Gucci sales decline slows in boost for Kering's turnaround efforts

By Dominique Patton

PARIS, July 28 (Reuters) - Sales at Kering's flagship brand Gucci fell less than expected in the second quarter, as strong U.S. demand for its new handbags partly offset weaker spending elsewhere, suggesting the luxury group's turnaround efforts are gaining traction.

Gucci sales totalled €1.4 billion ($1.6 billion), above analysts' consensus forecast of €1.37 billion, or a 4% decline, according to Visible Alpha.

The result marks a significant improvement from the previous quarter's 8% decline, though still represents the 12th straight quarterly sales drop at Gucci, once Kering's profit engine but recently experiencing years of weakening demand.

"We are still at the beginning of the journey and we remain realistic, really realistic about the challenges ahead," CEO Luca De Meo told analysts on a call. He said he did not expect the return to growth at Gucci to be linear and added that the third quarter may be "flattish," though it was not immediately clear whether he was referring to Gucci or Kering as a whole.

Kering's results come a day after larger rival LVMH reported a small rise in quarterly sales at its much bigger fashion unit, sending shares down earlier on Tuesday.

Kering's U.S. listed shares were up sharply after its results.

SALES LED BY U.S. DEMAND, MEN'S BAGS

The better-than-expected performance could reassure investors that Gucci is on track to return to full-year growth this year, a pledge made by De Meo as part of his plan to revive the €30 billion French conglomerate's fortunes.

Analysts expected the turning point in the third quarter.

Gucci sales in the United States, luxury's strongest-performing market thanks to new wealth from the tech boom, rose 9% in the quarter, finance chief Armelle Poulou said, accelerating from the first three months of the year.

Sales were helped by new bags such as the Borsetto and Paparazzo lines, as well as better demand for men's bags, she told reporters.

"These results confirm further progress at Gucci," Royal Bank of Canada analysts said in a note. "We would expect consensus estimates to modestly increase to reflect (the first semester) beat, and perhaps increasing belief that Kering can achieve its goals which is not fully reflected at present."

Kering's shares are down about 17% so far this year.

CUTTING DEBT

Overall, Kering's sales rose 2% in the quarter when adjusted for currency swings, just above analyst expectations for growth of 1.7%, with the Iran conflict shaving one percentage point off growth.

"The dynamic goes well beyond Gucci," said Poulou, pointing to the group's smaller brands such as Saint Laurent which she said has returned to growth.

The group also posted a first-half recurring operating margin of 12.8%, above analysts' forecast for 12.3%, but still far below levels at peers.

Kering's net debt was €3.3 billion at the end of June, down from €8 billion at the end of last year.

The group closed a net 84 stores in the first half, out of the 100 targeted for this year.

EXPANDING ITS JEWELLERY BUSINESS

Once the group's stellar performer, Gucci has seen sales halve over the past three years after aggressive price hikes and changing tastes alienated some customers.

De Meo, who took the reins last year, told investors in April he wanted to reduce Kering's reliance on the brand, expand its jewellery business, and more than double the group's profit margin over time.

"We also see significant growth potentially in jewellery across our fashion houses," he said on Tuesday. "The recent high jewellery activation of Gucci in Times Square generated strong client engagement and illustrated the potential for expansion."

($1 = 0.8778 euros)

(Additional reporting by Ingrid Melander; Editing by Mark Potter)