Regarding your last question about the balance sheet. I won't elaborate some more on that question. You know perfectly that we have always said that we could resume M&A without saving our Puma shares. But conversely, we could also sell Puma shares without having in mind specific operations. So in fact, there was an opportunity there. You know that we said that we were not long-term investors, that we would be very pragmatic and opportunistic. It was the case, there was a window. I think we did it very well. It was very well timed. And as I said, very well executed. We will still have, considering the year and the performance and the cash flow generation -- we will be, in any case, below our initial expectations besides the disposal of Puma shares compared to our initial expectations before the COVID-19 crisis. So we are not yet in a situation where we will be cash-free at the end of the year. So as long as we are not in that situation of being cash free, you know perfectly that we continue to scale the market but we are very satisfied with the situation we have, and the priority remains the organic growth of our brands.

[Operator]

The next question today comes from the line of Luca Solca from Bernstein.

[Luca Giuseppe Solca, Research Analyst]

Luca Solca from Bernstein. I wonder if by leveraging your CRM data, you got an understanding of consumer demand trends by age group. It seems to me that Kering and Gucci and many of the other Kering brands have been better than most over the past few years recruiting younger consumers. And I wonder if younger consumers in this current environment are possibly on the back foot, while more mature consumers are spending more money. This is just one hypothesis that I was entertaining in my mind. The second question deals with your digital development. You had announced digital as a priority in your Capital Market Day. I presume that you're probably now above many of the targets that you had set out at that time, COVID-19 has boosted digital significantly. I wonder how your strategic thinking is moving on digital. And the other element I had in mind was the wholesale transition to retail for Gucci, that is -- is that going to provide some tailwind to our retail organic growth? And is that going to be material or not in your current understanding?

[Jean-Marc Duplaix]

As regard to your first question, there was not a strategy to specifically target a cluster of clients. The fact is that we have -- give some freedom to our designers, that's the philosophy at Kering, and we have recruited in the past few years, a new generation of designers, which were very good at engaging with younger clients. With seniority of use of an average basket of younger clients, slightly below or below, depending on the regions. You can imagine that in Asia, the average basket, it's not so far from the average basket of the older clients. Of course, there is a more material difference in some more mature regions like the U.S. or Europe. However, you know that for 5 years, we have engaged with millennials, some of the millennials now are older, and we start to see in certain regions, also an increase of the average basket or an improvement of all retail KPIs of these millennials. So we see that the older millennials, there is a change in their behaviors in terms of consumption. And we are very happy to have recruited these clients. We see also that the retention rate has not deteriorated with this cluster, and we are very happy to have some people who will be, in the coming years, 50 years old. And we will continue to recruit our new clients. It's very important. All in all, globally, it depends on some regions. But if we look at China more specifically, the share of millennials continue -- the share of younger clients, let's say, slightly continue to increase, but not so materially. It's more obvious in the U.S. where we saw origination of the clientele. But I think also that, as we said before, and what made the success of Gucci until now was the capacity of the brand to engage with all the different clusters of clientele with an appropriate offer and the right merchandising. And it would be key to continue to walk this way and that also the rationale behind the inflection in terms of style, to be sure that we continue to feed the market with all the price brackets to address all the different types of clientele. So in a way, you are right to say that it's important, in any case, to have the right offer to engage with older clients. And I think within all our brands, we are working in that direction. As with regard the e-commerce and the digitalization of our industry, I would be just a little bit more prudent. It's obvious that we saw an acceleration during -- in '20 due to the COVID-19 crisis, and it was still the case in Q3. However, we have reached a level of penetration that may change a little bit once we will have more stores open and when travel will resume and that we will have more tourism. So I think that -- and once again and I don't want to be stubborn and to repeat myself, but we have a clear strategy, and we continue to execute that strategy. We had a plan to have one of among the best-in-class online platform for Gucci, and we continue to invest to be sure that we continue to lead the way. We have a strategy of internalization. And as I said in my speech, we are very pleased with the progress made at Alexander McQueen since we have internalized the e-commerce. And I can tell you that we are also very pleased with what the achievements of Saint Laurent, which was internalized more recently. So there is no, let's say, nothing new in our strategy, just the conviction that we need to continue to invest and maybe to accelerate. And that's the reason why I was answering to Antoine that going forward, we will probably increase the level of investments, OpEx and the CapEx, to support the digital development we had in mind. Wholesale, yes, the rationalization and the retailization of some wholesale accounts will have an impact on the retail at a point. I don't believe it will be the case in '20, and probably in '21, we may start to see some impact. But as I told you, it's a multiyear plan. So I think that in '22, we should have achieved the, let's say, the move and the rationalization of wholesale and probably more in '22, we will have the full impact of that rationalization on the retail sales. This will be probably the final question.

[Operator]

The final question today comes from the line of Aurélie Husson from Kepler Chevreux.

[Aurélie Husson-Dumoutier]

And so I will try to make good questions that of the last. I have 2, actually. You mentioned Gucci that was already strong in repatriation in Q3. Could you share with us the proportion of sales that are done with locals, probably not in Q3, but the evolution that you recently witnessed? And I have a question on hard luxury. You announced some layoffs in watches. The Boucheron and Pomellato brands are still struggling in some market a bit. What is the future in this segment at Kering, if there if there is no M&A to support the growth of this activity?

[Jean-Marc Duplaix]

So maybe Claire will correct me. First of all, good question. Maybe Claire will correct me, but if I'm not wrong, if we look at full year '19, it's true that Gucci was the most advanced brand in the group in terms of repatriation since we have more than 50% of the sales to Chinese made on the domestic market. It was the highest share in the group. You can imagine that this year, across the board, we are above 90% of sales made on the domestic market, including, of course, Hainan and so it's between 10% and 7% -- 7% and 10% in terms of the sales made outside. And on that, you have a contribution of some sales made at the beginning of the year. And even in Q3, you had some limited travels and deliveries to China. And that's the reason why also that Gucci has performed very well in the past few years in China. And we can guess that by the end of the year, if we look at the full year '20, based on my forecast, the Gucci size will have more than doubled compared to 2017. So it's a massive, let's say, increase business of Gucci in China. And I think we have no brand in the group which will have achieved such increase in terms of penetration, in terms of sales. Hard luxury, I think that, first of all, we are very -- what said about Boucheron and Pomellato is that because of the exposure of these brands to certain markets, and especially Japan or Europe, they had a more mixed performance in Q3. It doesn't mean that we are not confident at all in the future of this brand. I can tell you that since we have opened some stores for Boucheron in China, the performance is outstanding with an exceptional reception of Boucheron products, and we have transferred some products from Europe to China to supply the demand. And Qeelin is doing extremely well. It's a real success. Qeelin is growing very rapid in China. So globally, for the jewelry business, there is nothing to say. Here, again, we are -- we will stick to the strategy we have defined, and we have some open plan for Pomellato. When it comes to watches, it's true that we have been very pragmatic, and there was a need to adapt the cost structure of our watches brands. It was not an easy decision. I think we were among the first to take the right decision, to take a bold decision. I think we had a very good process managed by the [indiscernible] and [ Eric Sandrin ] teams. And we saw very dialogue with the unions in Switzerland. So -- and it was not a pleasant decision in any case. But you know that we have already commented that as regards the watches brand, we want to develop them, but in a very reasonable way. There is not a plan to increase massively the business of watches in the group, and we will try to bring back these 2 brands in positive territory both in terms of sales and growth and in terms of profitability. Thank you. So that was the last question. Thank you all again, and thank you all for being on our call and for your good questions. While these are uncertain times, difficult for many, we are all working hard to achieve resilient performances and continue to move forward with creative offerings and innovative solutions. We appreciate your interest in Kering and look forward to pursuing our conversations. Have a nice evening and stay well. Thank you very much.

[Operator]

Thank you very much. That does conclude the conference for today. Thanks for participating. You may all disconnect.