PPR Earnings Call Insights: 2020 Ambitions and Luxury Sales

PPR (PP) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

2020 Ambitions

Unidentified Company Speaker: I didn’t return to our ambitions for 2020, we don’t change those every six months, they remain present, let me remind you, this was an exercise undertaken by all the groups, brands supported by very concrete action plans, it’s an ambition, no doubt about it, it would be presumptuous on my part to have a clear view of what the world in 2020 will look like. It’s an ambition. It’s a potential of our brands that you must read into this ambition and the figures we gave you last year. Turning to your second question. Yes, the point about the population, well, it’s simple, the Luxury market was built up over the past 50 years between North America, Western Europe and Japan. That’s 800 million consumers. Today the markets that are essentially consuming very practically, if you add them up, that accounts for over 4 billion people. So trends are really headed in the right direction. No doubt about it. It’s up to us to reinvent Luxury of tomorrow which we’re doing daily with our brands. Gucci continues to have a sustained pace of growth. Its potential is significant. Once again, this concept of access to Luxury from the geographic standpoint of stores that was part of Luxury over the past 50 years, this will be replaced by another exclusivity, but it has nothing to do with the underlying concept of Luxury. There are the four contents, creativity, exceptional content, craftsmanship of the finest quality materials, absolutely exceptional first-grade materials and exceptional outstanding functionalities. It’s those criteria that the heart of the authenticity, the sincerity of the Luxury brand, the fact that it’s available in some place or another is not a fundamental criterion for Luxury. It’s up to us to ensure the attractiveness of our products through the genuine quality and their authenticity. You see that Gucci has been able to go up market with increasingly sophisticated products. You mentioned logos, well, logos are part of the luxury universe, the elements of the brand. What we must do is depending on the aspirations of the customers to adjust your products with very sophisticated Luxury products far more hedonistic in the way they are viewed by the consumer and there are other places where there will be an aspirational luxury goods, which will be necessary in the initial stages of developing Luxury product. So it’s addressing all the product categories and the products that will be developed in the future by Luxury brands, a quite term considerable were only present in a few categories you saw that Gucci developed a children’s category very successfully and here there is a lot of work to be done and expansion going forward. I’m not at all worried about our ability to maintain the attractiveness, the strong desirability for all our brands. Regards pricing and ForEx, well, it’s true that this year ForEx was favorable to our business, notably for Luxury, because ForEx exposure varies between PUMA, Sport & Lifestyle and Luxury. So FX were in fact a contrary, because procurement for PUMA made in dollar in Asia for distribution in mature countries, so there is a pooling degree of immunization linked to the complementary nature of our businesses. What’s interesting with ForEx? It doesn’t always move in a favorable direction, because the drop in the Europe gave rise to speculation about the interest of the Chinese who would buy more in Europe than in China. So the reverse effect will also the Chinese (ought) to reduce their price differential between Asia and Europe. Of course, we have currency hedges that will be even more favorable next year, given the hedging rate for all our currencies. Lastly, on prices, I mean, we don’t set prices on the basis of currencies. What we know is that today we have a potential across all brands of increasing prices that is there, we haven’t had a policy of across the board price increases for our brands and that will good (indiscernible) as we’ve said, there will be opportunities to increase prices on a case-by-case basis depending on product categories. If by chance, ForEx had such an adverse effect as might be perceived given recent trends.

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Unidentified Analyst – Exane BNP Paribas: Exane BNP Paribas. What are the Luxury consumer trends that you’re seeing in China? Are there differences by price point or by geography on the Chinese Continent? Secondly, we’ve clearly noted the focus in PUMA on renewing the product range and product innovation. Should we expect further strategic changes in PUMA, notably, retail distribution. Thirdly, we note that financial leverage available to the Group is on the rise. We know that you are attractive in organic growth, but also through bolt-on acquisition. So what are the M&A options and opportunities that you are currently considering?

Unidentified Company Speaker: On PUMA, the strategic direction aims at three points. Firstly, clarify the brand’s positioning. Next, improve product momentum with not only, as you mentioned, issues pertaining to innovation and design, but also addressing efficiency issues throughout the value chain that goes from merchandising through retail distribution. The third strategic focus area is revamping the organization, so as to really bring it up-to-date that is that PUMA for 10 years has focused on strong growth with various organizations that were not very global. So the aim here is to give greater consistency to this organization. Impact on distribution channels, not really very significant, if that we are going own – directly own stores and on the Internet we’ll have to have a more local approach than it currently is, but I would say that that really is the margins. Let me just add to clearly understand PUMA’s metabolism. This is a company that experienced phenomenal growth over 10 years through the success of its products but also by buying out it’s licenses. When you buy out your licenses, these are companies developed locally around your brand. You are buying organizations, processes and systems different to your own. So this requires an organization over time, the period that was very short, but explains for the very diverse organization, the need for more coherence. As to your question regarding Luxury trends in China, you’ll recall that last year there was a slightly slowdown effect relatively modest, in fact linked in part, but not only to the political transition. You saw that in Q4 there was a rebound of our sales of Luxury products in China, it’s a little too soon as you know, I mean the Chinese New Year is happening. It was in January last year. So we’re still in the dark when it comes to analyzing and confirming the positive trends seen at the end of 2012. But our sense is the new team in place will, of course – the new leadership will wish to put in place measures that are clearly visible to the population and boost Chinese domestic consumption, which is a key component in the countries macroeconomic strategy. The question that you raise concerns consumption levels in China. Greater China, Hong Kong in particular has always been a special case and point as you know there’ve been restrictions linked to – restrictions to continental Chinese join to Hong Kong, which of course impacted Hong Kong sales last year. There were restrictions which are purely temporary in my view, but most structurally we are seeing and we were discussing this earlier in brand changes. Consumption levels in more recent cities where we’ve opened stalls, the tier 2 or their 3 Chinese cities where consumer patterns are quite different from those we see in large cities, such as Beijing in China, where customer sophistication is growing a pace. This is something we saw in mature countries, but in a – quite significantly within a short space of time. So this compels us in China which is a good thing to be capable of offering entry level products to the brand in certain areas and to be able to evolve to a more sophisticated and more discreet products and the fact that we have those two systems, those two constructs in the same country means that we can respond rapidly and in spite of the slowdown in growth last year we were able to grow in 2012. Turning to your question on M&A; well, the Group’s balance sheet is improving year-over-year. It’s the business model driven by economic growth, a model of structural debt reduction. We have a track record when it comes to buying, but also when it comes to selling, which ties in with our ambitions for 2020, the bulk of the Group’s growth will be driven by the brand’s organic growth, notably existing brands, what we’re doing and in fact we reopened our M&A activity as of 2011. After 10 years of growth in our portfolio, you must realize that between 2002 and 2011 there were no acquisitions in the Luxury segment. We concentrated on the growth of all our brands and you’ve seen the figures. This has served us well. In 2011, we felt that we could now reconsider certain market segments that were too small 10 years ago that are far more significant today, the Men’s wear, that’s why we acquired the Brioni brand or to look at new brands that can enrich the Group’s portfolio whilst respecting very stringent criteria in terms of brand positioning regarding the stylistic content, product categories, or even market segments, the price segments that the brand addresses first and foremost. In the Group’s metabolism, we believe that we need to have varying degrees of maturity of our brands in order to contribute to enriching rejuvenating the more mature brands through the younger brands and in the years 2007, 2008, young brands such as Alexander McQueen or Stella McCartney, important for those to benefit for the experience of a brand such as Gucci, but Gucci was also benefiting from interaction with those brands. The fact that we can receive Christopher Kane amongst this over and above that this brand has its own specific positioning is part and parcel of this mix of varying levels of maturity within our portfolio. We know that it’s very beneficial toward our brands. One category where we were still relatively smaller. Few years ago, we felt it was necessary to ensure good balance of our book and need to grow, which was jewelry and watches gave rise to the acquisition in 2011 of so in with the brands Girard-Perregaux, JeanRichard and it was of course, the acquisition of the brand Qeelin in China, which in this product category, which also plans to expand as a matter priority on the Chinese market. So for us it’s a new experience in our portfolio of Luxury brands having acquired Qeelin.

Unidentified Analyst – Exane BNP Paribas: Amundsen Haakon, Handelsbanken, Germany. Two questions for PUMA. Clarification of brand positioning, does this mean specifically more of a return to a sport less lifestyle, the Adidas model? Secondly, there is missing a spot in management, should we appointing a new CEO, that’s true, but still will Jean-Francois Palus be really taking charge for that business?

Jean-Francois Palus – Group Managing Director, PPR: No, not me fortunately no. Seriously, no I will not be taking charge of the business, a Chief Executive will be appointed and will very much lead that business just like for all for other brands, he will do that closely cooperating with PPR and with the support of PPR, but I’m not going to be in charge of PUMA. Now, regarding clarification for PUMA as a brand. Firstly, we’re not going to do as Adidas. We’re not going to do like Nike. We’re not going to do like anybody else. We are us. We’re proud to be different and to be ourselves. We are going to do things like PUMA does things. That’s the first point. Secondly, as to clarifying things between Sport & Lifestyle, we won’t going to be adding the one or subtracting from the other; we are going to do both, but more clearly there will be clear for consumers, for retailers and clear for employees as well. So we’ll continue being Sport & Lifestyle brand. We will be focusing on Lifestyle & Sports and we’re going to really be bringing our specific PUMA touch to sport thanks to its lifestyle.

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Larry Klein – Capita: (Larry Klein from Capita), also Germany. A follow-on question regarding PUMA, some short-term questions. Can we expect there will be a new CEO as of April 1 at PUMA? What would the timeline be for this appointment? Second question, how patient will you be with that company, considering its negative performance of 2012? There were major sporting events nonetheless in 2012. Then this another point, for 2014, we don’t get the impression that things are moving forward very well. What’s your timeframe? What are your expectations for recovery? Are you expecting turnaround to the 2013?

Unidentified Company Speaker: Well, regarding PUMA’s Chief Executive, the process is very much under way. The announcement will be made in a few weeks’ time. You’ll find out at that point. Now, onto your second question; it’s not anything about being patient. It’s about having the will to do something and we have clear will and determination. We’re steadfast and this is clear to PUMA and all this is very much moving on the right track. As to the actually timelines, you mentioned 2014. I suspect you’re referring to the World Cup. Where we have a whole array of whole football collection that we just saw last week, that’s very promising, and no longer just focuses on a small number of soccer models and lines, but rather was really much more powerful top quality of your technical innovations, top ranking innovations and the whole lines and we’re very confident that will very much be there for that major global sporting event. Let me just remind you for those of you who remember the first period 10 years ago with Gucci there was also a sort of lengthy period before the brand really skyrocketed. We can say this group very much adheres to its commitments. When we commit to management team with a newer business that comes into our fold. We saw this in the past, there were economic difficulties and PPR had a learning curve for the new business line that we were less from here within 2007. That’s why things I’m sure have taken too long. I agree with you, but nonetheless, there is no doubt about it, we are proud to see how things are turning out. We gave our word and we kept our word. That’s how we operate in this group I agree with Jean-Francois. Our will is crystal clear and we are more than steadfast actually determined to move quickly to tap into that brand’s global potential.

Luxury Sales

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Unidentified Analyst – Exane BNP Paribas: (Indiscernible), Reuters. Three brief questions. Firstly, could you tell us how your sales held up in January and February? Any change in trend compared to Q4, I’m thinking of Luxury here, Luxury sales? Secondly, a lot of fashion and Luxury brands have talked about rebound in North America, particular the United States. Do you intend to open additional stores in the United States this year? How many did you open last year? So could you comment a little bit on the recovery in North America? Third question, how many Gucci stores opened last year in all, how many in China and how many do you intend to open this year in all and in China more specifically as well?

Unidentified Company Speaker: Regarding this year, Francois-Henri alluded to this figure already. Trends are entirely comparable with last year trends, slight difference though. The Chinese New Year is a month later. It was January last year and February this year, so that does have an impact and it’s this week. Your question on United States, our brand situation in the U.S. in the Luxury division is quite different. We have a brand that’s Gucci, that’s well established and has been for a long time and with a brand a little bit less well established and a proportion of sales is lower that Bottega Veneta. Bottega has very high potential for development of its sales in the United States. Gucci has potential for development, let me repeat though, and I’d like to slowly correct (your point). To measure potential for a brand by its number of stores, I am not sure that’s the right way of measuring. Surface areas of each store vary quite a bit. Even here average surface area for Gucci or Bottega can be two times different, so comparing store numbers isn’t always relevant, because to our size it can vary so much and it’s even less of a good comparison if you compare store numbers with other brands, especially with (their own) business model very different and their overall concept of Luxury would be different from ours. So, potential in the U.S. and also globally is there. If you look at Gucci on square meters, it got high potential per square meter. We can say that store size is even more important than store number and our stores tend to be much bigger than our competitors stores. Of course we create a whole Luxury experience in our stores. It is a spectacular architectural experience many times, often it’s very tailored consumer focused Luxury experience, there is differences that are beginning to appear between the various brands. To repeat, there is still a substantial potential for development regardless above and beyond the figure of stores numbers and including in the United States. Did I answer you that? Yes, outlook, outlook for growth in the U.S. this year in Luxury. Do you intend to open further stores there, was the question. We continue opening stores in the U.S. there are projects, recently I was in Miami, for instance, to take a look at some very interesting projects and the design district in Miami, so we certainly still have projects. Now the thing about the United States, they’ve got a huge domestic market as you know very well. They’ve also got a very big tourist industry, but proportionally it is not as big as in Western Europe, but we are betting on this. We think the U.S. will open up more and more to global tourism and that’s going to mainly U.S. market is going to see very interesting Luxury trends, which we’re already seeing in Europe. Proportions between Western Europe and the U.S. right now are 1 to 2 in terms of international tourist that come to the Luxury stores versus Latin America traveling to Florida – Latin American traveling to Florida, for the time being they are not all the Chinese tourists because some – it’s sometimes difficult to get to visas to go to U.S., but the U.S. administration, I believe, is very aware of this and is so working to improve things to make it easier for tourists to travel internationally to United States. This will have an impact on Luxury and we’re going to see this will have a major impact on our brands.