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Edited Transcript of KER.PA earnings conference call or presentation 12-Feb-20 7:30am GMT

Full Year 2019 Kering SA Earnings Call

Paris Cedex 08 Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Kering SA earnings conference call or presentation Wednesday, February 12, 2020 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* François-Henri Pinault

Kering SA - Chairman & CEO

* Jean-François Palus

Kering SA - Deputy CEO & Director

* Jean-Marc Duplaix

Kering SA - CFO

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Conference Call Participants

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* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Aurélie Husson-Dumoutier

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Edouard Aubin

Morgan Stanley, Research Division - Head of Luxury Goods

* Flavio Cereda-Parini

Jefferies LLC, Research Division - MD & Equity Analyst

* Melanie Anne Flouquet

JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail

* Thierry Cota

Societe Generale Cross Asset Research - Equity Analyst

* Thomas Vincent Chauvet

Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director

* Zuzanna Pusz

UBS Investment Bank, Research Division - Head of European Luxury Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Kering's 2019 Full Year Results Presentation. (Operator Instructions) I must advise, your meeting is being recorded today on Wednesday, the 12th of February 2020.

And I would now like to hand the meeting to your host today, Mr. Jean-Marc Duplaix, Chief Financial Officer. Please go ahead, sir.

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Jean-Marc Duplaix, Kering SA - CFO [2]

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Good morning to all of you. This is Jean-Marc Duplaix, Kering's CFO. With François-Henri Pinault, CEO; and Jean-François Palus, Group Managing Director, I would like to welcome you on this call to discuss our 2019 full year results.

I will start by sharing some highlights on Slide 4. Our growth trajectory was very sustained once again at both top line and profitability levels.

Revenue first. Sales were up above 16% in reported terms and more than 13% comparable. We generated organically an additional EUR 2.2 billion in revenue to EUR 15.9 billion. By region, Asia Pacific was a key driver, up 20% comparable. Western Europe posted healthy growth, up 14%. In North America and Japan, the pace was more moderate, up 7% and 6%, respectively. Japan was impacted in the last quarter by the VAT hike on October 1.

Second, recurring operating income stood at EUR 4.8 billion, a 20% increase compared to 2018 restated under IFRS 16. You can find reported and restated data in the appendix. Operating margin topped the 30% mark at 30.1%, a 90 basis points uplift compared to 2018 restated. This is the result of virtuous operating leverage and was achieved despite the dilutive impact from a combination of FX and hedging.

Third, our free cash flow generation was impacted in H2, primarily by the one-off cash out of the Italian tax settlement and higher recurring tax as anticipated. So our 2019 free cash flow level is not normative. As a consequence, net debt is just above EUR 2.8 billion, and this is excluding lease liabilities.

Switching to Slide 5. More detail on 2019, which was another year of significant, profitable growth. All our segments contributed to top line growth. Gucci accounted for 60% of the increase in reported revenue and all other businesses contributed the remaining 40%. It's worth noting that when we take into account the comparison base over 4 years, growth is balanced and consistent between H1 and H2, averaging 27% and 26%, respectively, over the period. Looking only at 2019, growth was steady between Q3, up 11%; and Q4, up 12%. This is true for all Luxury Houses as a whole, with some of them actually showing an acceleration. This translated into higher operating margins. Recurring income of our Luxury Houses was up 19%, yielding a 32.8% margin. The negative contribution from Corporate and other did not materially increase. So all in all, group EBIT reached a record high.

Now our Luxury Houses on Slide 6. Revenue exceeded EUR 15 billion, up 16% reported, with FX of 3 percentage point tailwind. So comparable revenue increased by 13%. Growth was double-digit throughout the year and healthy across distribution channels with retail up 14%, including a 23% increase online. Both wholesale and royalties were up 10%.

In Q4, comparable revenue increased 12% or 14% reported. Retail was up 12% with all regions apart from Japan posting double-digit increases. Western Europe was especially strong. All key countries in the region, namely Italy, the U.K. and France, were fueled by hefty tourism, chiefly from China and the U.S. Asia Pacific confirmed its good momentum, up 14%, despite heavy disruption in Hong Kong, down 50% in the quarter. Mainland China and Korea stood out with growth above 30%, and all other countries were also positive. North America reaccelerated sequentially, while Japan went into negative territory after the VAT hike.

Now looking at the Q4 sales of our top 3 brands by client nationality. The Chinese cluster retained its high-growth profile. Chinese customers repatriated an even larger share of their purchases to their domestic market, now accounting for 55% of spending. Purchases in Europe also rose sharply, while they were down in the U.S., Japan and the rest of Asia Pacific due to the situation in Hong Kong. Turning to other nationalities in the quarter, all were up but the Japanese. Koreans are steadily increasing their weight among the top 5 nationalities and grew sharply again. Middle Easterners returned to positive performance. The U.S. cluster was up double digits, both at home and in Europe. Western Europeans were less dynamic.

In the full year, EBIT of our Luxury Houses exceeded EUR 5 billion, and the margin gained 80 basis points. Margin growth was supported by Gucci, Saint Laurent and our Other Houses, and we continued investing in Bottega Veneta to fuel brand reinvention. CapEx in the period, at 4.2% of revenue, remained selective. Total store count stands at 1,381, with the planned extension of Balenciaga, Saint Laurent and Alexander McQueen, representing 2/3 of the unit increase.

Let's turn to Gucci on Slide 7. In 2019, once again, Gucci posted very strong top line growth, up 16% reported and 13% comparable on top of high comps. The brand is delivering on its plan, generating incremental revenues of EUR 1.3 billion, driven by a sound retail performance on a broadly stable network of stores. Looking at Q4, at 10.5% comparable, growth was in line with Q3, a very good performance considering stronger headwinds from Hong Kong and Japan.

In retail, up 10%, Western Europe and Asia Pacific, both up 14%, led the growth. As expected, North America returned to positive performance, up 6%, thanks to initiatives on assortment, targeted client selling and communications activities. E-commerce grew 20% with favorable dynamic across the board and a particularly good performance in Asia. Wholesale was up 14% in the quarter, driven by continuous appreciation for the collections, innovative relationships with key e-tailers and solid performance in watches.

Turning to profitability. Scale and higher sales density drove strong natural operating leverage. While we reinvested in communications, client services and omnichannel to further support brand leadership over long term, margins continued to expand. Recurring operating income rose 20% to nearly EUR 4 billion, and margin expanded 120 basis points to 41%. CapEx was targeted on the new store concept roll-out as well as strategic relocations and openings, notably in travel retail.

On Slide 8, some highlights on Saint Laurent, which delivered another year of strong performance. Having doubled sales over 4 years, the brand passed the EUR 2 billion mark and continues to enjoy plenty of market opportunities. 2019 revenue was up 14% comparable and 18% reported, driven by retail with space contribution on top of positive like-for-like. Despite headwinds from Japan and Hong Kong, Q4 improved sequentially with revenue up 14% comparable and consistent growth in both retail and wholesale.

In retail, performance was especially strong in Western Europe, where the brand successfully relocated its Milan flagship on Via Monte Napoleone in October and in North America. E-commerce growth was also notable. Recurring operating income rose 20%, resulting in a 50 basis point margin expansion to 27.4%. This improvement is solid as the brand is investing to deepen its penetration. CapEx represented nearly 5% of sales. Saint Laurent executes on its plans to broaden its geographical reach, relocate some key flagships, gradually develop travel retail and propose different, unique experiences as with the Rive Droite concept.

Moving to Slide 9. Bottega Veneta's brand reinvention is on track. Revenue was up 2% comparable in the full year with a material swing in H2, up 8%. This is the translation of the strong reception of Daniel Lee's creations with both wholesale partners and the retail network. New product availability increased gradually, reaching 60% of the assortment in Q4.

In this last quarter, revenue increased 9%, with retail up 7% and wholesale up 20%. In retail, Western Europe and North America clearly led the way, both up around 20%. Bottega Veneta is investing for long-term growth. As revamp plans encompass ready-to-wear, shoes & leather goods for both women and men, the House is strengthening its design and product development capabilities. It also requires additional talents in key functions as well as gradual step-up in communications to intensify brand awareness and desirability. Reflecting all these initiatives, recurring operating income was down, and margin compressed to 18.4%. CapEx was mostly dedicated to enhancing the network with a mix of selective openings, relocations and conversions.

On Slide 10, our Other Houses confirmed their role as growth drivers. Higher contribution to group profit shows that the investment phase of the past few years is paying off. Altogether, they delivered strong 18% comparable growth in 2019, 20% reported. Growth was fueled by Balenciaga and Alexander McQueen, both passing key revenue milestones. Performance was solid double-digit in jewelry, Boucheron, Pomellato and Qeelin, taking advantage of the success of their collections and improved market coverage.

In Q4, revenue was up 15% comparable. Balenciaga had another very solid quarter, up strong double digits across all product categories. Performance is driven by retail and online, while the House is now focusing on key wholesale accounts following major steps towards retailization. Shoes and ready-to-wear for both men and women performed extremely well again and newly launched leather goods confirmed the huge potential of this category.

Growth at Alexander McQueen was again outstanding in all channels and key regions. By product category, shoes are the main engine, thanks to sneakers, but also to the growing weight of other lines. Recent leather goods introductions are off to a promising start, and women's ready-to-wear is progressing nicely, thanks to tailoring and dresses. Overall growth results from healthy balance of like-for-like and some space contribution. Revenues at Brioni reflected the restructuring of its network as the brand streamlined its retail and wholesale distribution to focus on a more qualitative and relevant footprint.

In watches, the quarter was challenging, as is the market environment. Ulysse Nardin and Girard-Perregaux continued to implement their strategy based on improving sales experience, building stronger ties with key accounts and differentiating their offer, which blends tradition and innovation. Communications has also been enhanced with strong partnerships.

Finally, our Jewelry Houses had a slightly softer quarter than in the first 9 months, mostly impacted at Boucheron by the VAT increase in Japan, while Asia Pacific performed strongly. Pomellato also benefited from good trends in this region as well as in its Western European stores with a strong success of the Nudo Pink collection. As for Qeelin, which celebrated its 15th anniversary, its remarkable momentum continues, maintaining strong double-digit growth.

Recurring operating income of Other Houses rose by more than 40% and margin was up 190 basis points, thanks largely to significant contribution from Balenciaga and Alexander McQueen. In addition, initiatives at Boucheron and Brioni are starting to pay off. CapEx was up on the network expansion I mentioned earlier.

On Slide 11, you will find our Corporate and other segment. On the revenue side, and only 4 years after its launch, Kering Eyewear had total revenue of nearly EUR 600 million, translating into a contribution to consolidated sales of EUR 474 million, up 18% comparable. Performance was fueled by the continued appeal of Gucci, Cartier and Saint Laurent. Balenciaga and Montblanc joined the portfolio in 2019 and were rolled out successfully. Kering Eyewear is increasing its positive contribution to operating profit, and amortization of the Gucci license indemnity should be completed by 2020 year-end.

At EUR 264 million, negative EBIT contribution from Corporate and other is not materially different from last year. Costs related to corporate LTI plan rose modestly, while other expenses are higher due to the group's ambitious digital and innovation projects. CapEx increased as expected on acceleration of major investments to strengthen the logistics and IT infrastructure of our operations.

The remaining lines of the P&L are summarized on Slide 12. Other nonrecurring operating expenses were EUR 168 million, down 24% year-on-year. They include depreciation mostly related to some intangible assets as well as restructuring costs. Net financial charges amounted to EUR 310 million. They include interest on lease liabilities according to IFRS 16 for a total of EUR 110 million. Excluding this item, financial charges were EUR 200 million, down slightly year-on-year.

Cost of debt at EUR 52 million improved by EUR 25 million, following the decrease in average bonds outstanding and the negative interest rates obtained through the exchangeable bond issue in 2019 as well as some other short-term financing.

Other financial charges rose to EUR 148 million, driven by increased hedging volume and higher costs carry.

Corporate tax amounted to EUR 2.1 billion. This includes the net impact of the one-off settlement for approximately EUR 900 million and a recurring charge for EUR 1.3 billion. As expected, the recurring tax rate was close to 28%, up from last year due to the in-depth reorganization of our operating model, notably with regards to logistics and supply chain.

A word on equity-accounted companies. As Puma will report its Q4 results next week, we are using the current analyst consensus.

Group net income from continuing operations, adjusted for non-recurring items and the tax settlement, reached EUR 3.2 billion compared to EUR 2.8 billion euros last year.

A few comments on free cash flow, net debt and other key metrics on Slide 13 to 15. Our free cash flow generation stood at EUR 1.5 billion, impacted by the one-off tax cash out. As regards the taxes paid in Italy, this includes both the settlement for EUR 1.25 billion and the impact of reassessment on the charge related to 2018 paid in 2019 for EUR 350 million. Our normative free cash flow would amount to EUR 3.1 billion.

Working capital was an incremental cash use compared to 2018 as we are rebuilding inventories to support the growth of our brands, notably Bottega Veneta. Our new projects and organization should enable us to optimize it going forward. At 19.8% of revenue, operating working cap is consistent with industry average.

Group CapEx was close to EUR 1 billion or 6% of sales, showing our continued investment in our brands and platforms as well as our financial discipline.

At year-end, net debt was EUR 2.8 billion. This is after EUR 1.3 billion in dividend payments and EUR 400 million in share buyback. As a reminder, this net debt number does not include the EUR 4.3 billion lease liabilities related to IFRS 16, which you will find in our balance sheet.

This ends my remarks. So let me now pass on to François-Henri Pinault.

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François-Henri Pinault, Kering SA - Chairman & CEO [3]

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Thank you, Jean-Marc, and good morning to all of you. Well, I don't need to tell you that we live in a complex and fast-changing world, but our solid 2019 performances has reinforced my strategic resolve.

In the past few weeks, after a very positive start to the year, our environment has changed significantly with the coronavirus outbreak. Our first priority has been to look after the well-being of our associates and clients, and we have been impressed by the efforts of the Chinese authorities. Our teams have spared no energy in dealing with these developments, and I thank them for all their hard work.

Due to the evolving nature of this situation, it is impossible at this time to fully evaluate its impact on our businesses and how fast they will recover. We are hearing lots of different theories on the speed and shape of the rebound, but the reality is that it is too early to predict. I don't want to engage in guesswork, but based on past experience and knowing how dynamic and resilient the Chinese people are, we expect things to return to normal promptly once the emergency is over. And we are already working on the next steps.

This being said, the road map I will discuss in the next few minutes reflects our plans over time under normal business conditions. It doesn't take into account this particular disruption at this particular moment.

Our confidence in the dynamics of our industry and the fundamentals of our businesses over the medium and long term is intact. Our strategy is straightforward, and you are well acquainted with it. Creativity, sustainability and long-term financial performances are at the core of our vision. We are united by a strong set of values that guide everything we do, and I'll get back to our culture in a minute. We create value by nurturing the organic growth of the complementary Houses that make up the group, as you have seen once again in 2019. Our strength as a Group comes from the platforms our brands share, giving us a unique competitive advantage, and Jean-François will review this later on.

I would like to start with an overview of the culture that makes us who we are. 3 years ago, we spelled out our ambitions in terms of sustainability, people and innovation, summarized under the motto, "We care. We collaborate. We create." We were one of the first groups in the world to provide clear, quantified, science-based objectives and commit to high level of transparency and regular updates on our achievements. This promise led to a series of third-party recognition of our leading role.

Two weeks ago, we released an update on how we're doing. Some findings are summarized in this slide, and I'm not going to go through all of them, but they show a very satisfactory progress toward our goals. In particular, since 2015, we have reduced our overall environmental impacts by 14%, taking into consideration not only our own operations but our entire supply chain as well. And we are on track to reach our 40% reduction target by 2025. We are committed to intensifying our efforts and continuing to transparently report on our progress.

Now before turning to our priorities, allow me to look in the rearview mirror for a moment. In the past 4 years, as we completed our focus on Luxury, we doubled our sales. I want to acknowledge here the know-how and innovativeness of all the people of the group who are behind this amazing growth. At the same time, we tripled our operating profit and gained more than 10 points, 1,000 basis points in EBIT margin. Not only is our growth organic, it is also particularly virtuous. In the process, we create tremendous value for our shareholders, but also built a Group respected as a desirable employer, trustworthy partner and responsible corporate citizen.

Looking at it from the perspective of our Houses, their phenomenal trajectory over the past 4 years illustrates the systematic implementation of their strategies. We deepened their penetration and tightened control over distribution. Today, our Luxury Houses generates 78% of their sales through their own stores. Expansion of our retail networks has been controlled and highly selective. Growth was fueled by our Houses' creativity and disciplined execution, coordinated and overseen by the group. The growth we have at Gucci, Saint Laurent or Balenciaga and what we foresee at Bottega Veneta would not be possible without the organization and resources behind them.

But let's look at where we go from here, building on these solid foundations. I will spend more time on Gucci and Saint Laurent. They have yet to take full advantage of market opportunities but already generate considerable margin and cash flow. And I will update you on the outstanding progress of Bottega Veneta, requiring investment in the short term to strengthen future profitability.

Here, I would like to focus on the bottom half of this chart, starting with this table of brands we are currently scaling up. You've seen what this has meant until now for Alexander McQueen and particularly Balenciaga. We will continue investing in their developments so they can fully leverage their creative potential and expand control over distribution, including new flagships. One a very young brand, the other with roots going back a century, they share a unique ability to surprise, thanks to their strong identities expressed by talented designers. The recent announcement by Balenciaga that it will re-enter the Haute Couture arena is a striking example of this ambition.

In jewelry, the strategy is different but the goals are similar. Scaling up these brands require even more patience because the metabolism of the collections is different. Through product innovation, qualitative distribution and smart communications, we are moving in the right direction.

And then there's Kering Eyewear. Here, we turned a decades-old model on its head to better serve our brands and capture a greater share of the value chain. Our strategy has paid off beyond our expectations, and we will continue along the same path.

Finally, we have 3 brands, which relaunch is ongoing. Our two watchmaking Houses have been impacted by the slowdown of the sector, exacerbated this year by the situation in Hong Kong. We are revamping their distribution and have systematically overhauled their catalogues. Brioni celebrates its 75th anniversary with a retail network refocused on key locations. It's relaunched live on a better definition of its offering and greater brand visibility, notably with the new high-profile ambassador, Oscar winner, Brad Pitt.

So in addition to the 3 key Houses, I will now discuss, we have a stable of brands in great position to contribute to top-line and profitability growth. Nearing the EUR 10 billion mark, Gucci is as fresh and as full of potential as ever. The drivers and opportunities Marco discussed with you remain totally relevant today. Gucci's aesthetics always blends constancy and innovation. While Alessandro's collections

surprised and amazed, they fit uniquely within the Gucci family, exemplified by its beloved pillars. Gucci leverages these icons, upholding their timelessness and evolving them in a subtle way.

As we show year after year, there's also potential for growth, both within and across categories. In-depth customer engagement is essential to Gucci's strategy. In addition to digital, where the House is a clear leader, we deploy service centers within each of our regional hubs to provide distinctive customer interactions. Inclusivity is central to Gucci's philosophy, to its scale and reach. Exclusivity is just as important. Gucci expresses it through high jewelry, made-to-measure apparel or exotic skin leather goods that contribute to the House's desirability and also through the absolute distinctiveness of its retail concepts.

Nearly 60% of the Gucci retail network has been refurbished, generating an even higher percentage of its sales. The balance should be completed in the next 2 years or so. The brand also implements an original experiential strategy, the Gucci Osteria Concept, inaugurated at Gucci Garden in Florence and recently opened on Rodeo Drive, and we have plans to open it in other locations, notably Tokyo, in the next few months.

The Gucci Pin ephemeral concept that you see on this slide was inaugurated in late 2019 to showcase Capsule Collections. We are expanding it this year, notably for the current Mickey Mouse Collection. These thematic boutiques, built with social media in mind, are also testing grounds for new technologies such as augmented reality.

We have incremental retail opportunities, including flagship relocation or enlargement in some key cities, but also some buybacks and tactical openings and further expansion in travel retail. And while we have made significant progress in sales density as well as in conversion and other metrics, we have room to continue improving. All these factors will drive growth in Gucci's top line. This enables us to keep reinvesting at high level in people, products, strengthening bonds with our customers, but also in our development, production and logistics infrastructure, which is truly unmatched and getting better by the day.

We are not short of projects and initiatives, and we have the resources to carry them out while sustaining current margin levels. As you see, Gucci is a truly fantastic living organism, capable of constant change and adaptation while remaining fundamentally true to itself. Its organization is constantly improving, promoting the emergence of talent from within. Its aesthetics test new grounds. Its operations are always looking for new challenges and new frontiers. Gucci's success comes from its permanent ability to climb new summits, and I am confident there are plenty still ahead of us.

Saint Laurent is a House with a very strong and very singular personality. We have grown it to over EUR 2 billion last year, and we will continue to grow it, first, to EUR 3 billion, and then further. And we will do it carefully without veering from what constitutes its essence, the same way its creative direction and management team have done it until now. We are passionately nurturing the desirability of the brand. Ready-to-wear is a key factor for the House's desirability, visibility and expansion, and we are selectively broadening collections, translating Saint Laurent's distinctive aesthetics into more daywear and easier pieces.

It is important to emphasize that the contribution of the Chinese clientele to Saint Laurent's revenues is lower than for most Luxury Houses. So reinforcing our presence and visibility is a key focus as we boost our market penetration across all clienteles. Conquering the Chinese in Mainland China, where the brand was underrepresented, is a priority, and we made significant progress last year with flagships opening in Beijing and Shanghai. Saint Laurent is also intensifying its communication in that market, where it is better known in beauty than in couture.

Elsewhere, the Saint Laurent retail network has also room to grow. This is true by a number of stores but also for size and quality, notably to accommodate more ready-to-wear. So relocations and expansions are as important as new openings in moving the network closer to maturity.

Saint Laurent enjoys plenty of opportunities to bolster its presence online and in travel retail. Despite its history and impressive progression in the past years, Saint Laurent is a young brand. Its growth is fueled both by existing stores and new openings, by iconic pieces and by the subtle fine-tuning of the architecture of its collections. It has a long story to tell, to reach and pass the next milestones. We will provide the House with the resources it needs to get there, and not just financially. In the short term, continual investment might constrain margin expansion, but we are highly confident in the future of Saint Laurent.

We couldn't be happier with the way Bottega Veneta is responding to its reinvention strategy. Its 4 prizes at the December 2019 British Fashion Awards, including Brand of the Year, represent an incredible recognition of its reignited desirability.

First, with the arrival of Daniel Lee as Creative Director, then with the strengthened management team under Leo Rongone, who did a great job at Saint Laurent, Bottega Veneta is expanding and deepening its authority to include a complete silhouette with new iconic handbags & leather goods as well as shoes and ready-to-wear.

While new products now account for majority of the assortment, there are still whole categories, like men's, where we have barely scratched the surface. Brand reinvention has entailed a radical rethink of the House's collections. In a very short amount of time, we've built an entirely new aesthetics, once closely associated to a single leather goods design. This also led us to reorganize Bottega Veneta's manufacturing processes, resulting in some product delays. But these are gradually being resolved.

Bottega Veneta is reaching a younger clientele, notably in North America and Europe, where the brand is regaining a solid footing with locals. This should gradually be duplicated in Asia, where Bottega Veneta enjoys solid appeal that will broaden to new customer segments.

Regarding distribution, our priority is not to expand the network, which I mentioned is well adapted to the ambitions of the House, but there's a lot of potential for improvements in sales density. We are also giving much thought to the qualitative upgrade of the stores. The stunning new unit in the Miami Design District is a nice blueprint of the future direction of our network.

Wholesale has played a key role in Bottega Veneta's relaunch. In past years, we streamlined its wholesale exposure, and there is now room for selective growth with top-tier third party retailers. Leveraging its regained visibility, the brand is multiplying initiatives to engage with existing and potential customers, notably online, while its presence is growing exponentially. To strengthen brand awareness, Bottega Veneta's communications have become more visible and more disruptive. There is still much to be done to consolidate this transformation, and we shouldn't expect growth to be linear particularly in the early stages. But the past 6 months have been very encouraging, and on that basis, we will continue to invest at all levels to bolster the brand and its profitability in the long term. So I have no doubt that Bottega Veneta will soon return to the spot it deserves in the luxury universe.

The world of luxury is rapidly changing with new-generation customers exchanging instantaneously around the world and demanding authenticity and constant dialogue across all channels. Our Houses are in great positions to leverage the opportunities this new environment presents and to deliver strong performances with the support of the Group.

To this end, we are putting in place powerful growth platforms that we presented to you in some detail last June. Their development is on track and delivering the expected output, as Jean-François will now discuss.

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Jean-François Palus, Kering SA - Deputy CEO & Director [4]

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Thank you, François-Henri. Good morning to everyone on the call. Many of you attended our Capital Markets Day last June and are familiar with the ground I'll cover today, the platforms we have established at group level to turbocharge the growth and performances of our Houses. At the CMD, we gave a comprehensive overview of our projects, and my message today is straightforward. We are on track with all of them. We are working on 3 sets of initiatives: digital empowerment, information systems and logistics and supply chain. I'll say a few words about each of them.

Our digital empowerment strategy rests on 3 pillars. First, the digital space and social media in particular enable us to tell our story exactly like we want and establish direct communications with our customers. Second, expanding online retail is a huge opportunity, and we are seizing it. Third, we are harnessing data and artificial intelligence to handle fundamental changes in our businesses.

Let's look at digital communications and how we create aspiration around our products and our brands in the digital space. We shifted our advertising model dramatically over the past years, with digital now accounting for about 55% of our total spend and even more at some brands. We also built their social media presence. They have established large communities through social platforms in all their markets. You see here the impact of these efforts on brand awareness.

All of them, starting with Gucci, are particularly well positioned. Our Houses capture a disproportionately high percentage of total reach among the world's top luxury brands. The Lyst report on brand heat released last week reinforced this view, with our top 4 brands featured prominently.

Growing online sales is pillar #2. Last year, our online retail for the first time exceeded 5% of total sales. This reflects average growth of nearly 50% in each of the past 4 years. This is the part of the online business we focus on to offer the best possible experience to clients, foster growth and capture more customer data. This explains why we decided to gain full control over these activities, in a move not dissimilar to what we are doing in the off-line world. The internalization of our e-commerce activities will better enable us to reach these objectives. The time line in the lower part of the slide shows we are on track with the development and building of our own e-commerce platform. Testing and migration phases have been carried out since last fall, and the first brand go-lives should happen toward the middle of this year as planned.

I'm not going to detail the projects listed here. Some were presented at the CMD, others are more recent as we never stop thinking about new ways to do things both at Group and brand levels. These projects revolve around CRM and AI, or more generally, instilling innovation in all we do. We are building deep expertise, hiring world-class experts and driving operational efficiencies.

The second set of initiatives is a complete overhaul of our information systems to harmonize solutions across the group, provide real-time access to data and enhance security. Here, you can see the update of our implementation schedule presented at the Investor Day. Rollout plans are on track and we are pleased with progress to date.

Finally, over the past years, we accommodated huge and rapid increases in volume incrementally, adding a new warehouse here or there. We are now going for a complete redesign from the ground up, investing in facilities in Europe, North America and Asia. Above all, we are developing a state-of-the-art global distribution hub in Northern Italy to take the place of our 20-odd warehouses in Switzerland.

Last October, our U.S. distribution center was relocated to a single location in Wayne, New Jersey. Q2 this year, we'll see the opening of the first phases of our Italian hub in Trecate, and this will be followed in the next 2 years by distribution centers in Asia Pacific and the Middle East. This will ensure faster distribution in all channels, better product availability, optimized inventory and improved working conditions, while giving us access to true omni-channel services. It's worth stressing the value of an agile, flexible upstream setup in the situation we are currently facing. Our production footprint, blending internalized capacity and third-party suppliers, can be adopted almost in real-time to match demand levels. Similarly, we are relying on our shared logistics infrastructure to redirect the flow of pieces to where they are most needed.

Before we move to Q&A, I'd like to spend a couple of minutes on our financial priorities. François-Henri outlined our ambitions to continue building our Houses, each according to its stage of development, and to strengthen their positions and share of their respective segments. We'll do this while further investing across all drivers of their growth, product development and manufacturing, talent, communications and all the innovation logistics and IT I just described. We will also return to strong free cash flow generation. Our logistics and digital projects should enable us to optimize inventories, and hence, working capital. CapEx should represent about 6% of total sales in coming years, reflecting both store network enhancement and infrastructure and platform investments at Group level. And we will continue optimizing return on capital employed.

We have a balanced capital allocation strategy. First, our dividend policy is attractive and consistent and will remain so. Second, we have the operating and financial capacity to take advantage of relevant acquisition opportunities in a sector where consolidation is widely discussed. And if we do so, we will do it with our usual discipline. And third, good capital stewardships means having an efficient balance sheet, and we are open to returning additional cash to our shareholders.

We've demonstrated this in the past. In addition to our four-fold appreciation of the Kering share over 4 years and to a 50% dividend payout, our shareholders have benefited from the distribution of Puma shares, which are up 60% since that transaction, and from our EUR 570 million buyback in late 2018 and early 2019.

The Board of Directors has proposed a dividend of EUR 11.50 per share, 10% above last year's level. The dividend payout is in line with last year as a percentage of recurring net income and of available cash flow, excluding one-off. Including the one-off, payout represents 116% of available cash flow, reflecting our sound financial condition.

So to conclude our presentations, I'd like to highlight the continuity of our strategy and performances. We're doing what we said we would do, developing our Houses, providing them with the resources to grow and to preserve their margins at their significant levels. We live in a complex world, and as the current situation makes abundantly clear, things can change really fast. But we have a clear vision of where we want to be. We have 38,000 fantastic individuals around the world, all sharing a strong culture, we are nimble and we are rigorous. So we are confident we're going to continue delivering best-in-class performances.

François-Henri, Jean-Marc and I are now ready to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from the line of Edouard Aubin of Morgan Stanley.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [2]

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Yes. Edouard Aubin, Morgan Stanley. So congratulations on the results. So François-Henri, just sorry, to come back on the virus question. I guess it's something we have to ask. As you said, it's very difficult to speculate on the future impact of the virus on your business. But regarding the present, some of your peers have indicated that sales to the Chinese cohort are down about 50%. Are you experiencing more or less similar trends with this cohort? And when it comes to cost for now, are you holding back on cost reduction as you anticipate things to return to normal in the coming months? So that's the first question on the virus.

And then 2 questions on Gucci, if I may. The U.S. is back to, clearly, to a growth mode. As you said, 6% organic in the fourth quarter. Is it fair to say that the U.S. cohort is up double-digit in the quarter? And if you could come back on the drivers of the improvement, are they basically mostly related to the increase in marketing spend that you have been talking about over the past few months? My second question on Gucci is more fundamental. So some fashion critics have described the latest collection as slightly more classic or minimalist than it used to be, I guess, slightly less baroque. How material is the change in the -- stylistic change at Gucci? Is it a strategy to institutionalize the brand and manage some kind of soft landing, so to speak? Or is it simply a reflection of Alessandro Michele's creative mind?

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François-Henri Pinault, Kering SA - Chairman & CEO [3]

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Merci Edouard. So to answer your first question about the coronavirus. As I said, first of all, let me again repeat that we really want to pay tribute to the Chinese people overall, the Chinese authority, and of course, our teams over there for their spirit, their reactiveness in facing the situation. I'm very impressed by them right now.

Having said that, we are also, of course, looking at numbers. We have a serious drop in traffic in Mainland China. Overall, we have roughly 50% of our store networks that is closed. It's closed based on the decision taken by malls considering the security -- the health security situation of those malls. We are following very closely malls' recommendation and the Chinese authority recommendation based on that. For the rest of the network, as you probably know, the store opening hours have been reduced from -- it used to be 10 to 10 p.m., now it's 11 to 7:00 p.m. In Macau, the situation is very simple, all stores have been closed. In Hong Kong, no stores are closed. They are all open on reduced hours.

So yes, we have a strong drop in traffic and in sales over the last 10 days, but I want to mitigate that with one thing that is important. As you know, the Chinese New Year this year was earlier by almost 10 days compared with last year. It was the 25th of January compared to the 5th of February. So we knew that despite the virus, that we would have, last week and the week before, a very tough comparison base because it was Chinese New Year last year. So it's very difficult to read the numbers right now and more difficult to use those numbers to draw a line to see what could be the trends in Q1. So we are looking at that very seriously. But again, yes, we are on the same situation as our peers in terms of store closing and drop in traffic.

When it comes to cost reduction, as you know, in China, we have a strong base in terms of costs that are variableble. So of course, we are pushing all the expenses that was meant to be engaged beginning of this year. We are postponing a lot of events, refurbishment, store openings. A&P expense are pushing forward. It's even easier in China because most of our spending in communication is online. So it's easier to postpone and to make sure that we're not spending things when customers are not in stores. The only thing that you probably remember, that in our budgeting process for years now, we have always what we call a B plan in case of a downturn in the situation. So all brands always prepare this B plan. So we are actively working with all brands on an action plans, short-term action plans to be taken to protect the profitability of the group. So it's already done.

At headquarter's level at the brand, we've been already over the last 10 years -- 10 days, sorry, reviewing for what has been produced inventory allocation. As you probably know, in our supply chain, at the beginning of the season, we send just part of what has been ordered by the regions. The rest of the inventory is kept at worldwide level in Europe, so we are now brand-by-brand reallocating that inventory to the other regions of the world to make sure that we're not too heavy on stock in China. So this is done. And we are reviewing also production launches, and as you also know, that being very much producing in Italy, we have a production organization that is very flexible, that will, of course, enable us to adapt ourselves to the reality of the markets in Asia in particular, so we are in all brands working also on those aspects at worldwide level.

Coming to Gucci in the U.S., as Jean-Marc mentioned, we had a rebound geographically in the U.S. in Q4 at Gucci, plus 6%. And as you mentioned, the U.S. clusters, because of strength of the dollar, has been a key driver for us. And it's true to say that the U.S. cluster domestically and abroad is double-digit. So it's a good rebound overall of the American clientele that are coming back very strongly to the brand.

The other question was about the collection of Alessandro. You're right to mention that, it's something that we worked on with Marco end of June last year with Alessandro to make sure that he was not shy in changing things because the brand is already big because there's so much at stake, to make sure that he feels very free to express his creativity even more now, and it's what has been done.

And as you mentioned, the collection has been very well received. They are less baroque, more minimal than it used to be. And we had a great response to that in terms of in the press but also in the showrooms. And this is something that is very encouraging for Gucci. And as we've proven, the brand is really capable of outperforming the market on an ongoing vision. So this has been a very, very nice and a very good move by Alessandro and the merchandising team at Gucci.

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Operator [4]

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Your next question is from the line of Antoine Belge of HSBC.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [5]

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It's Antoine at HSBC. Three questions. First of all, if we leave coronavirus aside, and I know it's not easy, but you -- in 2019, Gucci rose 13%, 1-3. That was more than double the pace of the industry, assuming that our forecast of 6% or estimate of 6% is the right one. Do you think that now that Gucci has reached a certain size, it would be more difficult for the brand to grow towards the pace of the industry? Are you confident that it's still the case? And then is a high single-digit number, again, on a sort of like 2- to 3-year view rather than short term, is that sustainable in your view? And in terms of margin, we've also seen a significant increase, driven by fantastic sales productivity improvements. So what's the outlook for the EBIT margin over the medium term? Second question is on Bottega. I think you had mentioned in recent calls that there were some delays that were sort of maybe limiting the pace of the rebound. We didn't really see that in Q4, and I think you also mentioned that they were gradually resolved. So could we expect an acceleration of growth at Bottega maybe earlier than expected then, again, maybe leaving aside the virus impact?

And finally, you mentioned strong balance sheet and also willingness to be part of the consolidation in the industry. I think recently there were mention about an interest to do something with Moncler, which has been confirmed by Remo Ruffini. Would it be possible for you to say a bit about the M&A strategy for you in general and maybe more in -- maybe a word particularly on Moncler?

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François-Henri Pinault, Kering SA - Chairman & CEO [6]

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Thank you, Antoine, for your question. To start with, your first question was about the pace of the growth of Gucci, and compared to the industry. It's true that last year, Gucci outperformed probably by twice the growth of the industry. As we mentioned, Gucci is in position to -- over the long run, to outperform significantly the industry.

Let me mention, again, things that are very precise. Store networks. Of course, the maturity of the store networks is a given. But the quality of the store network in terms of size in terms of location, it's an ongoing work that Gucci has started. The size of the stores are not that big, so we could enlarge significant number of stores, relocate some of them.

Jean-Marc mentioned 60% of the stores had been renovated at the end of last year. As you know, the new concept is more efficient sales-wise, in terms of sales density also. And of course, we still have a strong potential there that is untapped as of today.

And finally, in terms of sales density, you mentioned the progress of Gucci. We reached around EUR 45,000 per square meter last year. As you probably know, best-in-class or above EUR 50,000. There's no reason why Gucci should not be among the best-in-class. It's another thing. We have -- we know we have the potential and we look at that with Marco in terms of conversion rate, in terms of UPT, in terms of cross-selling. So we are looking very, very precisely all those retail metrics, which given the strong confidence in the ability of Gucci over the long run, again, to outperform the market. Of course, this is, as you mentioned, putting aside the situation with the virus.

Your second question was about B.V. You had a question about the margin on Gucci, I guess.

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Jean-Marc Duplaix, Kering SA - CFO [7]

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Yes. Hello, Antoine, Jean-Marc Duplaix speaking. Regarding the margin, I think that François-Henri has clearly expressed something about the capacity of Gucci to grow in terms of sales and to outperform the market. And besides the potential impact of the coronavirus, I would say that in terms of margin, we have always been clear about the fact that with low to mid-single-digit top line growth, we would be in a position to maintain the current margin level and above mid-single digits, a slight margin expansion would be achievable, considering that we believe that the brand has a clear road map when it comes to investment. And What I'm just saying is true if we don't make specific action regarding the OpEx base, or meaning no acceleration or no moderation in terms of investments.

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François-Henri Pinault, Kering SA - Chairman & CEO [8]

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Thank you, Jean-Marc. So Antoine, second question was about Bottega Veneta and about what I mentioned in my speech, which are about the delays we had in terms of production in Q4. But as I mentioned, all this has been settled. So we are now capable of delivering on time all our customers, including our regions. So there is no issue there.

And it's true that the transformation of B.V. is not just about the collections and the image of B.V., it is also a new process in terms of supply chain and in terms of production, which explains what happened at the end of last year. So basically, despite again the situation, I would say that H2 2020 will probably deliver a very strong growth again on normal situation, on normal conditions at B.V. Don't forget that last year, in the transition year between the designers, we had a very high level of discounted sales that we won't reproduce this year, so the comparison basis will be little, but if we were talking about full price sales, we will have a very significant growth. The beginning of the year was very impressive at Bottega in terms of full price sales. So yes, the recovery is probably earlier than we thought.

Your last question was about the M&A strategy of the group. How do we intend to use our cash? First, as you know, the deleveraging of the group is on track. So we still have some work to do on that.

Secondly, as you know, the priority of the group is, and will be in the future, the potential in terms of organic growth of the brand. You saw the achievement of Gucci. You saw the great development at Balenciaga, at McQueen, the relaunch and the success of Bottega Veneta. So we have a significant potential in front of us, including in jewelry. After 3 years of investment, Boucheron is doing very well. So this is for me the, by far, the most profitable growth in front of us, and this is the priority of the group.

As you already know, we are very demanding when it comes to M&A as to complement the portfolio of brands. We are -- we won't buy because things are available on the market, for sure. But this has not changed.

Then I won't comment on the rumors. But it's true that -- and I know that my peers also mentioned, we meet each other in many, many occasions. So with Remo, for instance, because he's one of the key player of the Fashion Pact. For instance, we met each other a few times at the end of this -- of last year. We're going to meet again. You have to know that we have a meeting that is settled in April of the Fashion Pact. I don't know if this will create rumors about things between us. No, there is nothing on the table. We know each other. We appreciate each other. We have -- and it's true with the other luxury brands in the industry.

So -- but there is no active project on the table in terms of M&A.

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Operator [9]

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Your next question is from the line of Flavio Cereda of Jefferies.

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Flavio Cereda-Parini, Jefferies LLC, Research Division - MD & Equity Analyst [10]

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Obviously, congratulations for the really remarkably strong numbers. I have 3 questions, please. The first one, I'm afraid, going back to what's going on in China. So in line with your peers, clearly, sales are down 80%, 90%, whatever, in the stores that are open. I was wondering, however, can you give us some color at the beginning on January. We know the first 2 to 3 weeks in January were really almost abnormally strong for a number of brands. And I was wondering if you could tell us because that will give us a sense of the underlying pent-up demand, if you will, once we get past the situation. So that was my question on China. Then I have a question on Gucci. I was wondering if the strategy on wholesale was changing in any way. So are you driving Gucci more towards the retail model? Or -- and in terms of closing accounts, especially, not so much with the online accounts, but the off-line accounts or multi-brands. Or is that not changing? And my third question was on Saint Laurent, where, I mean, the growth has been really quite extraordinary. And I think Francesca has done a super job here. I am, however, noticing that, I mean, leather goods is now almost 70%. And given the nature of the brand and its history, how much more can you actually grow in that category? I can't imagine Saint Laurent going to 90% leather goods. So I was wondering what the project was here for the next 3, 4 years in order to maintain, if not double digit, certainly high single-digit growth.

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Jean-Marc Duplaix, Kering SA - CFO [11]

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Flavio, Jean-Marc Duplaix speaking. I will answer to you to the first question, without providing any figures, as you can imagine. But what we can confirm is that the start of the year was very strong, and it was very strong across the board, meaning, in all the regions, especially in Mainland China, but not only -- there was still a disruption, of course, in Hong Kong. And in fact, we started to see the impact of the outbreak of the coronavirus only at the end of January. So that at the end of the day, with a very dynamic also tourism performance in many regions with a strong support of local clientele and especially still in North America, some signs of recovery also in Japan, we had a very strong month of January.

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François-Henri Pinault, Kering SA - Chairman & CEO [12]

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Second question was about the wholesale strategy of Gucci. I will remind you first that the market day that we did in 2018 with Marco. Remember, over the long term, we do intend to decrease the share of wholesale in our numbers from 15% to below 10%. And this is still the target for Gucci. So we do intend by, again, the renovation of the retail network, the improvement of the retail metrics, this will have a strong impact on the retail sales compared to the wholesale sales. So yes, we will decrease the weight of wholesale in Gucci.

Just one thing about wholesale strategy online, the same thing online. We do favor sales that we control, that we can really in terms of image of the brand, in terms of assortments. So the model that we intend to push online, first of all, the priority, of course, is our dot-com sites, our own sites. But when it comes to third parties, we will favor a concession-based model rather than wholesale-based model in the future. So this was about Gucci wholesale.

Your third question was about Saint Laurent and the growth of the leather goods. It's right to say that Saint Laurent is a very strong brand in terms of leather goods. Every launch has been successful. And I said, it's a very impressive achievement over the last few years on leather goods. But never forget that Saint Laurent is a couture brand from its origins. So -- and it means that on the side of leather goods, we are working very actively also on ready-to-wear, in which we have a strong potential, particularly in enlarging the customer base in ready-to-wear with more day wear, probably a little bit more accessible product also. And we have a new team on board in the merchandising team led by Maggy Chamoun, and they are very strong. I went to the showroom in January, and I was really impressed by the work that has been done, particularly on ready-to-wear, but also on shoes, where the brand has a strong potential.

So yes, leather goods will continue to grow significantly because of the know-how of the brand. But we will grow very significantly also ready-to-wear and shoes in the near future.

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Operator [13]

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Your next question is from the line of Melanie Flouquet of JPMorgan.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [14]

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I'm sorry to come back to the coronavirus. But I have fully a quick question on this one. If I look back at what's happened historically on similar events, certainly, there is cause of optimism, as you rightly said in your presentation, on the capacity to rebound of the Chinese consumer base. But this seems to have quite unprecedented measures and impacts on Mainland China, specifically locally and also yet to come, I suspect, on the tourist into Western Europe. I think we're more familiar with the impact on Hong Kong and Macau than on these 2 specific areas. How are you reading this your end? And how are you going to plan -- face through this? I mean, I suspect the consequences of Mainland China being hit hard may be logistics. The recovery might be more complicated. Other products will be prioritized on luxury in the logistics. So I was wondering whether you could share with us -- and also Western European tourists used to historically rebound not as quickly as Hong Kong and Macau. So I'm wondering, your end, how are you planning for potential delay in the recovery compared to our past experience. Are you planning for that? Is inventories run a bit lower? My second question is on your comment on sales density potential for Gucci and the capacity to decrease -- at the level of best-in-class, above 50. I think there are very few best-in-class actually above 50, if I'm not mistaken. But usually, they have a higher percentage of sales in handbags. So that are the highest sale density's product categories. So are you saying that Gucci will have more traffic to be able to compensate the fact that its exposure to that product category is lower? Or should we think about Gucci progressively moving its share of leather goods up? And my last question is on B.V., sorry. You're mentioning in your presentation that it should return to the spot it deserves. Can you share with us what you think is the spot it deserves, mainly in terms of potential of sales and margins?

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François-Henri Pinault, Kering SA - Chairman & CEO [15]

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(foreign language) Melanie. So your first question about -- yes, the parallel that could be made with the 2003 Sars epidemic. It's a very interesting thing. As you probably know, but I'm very cautious in mentioning this because I'm not, of course, a scientific. But it's the same original virus, 70% to 80% of the rate is comparable to the Sars. As you know, with the coming months of spring and summer, the strength of the virus is very likely to decrease significantly.

In 2003, few people remember, but the virus disappeared in June and all the vaccine that was found was not even used at the time. So this is why we're talking about a short-term recovery, a short-term rebound. We're getting prepared to that. So of course, first thing was to locally adapt as much as we can. And as I mentioned, the B plan that we have in the budget, all our cost structure locally to make sure that we protect our P&L in China.

We've been working on logistics, as I mentioned, in terms of inventory allocation. We have a logistics system that is very flexible. As you know, probably 5 years ago, we were sending at the beginning of the season all the product to the region. It's not the case anymore. We keep most of it and we replenish during the season. So thanks to that replenishment system, we are able to redirect what has been already produced for China.

In terms of cost base, for instance, I mentioned what we've been postponing. We have already received some rent reduction from landlords, which is very appreciated by ourselves. So this is why we -- for now, for us, the main question is to be prepared to make sure that we can seize the opportunity of the rebound when it will be started. And again, we are in the production processes that we are looking at forward, for instance, the pre-fall collection that is not yet produced. We are looking at what do we launch between newness and between carryovers. Producing newness is important. Carryovers might be delayed because we have a capability to produce during the season, if necessary. So all this has been addressed to be very reactive, to be very -- in a very good position when the rebound will be there.

We are working also very much and getting ready to work on CRM and digital to boost local clientele right now. Of course, you're right to say that in the coming weeks, we will have the effects of the coronavirus on the tourist flows in Western Europe in particular. And then this is why one of the key elements is now to really make sure that we have a strong local base that we activate again to try to offset parts, let's say, of course, part of the decrease that we will have on the touristic activity in the coming weeks.

The second question was about Gucci, about the sales density. You mentioned the best-in-class of brands with more leather goods, more handbags than us. True. But again, we have -- this is where we think we have a potential to grow. This is where -- and I mentioned in terms of the quality of the network, we still have room to grow the average size of our stores to have a broader offer in terms of leather goods, not only, but particularly in terms of leather goods. And this will enable us, as you mentioned, to reach even higher level of sales density at Gucci in the future.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [16]

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So you do expect to...

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François-Henri Pinault, Kering SA - Chairman & CEO [17]

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Third question was...

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [18]

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Sorry, you do expect the product mix to shift a bit in favor of leather goods in Gucci?

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François-Henri Pinault, Kering SA - Chairman & CEO [19]

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Well, not overnight. You know -- but you have to take into consideration that in the structural trend of luxury, it was a rebalance between handbags and shoes overall in terms of buying patterns of the customer. And it's true for all brands in the industry. And you need to be very strong in handbags but also very strong in shoes, and which has been the case for Gucci. So it's a little bit dangerous to split handbags and shoes when you look at the leather goods product of the brands going forward.

But no, yes, we have room to improve even in handbags in the future in Gucci, and this is one of elements of our performance that we intend to grow in terms of sales density going forward.

Fourth question was about Bottega Veneta. So your question, Melanie, was -- I forgot...

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [20]

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The spot it deserves. What -- maybe you can share with us your medium-, long-term idea of where B.V. should be in terms of sales and margin?

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François-Henri Pinault, Kering SA - Chairman & CEO [21]

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Potential of B.V. -- sky is the limit in the case of B.V. No, seriously, the -- B.V., we grew that brand on a very niche market, very high craftsmanship on very, very specific handbags. And it's been a very, very good success over the 17 years by transforming the brand. And as I mentioned, the brand used to be an accessory and couture, but very small lower-case couture. It's becoming a global house, a couture and accessory brand. Meaning that the desirability, the capability of Bottega Veneta to address a much, much broader customer base give a potential to the brand that is absolutely amazing. We have a very strong, despite the coronavirus, very strong growth in full price on women categories. As I mentioned in my speech, the men's category have always been very important for Bottega, and we even -- we didn't even work on that yet.

So we are actively working on those categories, too. So I really do consider that it's a new start for the brand and the brand has a potential to grow very significantly in the near future.

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Operator [22]

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Your next question is from the line of Thomas Chauvet of Citi.

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Thomas Vincent Chauvet, Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director [23]

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I have 3 questions, please. The first one, coming back to Gucci and the toning down of the collection, less baroque, more classic. What are the other things you want to change in the next couple of years to make sure the brand becomes a defensive brand, a steady cash cow maybe, whether that's on product categories, you talked about experiences, distribution, communication or more broadly, the cost base? Secondly, on the other house. You referred to key revenue milestones at Balenciaga and Alexander McQueen. Can you share with us the revenue figure for 2019? And what are the key milestones for these brands to reach a much higher level of profitability? And finally, on capital allocation. In the absence of large-scale transformational M&A, what would be your preferred options between another share buyback or maybe a special dividend or mid-sized acquisitions, like perhaps the internalization of some businesses? I'm thinking about Coty's fragrance business.

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François-Henri Pinault, Kering SA - Chairman & CEO [24]

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Merci Thomas. So first question was about the Gucci potential beside the classic collections. Again, it's difficult -- the classic collection are not at maturity, in my opinion, far from that. Again, we have a strong potential in leather goods and shoes in ready-to-wear going forward, which is true that we have also product categories that we can continue to grow. Jewelry is one, is doing very well. The launch of eye jewelry has been very promising last year. The fashion jewelry is doing also very well.

In terms of retail network, you probably heard about the new initiative of Gucci starting last year with what we call Gucci Pin, which is the -- there is a dedicated team that has been put in place by Marco for that, which is the pop-up activity of Gucci that we are organizing right now. We started in Denver, in Bal Harbour, in Miami last year and also in Waikiki in Hawaii. It's a very strong concept in terms of brand visibility, in terms of customer engagement. It's not just pop-up for 2, 3 weeks, but it's always -- there's always a theme like the Mickey Mouse related to the Year of the Rat in China. There will be the Gucci psychedelic theme that will start. We have capsule collection dedicated to that. There is a very strong social media engagement, part of the concept. There is a very strong experiential effect on the pop-up based on virtual reality. So -- and the engagement is not just during those 3 weeks. It goes much after that. We relay all that online with Instagram and Snapchat based on that.

So all those elements puting together, and I'm not going to repeat about the store networks and the metrics of our retail operations, makes the potential of the brand still very, very important in the future.

Second question was about -- but I will let Jean-Marc to give you some answers on that.

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Jean-Marc Duplaix, Kering SA - CFO [25]

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Yes. Thomas, and of course, I will give you some answers, but not precise answers with detailed figures. It's a year where symbolically we have reached some milestones, the EUR 2 billion of sales for Saint Laurent. We have exceeded EUR 1 billion of sales and significantly above EUR 1 billion of sales for Balenciaga and above EUR 500 million of sales for McQueen.

About -- you have mentioned some -- or you had a question also about the profitability of these brands. So you can imagine that with that scale generally, we say that at around EUR 1 billion of sales, a brand can deliver something like 20% of EBIT margin, and we are slightly above when it comes to Balenciaga. But we are entering a phase where we need to consolidate and sustain the growth of the brand with some investments. Couture is part of it. We have also some investments in the leather goods category, which is doing extremely well at the end of the year with very positive signs in terms of reception by the market. So globally, I think that we are able to continue to deliver a very strong profitability at Balenciaga, but with the phase of investment.

McQueen it's a different story because you know that there is a very strong content of creativity at McQueen. It means that we have -- in terms of design expenses, a quite high level of design expenses, so that the profitability of McQueen, there is room for improvement. Also, you know that the share of leather goods at McQueen is still quite small. If you look at the split of the revenues. So here, we have room for improvement. But already, McQueen is decently profitable, and we are working to both improve the profitability but also to be sure that we are dedicating the right level of investment in the brand in order to deliver where we need to improve. And I mentioned the leather goods category. You know that we have also in terms of expansion of the network a lot of CapEx to dedicate in a very wise manner and selective manner. But definitely, here, we will continue to invest.

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Jean-François Palus, Kering SA - Deputy CEO & Director [26]

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Good morning Thomas, Jean-François speaking. Regarding our capital allocation. As Francois-Henri emphasized our priorities to invest to grow organically all our Maisons, the current ones, but then, of course, we are very conscious, and we are also quite agile. So we may consider all the things that you mentioned. And we will contemplate the best solution both for Kering and for our shareholders.

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Operator [27]

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Your next question is from the line of Zuzanna Pusz of UBS.

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Zuzanna Pusz, UBS Investment Bank, Research Division - Head of European Luxury Equity Research [28]

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I have 3 questions, please and actually, just 1 follow-up. So on M&A. So I understand your focus is primarily on organic growth. And obviously, M&A is something that is quite difficult to plan. But any chance you could share with us maybe the -- what is it exactly you look for when you look at potential targets in terms of some sort of criteria you may have internally? That will be very helpful.

Secondly, on the Chinese consumer. Can you remind us, by any chance, the exact exposure of your largest brands to the Chinese consumer? The reason I'm asking is because I've just in your annual report, there is the new baked data on the market, and it shows that basically, the Chinese cluster has increased to 45% for the market. But my impression is that, actually, in the recent years, there's been a big difference in terms of growth between the brands in the sector. Some have been able to grow with literally every single consumer nationality, and I presume your brands have been one of those, and some other brands, which haven't really seen that much growth. They've been able to grow only with the Chinese consumer. So it would be interesting to see if you've actually also seen a big increase of the share of the Chinese consumer for your brands. Thirdly, on B.V. So when I look at the performance in retail in Q4, it's quite impressive, double-digit across regions. And only APAC is a little bit weaker, 3%. Is there any specific reason for that apart from, obviously, the Hong Kong exposure? And finally, just a follow-up on Gucci. I know it's very difficult to comment on basically what Q1 could be, given the coronavirus outbreak. But the reason why I'm following up on this is because Gucci is facing a significantly tougher comparable basis in Q1. I think it's around 800 basis points. And so when we look at the Q4 growth rate when I think of the comp and on top of that now the coronavirus, I just wonder whether we do face the risk that Gucci could be potentially negative in Q1. So it would be helpful to get your idea on that.

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François-Henri Pinault, Kering SA - Chairman & CEO [29]

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Thank you, Zuzanna. So going back on the M&A, it's true that we are very selective when it comes to M&A. Again, I'm not saying that we're not looking on what could be the opportunities, priorities of the (inaudible) but we are actively looking at potential targets.

Again, if -- and to give you some criteria that we are using, I don't want any brand competing directly face-to-face with my existing brands. That would be destroying value in doing so. So in terms of product category, price segment on the market or style, we are always assessing the opportunities that could be -- that could come on the market based on that. So we're not passive, but we are still very, very, very selective.

When it comes to the Chinese cluster, you're right to say that we have -- we had in Q4 a strong growth across the board. Of course, there was a phenomenon that is a structural phenomenon of repatriation of sales in Mainland China due to the push of the authorities, lowering the VAT, lowering the import duties in China and pushing the customers to buy locally. Of course, the phenomenon of Hong Kong has amplified that phenomenon. So Mainland China, Q4 was 55% of the Chinese, Mainland Chinese purchase, 45% was when they travel.

Overall, the Chinese cluster continued to grow significantly in Q4. There's of course, if you look at Mainland China, the growth in Q4 above 30% was very impressive. But you have to be very cautious because there is some reallocation of purchase between Hong Kong to China. But overall, still for all brands, the Chinese cluster was growing. Overall, for the combined brands, Gucci, Saint Laurent and B.V., last year, we are slightly above 30% for the Chinese cluster, the Mainland Chinese cluster. It's stronger at Gucci, a little -- slightly above 20% for Saint Laurent and slightly above 25% for Bottega Veneta and above 30% for Gucci.

I think that answers your question. Third question, Jean-Marc?

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Jean-Marc Duplaix, Kering SA - CFO [30]

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Yes. As regards the performance of Bottega Veneta during the last quarter. If we look at the performance by region or by nationalities, what is obvious is exactly what happened with Gucci when we started the journey of the transformation of the brand is that the reception of the newness in leather goods, but also, of course, in ready-to-wear and shoes, is starting -- or is more positive at the beginning in the mature markets. So it means that the reception is very positive with the local clientele in Europe or in the U.S., and we see that the trends are very supportive.

While in Asia, it does take more time for the customers to embrace the new aesthetic. So it means that when we look at the Chinese cluster, Bottega Veneta was up for the last quarter, but with a negative performance in Hong Kong, Hong Kong was a very important help for Bottega Veneta.

Just to remind you, in 2018, it was approximately close to 10% of the sales. So it had an impact. And in fact, the brand was not able to completely offset that weakness of Hong Kong in the other markets. So it does probably explain the performance of B.V. in Asia.

I would like to mention, however, that the reception in Korea, which is a very sophisticated market now and which is probably one of the leading -- an early indicator of what could be the reception going forward in Asia, the reception in Korea is very positive and the trends were very good in Korea, when we look at the sales of B.V. in the country.

And as a follow-up on Gucci. I mean, the point is not so much about the comp base because we had a very strong start of the year, as I said before, for Gucci and the other brands. You could argue that it was because of the change of dates of the Chinese New Year, which is not completely true because we saw also with all the clientele, especially in the U.S., that the trends were very supportive despite the comp base. So now I come back to what has been said by François-Henri. It's very difficult to predict today what could be the trend for the coming year -- for the coming months.

So of course, we can imagine that if the trends witnessed since last January continue in February and in March, a negative outcome is not out of the question for the all industry, for all the brands, and of course, for Gucci. So let's see how the market and how the sales would evolve in the coming weeks, but it's very soon to predict.

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Zuzanna Pusz, UBS Investment Bank, Research Division - Head of European Luxury Equity Research [31]

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Perfect. Just, sorry, to clarify on the Chinese cluster. Because what I meant was for -- when I look at the exposure to the Chinese consumer globally. So basically, if for the sector, let's say, the Chinese consumer was 33% of sales in 2018 and will then argue, it went up to 35% of sales for the sector in 2019, did you see a similar trend that for, let's say, Gucci, at least the share of the Chinese consumer globally increased? Or did it stay more or less the same in the prior year?

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Jean-Marc Duplaix, Kering SA - CFO [32]

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No, it's roughly the same trends. We have an increase of the Chinese cluster across the board, roughly in the same -- constant currency, in the same momentum on the same figures that you just mentioned, slightly slower, as I mentioned, for Saint Laurent and Bottega Veneta. But for Gucci, yes, it's reflecting the industry on that.

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Operator [33]

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Your next question is from the line of Aurelie Husson from Kepler.

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Aurélie Husson-Dumoutier, Kepler Cheuvreux, Research Division - Equity Research Analyst [34]

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My first question is on Gucci, the stylistic evolution. In the recent months, you have tried to regain traction with more mature clientele at Gucci. So are you satisfied with the measures that have been taken? Is this clientele now growth -- growing in line with the millennials. My second question is still on Gucci. In Q4, you had a 14% drop in royalties. What is behind that? Is there maybe some mechanical elements that I'm not aware of? And if not, would that mean that the growth of the royalties in beauty have dropped? In that case, does not that put into question the future that you -- of your relationship with Coty? And finally, my question is on the cost basis. It's just for modeling purposes. Is it fair to assume that in China your OpEx base is 50% variable? Or is it more than that?

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François-Henri Pinault, Kering SA - Chairman & CEO [35]

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Thank you, Aurelie. So to answer your first question about Gucci and the evolution of the creative direction taken by Alessandro. First of all, as I mentioned, this has been very well received, and we saw already the effect of that in the showrooms that we had in October and for the pre-fall in December and January. So very good answer on that: It's too soon to say because we are delivering the spring/summer collection. But based on what we saw in the showroom, yes, we address an even broader clientele base with that collection.

And I would say that -- I would add to that, that the launch, for instance, of the 1955 new handbag, which is more classic, is a big success also. So I would say that it's true that it's not only growing with the millennials, but we are also growing with the more mature clientele going forward.

Your second question was about the royalties in Q4. Jean-François?

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Jean-François Palus, Kering SA - Deputy CEO & Director [36]

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Yes, Aurelie. Yes, you're right, Gucci saw a decline in royalties in Q4. This was due to a sequential deceleration due to tough comp basis in Eyewear. And also, this was due to some phasing impact between Q3 and Q4 for the beauty license.

For the whole year, we are quite satisfied with the performance in Eyewear, and we are quite confident that we have a very strong potential to grow in this product category. And for beauty, we think that we should do far better, and we will work on making sure that we will also tap this potential for growth.

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Jean-Marc Duplaix, Kering SA - CFO [37]

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Aurelie, Jean-Marc Duplaix speaking. So if you give me your e-mail address, of course, I will send you the full P&L of China. No, I'm kidding. Just, of course, you can imagine that I won't provide you the details as regards the share of variable cost.

Globally speaking, what we can say that at a worldwide basis, there is a proxy that you know more or less, which is that if you look at store expenses, you are approximately 40% of the cost which are variable. This is at worldwide level. So you can imagine that the proportion of the share is significantly above in China. But I think that it would be too -- it's not the right view to consider only the variable cost. I think when we think about a cost base for operations on a worldwide basis, there are a lot of different ways to adapt the cost structure. François-Henri has mentioned the fact that we can postpone some activities, some clienteling activities, some events and so on. So I think also in terms of recruitment, of course, you adapt to the evolution of the traffic. So here, again, there is the capacity of Gucci and of our brands to manage, of course, the cost.

More globally speaking, also, we have some ongoing discussions about the rents and especially about the fixed part of the rent. I think that some of our peers have already mentioned that there were some, let's say, open discussions with the landlord to adapt to the situation. So I think that beyond the pure variable share, there is a capacity today to, of course, discuss all the -- and to review all the fixed part of the cost relying on the group power. Meaning, that as a group, we have the capacity to lead some discussions with landlords, which is, of course, more efficient than if we were on a stand-alone basis.

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Operator [38]

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And your last question today is from the line of Thierry Cota of SG.

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Thierry Cota, Societe Generale Cross Asset Research - Equity Analyst [39]

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Three questions from me. First, back to the virus. Given your past experience, how do you think that the rebound will shape up in terms of categories? Do you think that there should be a differentiation between categories in the spend catch-up on the missed sales of Q1 ready-to-wear versus leather or footwear? Or do you think it's going to be pretty consistent? My second question would be on B.V. When do you think that the margin will start to repair? Do you think -- well, is it going to be as early as this year? Or maybe more likely starting next year? What basically would be the plans? And lastly, if we could get an indication of the breakdown of the retail sales growth of Saint Laurent in Q4 and the breakdown of like-for-like versus store openings.

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François-Henri Pinault, Kering SA - Chairman & CEO [40]

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Thank you, Thierry. So about the rebound that we are very confident about, it's very difficult to make very precise things, but it's true that the accessory categories will be, for sure, at the heart of the rebound and the consumption. So as I mentioned, for every brand, we have a strong base of carryovers in accessories and we are very capable. We have a supply chain that is capable to react very, very fast as soon as we see the rebound to start on those categories.

But we have also in ready-to-wear Basics. It's called Basics. In Saint Laurent, it's called Vestiaire. So we have also carryovers in that, on which we'll be able also to address the rebound. So yes, well, we are confident that we will be capable to be very active as soon as the rebound comes and in all categories, I would say, going forward.

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Jean-Marc Duplaix, Kering SA - CFO [41]

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As regards the profitability of Bottega Veneta, I think that we have elaborated a lot about the potential of the brand in terms of sales. But clearly, depending, of course, of what will be the outcome for the virus. Under normal circumstances, I would say that in terms of margin, we want to take the advantage of this renewed momentum of the brand to invest for the long term and in order to ensure profitable growth in the long run. So it means that there is not on our side an obsession about improving short-term EBIT margin of Bottega Veneta. I think that, once again, under normal circumstances, we would have room to improve slightly the EBIT margin of Bottega Veneta in 2020. But the priority is to rightfully invest in the brand, bearing in mind also that we will have going forward probably some more investments to allocate in terms of CapEx in order to refurbish and be sure that we have flagship stores in all key destination cities, which is not the case today.

So don't expect short-term major improvement or major uplift in terms of profitability at Bottega Veneta.

The last question is not the easiest one -- it's not the one I will elaborate so much on. I think that globally speaking, what is important to say because there was, of course, some questions in Q3 because of a very specific situation. As you know, and François-Henri has reminded it, that we had no, almost no flagships for Saint Laurent in China. We have opened just 2 flagships this year, 1 in Shanghai, 1 in Beijing. And they have opened rather in H2. It means that when there was the downturn in Hong Kong due to the events, we have not been able to recoup completely the sales in China because we are not in the network. And still, we need to improve the network in China. So that's the reason why if you look at a like-for-like basis, globally, the performance of Saint Laurent was disappointing in Q3.

Now if we look at Q4, the like-for-like was positive. I won't give you the breakdown between like-for-like and store expansion. I think the road map was very clear when we organize the Capital Markets Day for Saint Laurent considering that at a point, Saint Laurent should grow on par with the market on the existing network and the additional growth would be brought by the space expansion.

I think that what we saw in 2019 and what we expect for 2020 is quite on par on what had been presented by Francesca and this sort of equation of grow on par with the market in the existing system -- existing network and save all possible opportunities to add stores for Saint Laurent.

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Operator [42]

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That concludes the question-and-answer session today. I would now like to hand the meeting over for closing remarks to Mr. François-Henri Pinault. Please go ahead, Sir.

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François-Henri Pinault, Kering SA - Chairman & CEO [43]

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So thank you to all of you for your attention and particularly for your strong interest in Kering. It's been a long call, and I hope that we've been able with Jean-François and Jean-Marc to answer in detail most of your question. But I'm pretty sure that many of you will talk to Claire and her team in the coming days.

So after a very solid year in 2019, our presentation comes at a critical moment. So let me remind you that, first of all, our priority going forward, every day is the security of all our employees and our clients in China. And again, the way that all those people are facing the situation, their spirit, their resilience, is very impressive. And we will work hard in the coming days and weeks to mitigate, of course, the impact of the situation and make sure that we are ready to bounce back as soon as the situation improves. And we remain, of course, absolutely confident in our prospects over the medium and long term.

So thank you, again, and have an excellent day.

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Operator [44]

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That concludes presentation today. Thank you for participating. You may disconnect.