Kering's Gucci joins peers in defying China fears

Luxury goods group Kering joined competitors in defying concerns of waning demand in China, as momentum at its powerhouse Gucci slowed slightly in the fourth quarter but still outperformed most other fashion brands.

Paris-based Kering, which also owns Saint Laurent and is trying to turn around Bottega Veneta, has been under scrutiny over whether demand can hold up among Chinese shoppers, who account for over a third of industry revenues.

“Sales among our Chinese clientele remained very dynamic in the fourth quarter, even with a high comparison base,” Financial Director Jean-Marc Duplaix told journalists, adding that spending by these customers had shifted from overseas to mainland China.

The firm’s comparable sales rose a higher-than-expected 24.2 percent in the October to December period, when stripping out currency swings and acquisitions, and were up 24.5 percent on a reported basis to 3.8 billion euros (£3.3 billion).

Kering, which reported record group profits of 3.7 billion euros for 2018, hiked its dividend to 10.5 euros per share, up from 6 euros in 2017. Duplaix said this was in keeping with a dividend payout ratio policy of around 50 percent.

Like its rival, Louis Vuitton owner LVMH, the group’s growing cash pile, estimated by analysts at Berenberg at around 10 billion euros, has raised questions over whether the sector’s big conglomerates will pursue acquisitions - in Kering’s case, to potentially offset its reliance on Gucci.

The Italian fashion brand, one of industry’s fastest-growing labels in recent years following a flamboyant revamp under designer Alessandro Michele, accounted for over 80 percent of Kering’s operating income in 2018.

Kering shares fell almost 3.5 percent in early trade before recovering slightly, to leave them 7 percent higher year-to-date. However, they are down around 16 percent from last June’s peak following a correction in the sector after fears began to emerge over the U.S.-China trade war and the potential hit to Chinese demand.

“While Gucci did not disappoint in the fourth quarter, it was only marginally above consensus and this might not be enough to please demanding market expectations,” Citi analysts said, noting that the sector had rebounded strongly after LVMH posted strong results at the end of January.

ITALY TAX SPOTLIGHT

Gucci’s growing might, with annual sales of 8.3 billion euros, puts it neck and neck with privately-owned Chanel in the race to catch up with Louis Vuitton as the top luxury label by sales.

Gucci has also been in the spotlight over an Italian tax investigation, with Kering facing a potential 1.4 billion euro tax bill for allegedly avoiding tax on earnings generated in Italy by the label and billed to a Swiss subsidiary.

Kering is disputing the basis of the claim and the amount.

Negotiations on a potential settlement between Kering and Italy’s tax enforcement agency could take another couple of months, a source close to the investigation told Reuters.

Prosecutors in Milan would then decide whether or not to proceed with a criminal case and potential trial against Gucci’s CEO Marco Bizzarri and his predecessor Patrizio Di Marco that is linked to the tax probe, the source added.