PPR Reports 1st Half Profit Surges 87%

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Francois-Henri Pinault, chairman and chief executive of PPR, will assume control of the Gucci Group luxurygoods division next month.

Paris–PPR SA reported today a first-half profit surge of 87% as demand for apparel and accessories in Asia offset faltering wholesale revenue at its Gucci brand in North America.

Profit from continuing operations advanced to 407 million euros ($531.8 million) from 217.9 million euros a year earlier, PPR said in a statement. Net income more than doubled to 402.8 million euros after PPR spun off its African distribution unit CFAO. The figures exceeded the 327.5 million-euro average estimate analysts had forecast.

As has been the case with other recent luxurygoods earnings report, sales show that Asian, and particularly Chinese, consumers are increasing discretionary spending and retailers are replenishing inventory levels after the recession. Second-quarter sales at the company’s largest division, Gucci Group NV, climbed 18%, but still trailed larger rivals. Both Burberry Group  and Hermès  reported a 27% increase in the period ended June 30 and LVMH Moet Hennessy Louis Vuitton’s sales rose 22%.

PPR also indicated it plans to rebuild the company as a collection of brands with global potential, organized around Gucci and sportswear brand Puma, the two divisions that have proved more profitable and have better prospects for growth beyond Europe. Its three main retail divisions—the electronics chain Fnac, furniture retailer Conforama and catalogue division Redcats—have been flagged for eventual disposal. PPR owns 71 % of Puma.

Gucci Falters in North America

The Gucci brand reported a 10% increase in revenue to 1.22 billion euros, lifted by strong growth in emerging markets, especially China where many luxury players are focusing development efforts. However, there was a “considerable fall” in Gucci’s first-half North American wholesale revenue, Jean-Francois Palus, chief financial officer said, adding that first-half sales were not satisfactory. Sanford Bernstein, an analyst at Luca Solca, said the Gucci brand is more exposed to wholesale than others, meaning it has less control over its sales and discounts.

While the company didn’t provide details results for all its brands, the report stated that its smaller brands Stella McCartney, Alexander McQueen and Balenciaga grew strongly, posting double-digit organic sales growth in the second quarter. The Yves Saint Laurent label inched closer to profitability, after it reduced operating losses to 5.7 million euros from 17.2 million euros last year and increased margins by reducing markdowns.

Puma, the Second Key Division

Revenues at Puma were up 2.5% to 615.4 million euros but the brand reported Thursday that they were lower in currency-neutral terms because of closeout sales and high inventory availability last year and late product deliveries in June. Puma outlined a five-year plan aimed at increasing sales from an expected 2.5 billion euros ($3.3 billbion) in 2010 to 4 billion euros in 2015, through organic growth and acquisitions.

“PPR has shrugged off yesterday’s weak Puma figures to beat market expectations convincingly” in the first half, said Tony Shiret, an analyst at Credit Suisse, London. Still, Puma’s results “question the declared aim of establishing a second main division focused on premium consumer goods.”

PPR’s stock has gained 20% this year giving the luxurygoods company a market value of about 12.8 billion euros.

First-half recurring operating profit as a percentage of sales widened to 8.7% from 7.5 %, as each of the company’s businesses posted higher operating income in the period. Total first-half sales on the same basis climbed 3.6% to 8.14 billion euros.