2017 First-Half report

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1 2017 First-Half report

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3 Table of contents Chapter 1 Kering in the first half of 2017 Key figures 3 Chapter 2 Financial information for first-half Activity report 6 Highlights of first half First-half 2017 business review 7 Operating performances by brand 13 Financial structure as of June 30, Definitions of non-ifrs financial indicators Condensed consolidated interim financial statements 45 Consolidated income statement 45 Consolidated statement of comprehensive income 46 Consolidated statement of financial position 47 Consolidated statement of cash flows 48 Consolidated statement of changes in equity 49 Notes to the condensed consolidated interim financial statements Statutory Auditors review report Statement by the persons responsible for the interim financial report 73 This is free translation into English of the 2017 First-Half report First-Half Report Kering

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5 Kering in the first half of 2017 Kering in the first half of 2017 Key figures 1 Key figures Key consolidated figures (in millions) First-half 2017 First-half 2016 Change Revenue 7, , % EBITDA 1, , % EBITDA margin (as a % of revenue) 20.9% 17.8% +3.1 pts Recurring operating income 1, % Recurring operating margin (as a % of revenue) 17.5% 14.2% +3.3 pts Net income attributable to owners of the parent % o/w continuing operations excluding non-recurring items % Gross operating investments (1) % Free cash flow from operations (2) % Net debt (3) 4, , % Per share data (in ) First-half 2017 First-half 2016 Change Net income attributable to owners of the parent % o/w continuing operations excluding non-recurring items % (1) Purchases of property, plant and equipment and intangible assets. (2) Net cash flow from operating activities less net acquisitions of property, plant and equipment and intangible assets. (3) Net debt is defined on page First-Half Report Kering

6 1 Kering in the first half of 2017 Key figures Breakdown of revenue by activity Breakdown of revenue by region Corporate and other 2% (1) Luxury 69% Asia Pacific 28% (+34%) Other 10% (+19%) Western Europe 32% (+34%) 7.3bn Sport & Lifestyle 29% Japan 9% (+6%) North America 21% (+21%) (1) The Corporate and other" segment is defined on page 33. as a % of revenue (% comparable growth (2) ) Change in revenue by quarter and by activity Number of directly operated stores by region (Luxury activities) Comparable change (2) Group Luxury activities +28.6% +24.6% +26.5% +31.6% +25.3% +28.3% Western Europe North America Japan Sport & Lifestyle activities +14.0% +14.7% +14.3% Emerging markets First-quarter 2017 Second-quarter 2017 First-half 2017 Total as of Dec 31, 2016 : 1,305 Total as of June 30, 2017 : 1,323 (2) Comparable revenue is defined on page First-Half Report Kering 4

7 Kering in the first half of 2017 Key figures 1 Breakdown of recurring operating income by activity (1) Recurring operating income: change and margin (in millions) Sport & Lifestyle 8% 1.3bn Luxury 92% Recurring operating income Reported change (%) Recurring operating margin (%) Change Luxury 1, % 24.9% +3.2 pts Sport & Lifestyle % 5.3% +2.6 pts Corporate and other (90) -17.6% - - Group 1, % 17.5% +3.3 pts (1) Excluding the Corporate segment. Net income attributable to owners of the parent Free cash flow from operations (2) Net debt (3) (in millions) (in millions) (in millions) H H H H , ,066.6 H H ,370.7 (2) Net cash flow from operating activities less net acquisitions of property, plant and equipment and intangible assets. (3) Net debt is defined on page First-Half Report Kering

8 2 Financial information for first-half 2017 Activity report Financial information for first-half Activity report Highlights of first-half 2017 Kering Eyewear A strategic partnership with the Richemont group On June 1, 2017, Kering announced that Kering Eyewear and the Maison Cartier, owned by Compagnie Financière Richemont, had completed the closing activities related to the strategic partnership for the development of the eyewear category, in accordance with the terms announced on March 21, The partnership aims at combining their operations to create a stronger platform for the development, manufacturing and worldwide distribution of the Cartier eyewear collection. Under the terms of the agreement, Richemont acquired a minority stake in Kering Eyewear, a specialised company fully dedicated to the eyewear activity of the 12 brands of the Kering Group (Gucci, Bottega Veneta, Saint Laurent, Alexander McQueen, Brioni, Christopher Kane, McQ, Stella McCartney, Tomas Maier, Boucheron, Pomellato and Puma). Kering Eyewear will notably integrate the Manufacture Cartier Lunettes entity in Sucy-en-Brie, France. The Cartier 2018 Spring-Summer collection, which will be presented during the forthcoming Silmo in Paris (October 6-9, 2017), will mark the official beginning of the partnership. The Manufacture Cartier Lunettes entity will be consolidated in the second half of Change in management and creative responsibility at Brioni On March 17, 2017, Kering announced the appointment of Fabrizio Malverdi as the CEO of Brioni. On June 15, 2017, Kering announced the appointment of Nina-Maria Nitsche as Brioni's new Creative Director with creative responsibility for the House's collections and image. Bond issue On March 28, 2017, Kering carried out a 300 million issue of ten-year bonds with a fixed-rate coupon of 1.50%. The bond was settled and delivered on April 5, First-Half Report Kering 6

9 Financial information for first-half 2017 Activity report 2 First-half 2017 business review Definitions of Kering s non-ifrs financial indicators are presented at the end of this chapter on page 43. Key figures Condensed consolidated income statement (in millions) First-half 2017 First-half 2016 Change Revenue 7, , % Recurring operating income 1, % as a % of revenue 17.5% 14.2% +3.3 pts EBITDA 1, , % as a % of revenue 20.9% 17.8% +3.1 pts Other non-recurring operating income and expenses (44.1) (85.8) -48.6% Finance costs, net (112.5) (100.7) +11.7% Corporate income tax (250.3) (138.2) +81.1% Share in earnings (losses) of equity-accounted companies (3.1) (4.6) -32.6% Net income from continuing operations % o/w attributable to owners of the parent % o/w attributable to non-controlling interests % Net income (loss) from discontinued operations (2.8) 0.4 N/A Net income attributable to owners of the parent % Net income from continuing operations (excluding nonrecurring items) attributable to owners of the parent % Earnings per share Earnings per share attributable to owners of the parent % Earnings per share from continuing operations (excluding non-recurring items) attributable to owners of the parent % Operating investments (in millions) First-half 2017 First-half 2016 Change Gross operating investments % Free cash flow from operations (in millions) First-half 2017 First-half 2016 Change Free cash flow from operations % First-Half Report Kering

10 2 Financial information for first-half 2017 Activity report Revenue (in millions) First-half 2017 % First-half 2016 % Reported change Comparable change (1) Luxury 5, % 3, % +29.7% +28.3% Sport & Lifestyle 2, % 1, % +16.1% +14.3% Corporate and other % % N/A N/A Total revenue 7, % 5, % +28.2% +26.5% (1) On a comparable Group structure and exchange rate basis. Consolidated revenue for the first half of 2017 amounted to 7,296 million, up 28.2% on first-half 2016 as reported and 26.5% based on a comparable Group structure and exchange rates. Exchange rate fluctuations had a 73 million positive effect on revenue during the period, of which 38 million related to the US dollar. Revenue by region (in millions) First-half 2017 % First-half 2016 % Reported change Comparable change (1) Western Europe 2, % 1, % +31.6% +33.5% North America 1, % 1, % +24.2% +20.7% Japan % % +8.6% +6.4% Sub-total mature markets 4, % 3, % +25.4% +24.6% Eastern Europe, Africa and the Middle East % % +25.5% +20.4% South America % % +17.6% +16.4% Asia Pacific (excluding Japan) 2, % 1, % +37.2% +34.4% Sub-total emerging markets 2, % 2, % +32.8% +29.7% Total revenue 7, % 5, % +28.2% +26.5% (1) On a comparable Group structure and exchange rate basis. Comparable revenue growth was just as strong in mature markets (led by Western Europe and North America) as in emerging markets, whose sales contributed 38% of the consolidated total, with the Asia-Pacific region (excluding Japan) accounting for 28%. Revenue generated outside the eurozone represented 78% of the consolidated total in first-half First-Half Report Kering 8

11 Financial information for first-half 2017 Activity report 2 Quarterly revenue data Consolidated revenue by quarter First quarter Second quarter First-half , , ,296.2m First-half , , ,692.9m Quarterly revenue by activity (in millions) First-quarter 2017 Second-quarter 2017 First-half 2017 Gucci 1, , ,832.5 Bottega Veneta Yves Saint Laurent Other Luxury brands Luxury 2, , ,031.2 Puma 1, ,981.0 Other Sport & Lifestyle brands Sport & Lifestyle 1, , ,086.5 Corporate and other Kering total 3, , ,296.2 (in millions) First-quarter 2016 Second-quarter 2016 First-half 2016 Gucci , ,947.5 Bottega Veneta Yves Saint Laurent Other Luxury brands Luxury 1, , ,877.9 Puma ,686.4 Other Sport & Lifestyle brands Sport & Lifestyle ,796.8 Corporate and other Kering total 2, , , First-Half Report Kering

12 2 Financial information for first-half 2017 Activity report (comparable change) Change First-quarter 2017 Change Second-quarter 2017 Change First-half 2017 Gucci +48.3% +39.3% +43.4% Bottega Veneta +2.3% +1.7% +2.0% Yves Saint Laurent +33.4% +23.7% +28.5% Other Luxury brands +11.1% +9.1% +10.1% Luxury +31.6% +25.3% +28.3% Puma +15.3% +16.1% +15.7% Other Sport & Lifestyle brands -6.3% -7.4% -6.8% Sport & Lifestyle +14.0% +14.7% +14.3% Corporate and other N/A N/A N/A Kering total +28.6% +24.6% +26.5% Recurring operating income The Group's gross margin for the first half of 2017 stood at 4,725 million, up 1,123 million, or 31.2%, on first-half 2016 as reported. Operating expenses increased by 23.7% as reported during the first six months of (in millions) First-half 2017 First-half 2016 Change Luxury 1, % Sport & Lifestyle % Corporate and other (90.1) (76.6) -17.6% Recurring operating income 1, % Kering s recurring operating income amounted to 1,274 million in the first six months of 2017, up 57.1% on first-half 2016 as reported. Consolidated recurring operating margin came to 17.5%, fuelled by Luxury activities whose recurring operating margin widened to 24.9%. Recurring operating margin for the Group s Sport & Lifestyle activities came to 5.3%. EBITDA (in millions) First-half 2017 First-half 2016 Change Recurring operating income 1, % Net recurring charges to depreciation, amortisation and provisions on non-current operating assets % EBITDA 1, , % 2017 First-Half Report Kering 10

13 Financial information for first-half 2017 Activity report 2 (in millions) First-half 2017 First-half 2016 Change Luxury 1, % Sport & Lifestyle % Corporate and other (52.9) (55.9) +5.4% EBITDA 1, , % The EBITDA margin widened by 3.1 points on a reported basis to 20.9% in the first half of 2017 (from 17.8% in the first half of 2016). Other non-recurring operating income and expenses Other non-recurring operating income and expenses consist of unusual items that could distort the assessment of each brand's financial performance. This item represented a net expense of 44 million in the first half of 2017, significantly lower than the 86 million net expense recorded for the same period of The first-half 2017 figure primarily included restructuring costs and asset impairment relating to the Luxury Couture & Leather Goods activities. The net expense for the six months to June 30, 2016 chiefly comprised restructuring costs for Luxury activities, asset impairment losses for Luxury activities and Kering s industrial operations, and a net loss on the disposal of shares, including the Electric brand. Other non-recurring operating income and expenses also included the losses recorded by Kering Eyewear during its ramp-up phase prior to it being granted the Gucci license on January 1, Since that date, Kering Eyewear's results of operations have been presented under "Recurring operating income". See Note 5 Other non-recurring operating income and expenses, to the condensed consolidated interim financial statements. Net finance costs (in millions) First-half 2017 First-half 2016 Change Cost of net debt % Other financial income and expenses % Finance costs, net % The Group's cost of net debt was 67 million in first-half 2017 versus 62 million in the same period of This 7.5% year-on-year increase primarily stemmed from the repayment of very short-term debt (commercial paper) which had extremely low interest rates and was partly refinanced by the issue of longterm bonds in 2016 and 2017 which have higher interest rates but secure the Group s financing over the long term. The consequent rise in the Group's average interest rate in first-half 2017 was only partially offset by its lower average outstanding net debt. The rise in the cost of net debt for the period also reflects albeit to a lesser extent higher interest rates on borrowings denominated in US dollars First-Half Report Kering

14 2 Financial information for first-half 2017 Activity report Other financial income and expenses represented a net expense of 45 million in first-half 2017, up 18.5% on the 38 million net expense recorded for the first half of This increase was chiefly due to the adverse effect on the cost of currency hedges caused by the higher interest rates in the United States, the volatility of Asian rates and negative interest rates in the eurozone. See Note 6 Finance costs (net), to the condensed consolidated interim financial statements. Corporate income tax (in millions) First-half 2017 First-half 2016 Change Tax on recurring income (250.7) (167.6) +49.6% Tax on non-recurring items % Total tax charge (250.3) (138.2) +81.1% Effective tax rate 22.4% 22.1% +0.3 pts Recurring tax rate 21.6% 23.6% -2.0 pts The income tax charge for the period (current and deferred) is calculated based on the estimated effective tax rate for the full year for each tax entity or sub-group and is adjusted for any transactions specific to the first half of the year. See Note 7 Income taxes, to the condensed consolidated interim financial statements First-Half Report Kering 12

15 Financial information for first-half 2017 Activity report 2 Operating performances by brand Luxury activities (in millions) First-half 2017 First-half 2016 Change Revenue 5, , % Recurring operating income 1, % as a % of revenue 24.9% 21.7% +3.2 pts EBITDA 1, % as a % of revenue 28.5% 25.4% +3.1 pts Gross operating investments % Average FTE headcount 22,719 21, % The luxury goods market as a whole showed signs of picking up in the first half of 2017 following on from 2016 when, according to data published by Bain Altagamma, it contracted on a reported basis and was stable at constant exchange rates. One such positive sign was the 4% market growth seen in the first quarter of 2017, although this overall improvement masks mixed trends across the various regions. In line with the gradual upward pattern observed during the course of 2016, spending by Chinese customers on luxury goods rose sharply, which lifted not only the domestic market but also markets in tourist destinations. The ensuing upturn for the market in Mainland China boosted overall performance in the Asia Pacific region, which also saw the market contractions previously experienced in Hong Kong and Macau beginning to level off. Growth was also robust in Western Europe thanks to high tourist numbers and spending by domestic customers. Based on data issued by Global Blue, sales to tourists in the region rose by 21% in the first quarter of 2017 and by 13% in the second quarter, with France reporting an upswing and trends in the United Kingdom still very positive. Conversely, luxury goods sales in North America were once again weighed down by the lacklustre market in the United States. The weaker performances delivered by US department stores which are key distribution partners for luxury goods players are particularly indicative of this situation. In Japan, having peaked in 2015, the market was relatively stable in the first six months of 2017, with luxury goods sales hampered by tourists making their purchases in other countries. The picture was also mixed across product categories. Accessories and jewelry and, to a certain extent, ready-to-wear, fared well, whereas although watches showed signs of stabilising, performance was volatile from one month to another depending on the schedule of deliveries to distributors. In terms of distribution channels, the first half of 2017 saw an acceleration in e-commerce sales whereas wholesale performance deteriorated once again in certain regions. Lastly, as volatility in the world's major currencies was low between the first half of 2016 and the first half of 2017, there was little difference between reported growth for the period and growth at constant exchange rates. Despite the euro's recent strength, average rates for the US dollar, Korean won, Hong First-Half Report Kering

16 2 Financial information for first-half 2017 Activity report Kong dollar and Japanese yen all rose during the period which resulted in higher reported sales growth (between 2 and 9 percentage points) for business denominated in those currencies than growth at constant exchange rates while fluctuations in the Chinese yuan and pound sterling had the opposite effect. Revenue First-half 2017 First quarter 2,417.1 Second quarter 2, ,031.2m Reported change First-half % First-half , , ,877.9m Comparable change +28.3% Other brands 18% Yves Saint Laurent 14% 5,031.2m Bottega Veneta 12% Gucci 56% The Group s Luxury activities (whose scope of consolidation remained unchanged during the period) posted exceptional 28.3% revenue growth on a comparable basis in the first half of 2017 and once again significantly outperformed their market. Year-on-year organic growth came to 31.6% in the first quarter and 25.3% in the second quarter, when the 2016 basis of comparison was higher. Retail sales in directly operated stores and online advanced 34.0%, propelled by excellent in-store performances from Gucci, Yves Saint Laurent and Balenciaga. First-half 2017 Sales in directly operated stores 75% 25% Wholesale sales and other revenue (including royalties) 5,031.2m Directly operated stores accounted for 74.9% of total revenue reported by the Group s Luxury activities in the first half of 2017, versus 71.5% in the first six months of This increase reflects the strategy implemented by all of the Luxury brands to control their distribution more effectively and reinforce their exclusivity, as well as measures taken to prudently manage the expansion of the directly operated store network. It also illustrates the Group s objective of retaining and, where appropriate, developing, a network of high-quality wholesalers for certain brands and product categories and in certain regions. Wholesale sales for the first six months of 2017 were 14.7% higher year on year on a comparable basis, with all of the Group s main wholesale markets posting robust growth, including the United States. This performance reflects the strong appeal of the Group's brands, which has resulted in them being showcased by wholesalers, which have generally become increasingly selective in their purchasing choices. As a result, the brands were able to win further market share during the period First-Half Report Kering 14

17 Financial information for first-half 2017 Activity report 2 Revenue by region As in 2016, during the first half of 2017 revenue growth for the Group s Luxury activities was generally balanced across mature and emerging markets. Sales in emerging markets climbed 31.8% compared with the first half of In the Asia Pacific region (excluding Japan) the year-on-year growth figure was 33.9%, with all key markets in this region except Taiwan reporting very solid increases. Revenue in Mainland China jumped by almost 50% and Hong Kong and Macau saw a strong sales recovery, delivering double-digit growth. Despite the tensions that put strain on tourist numbers, business levels in South Korea which is the Group s second largest emerging market remained extremely buoyant during the first half of In mature markets, revenue was up 26.0%, with growth breaking down as follows by region: Other 7% Asia Pacific 32% +34.6% in Western Europe (with very even revenue rises across all of the main markets and consumer nationalities); +23.0% in North America; +7.0% in Japan. Revenue by product category Other 7% Watches & Jewelry 7% Shoes 17% Japan 9% Western Europe 33% North America 19% Leather Goods 53% Ready-to-Wear 16% The weighting of product categories within Luxury activities overall revenue is becoming increasingly balanced, reflecting the strategic fit of the brands in the portfolio. Apart from Watches whose sales were virtually stable compared to the first half of 2016 revenue was up sharply for each of the main product categories. After declining in 2016, revenue from royalties increased significantly in the first half of 2017 thanks to the strong momentum for Gucci eyewear following the transfer of the Gucci license to Kering Eyewear. Recurring operating income Recurring operating income for the Group's Luxury activities totalled 1,254 million in the first half of 2017, up by a sharp 49.4% as reported, and recurring operating margin widened by 320 basis points (as reported) to 24.9%. The year-on-year rise in profitability was mainly attributable to the strong increases posted by Gucci and Yves Saint Laurent, whose sales growth far exceeded the rise in their cost bases resulting from the in-store expenses and communication costs incurred in connection with their expansion projects. The combined effect of exchange rate fluctuations and currency hedges had virtually no impact on recurring operating income in the first half of EBITDA topped the 1 billion mark, surging 45.3% to 1,433 million, and EBITDA margin widened by 310 basis points to 28.5% First-Half Report Kering

18 2 Financial information for first-half 2017 Activity report Store network and operating investments Luxury activities gross operating investments totalled 185 million in the first half of 2017, 41 million higher than in the corresponding prior-year period, but stable as a proportion of revenue at 3.7%. However, as in 2016, the majority of operating investments are expected to be made in the second half of the year. As of June 30, 2017, the Group s Luxury activities had a network of 1,323 directly operated stores, including 812 (61%) in mature markets and 511 in emerging markets. Net store additions during the period totalled 18, representing a 1.4% increase during the period, which was largely attributable to the expansion of the Yves Saint Laurent network in line with the brand s plans. Gucci Store network 1,305 Dec. 31, ,323 June 30, 2017 (in millions) First-half 2017 First-half 2016 Change Revenue 2, , % Recurring operating income % as a % of revenue 32.0% 27.6% +4.4 pts EBITDA 1, % as a % of revenue 35.6% 31.4% +4.2 pts Gross operating investments % Average FTE headcount 11,059 10, % Gucci had an excellent first half in all respects, clearly outperforming the luxury goods market as a whole, exceeding its own financial targets and successfully pursuing its action plans aimed at supporting its growth over the long term. The main highlights of the first six months of 2017 were as follows: Gucci continued to rework its product offering, almost entirely completing the process by the end of the period. In all categories, older styles have been replaced by the new aesthetic brought to the brand by Alessandro Michele. The reaction of both customers and distributors has been extremely positive, as illustrated by Gucci s sales figures. However, the in-depth work of Gucci s merchandising teams is ongoing as the brand needs to be able to maximise each category s growth potential over the longer term by constantly honing the product offering. The fashion shows and collections presented by Gucci during the period were once again extremely well received, consolidating the brand s leading position in the world of fashion and luxury. Thanks to Gucci s renewed brand appeal and the success of its reworked offering, it has not run any promotional offers in its stores since the last quarter of The ramp-up programme for the new store concept was continued, with 23 stores developed around or converted to the concept during the period. Gucci's new image was also relayed through in-store events, measures to further enhance the customer experience, and the launch of more consistent and better targeted communication campaigns. The brand has forged a number of new partnerships as a launching pad for these 2017 First-Half Report Kering 16

19 Financial information for first-half 2017 Activity report 2 initiatives, covering distribution (e.g., with Farfetch for deliveries in less than 90 minutes and with Mr Porter for an exclusive capsule collection), design and content creation. As part of its content creation strategy, Gucci has invested heavily in the production of images and films with a view to regularly enriching its digital communication. Digital technology remained at the heart of Gucci s corporate strategy and the brand pursued its work on optimising and deploying its online platform, Gucci.com. Gucci s online sales jumped by over 60% during the period. Additionally, in early July 2017 it launched its e-commerce activity in China. Revenue First-half 2017 First quarter 1,354.0 Second quarter 1, ,832.5m Reported change First-half % First-half ,3 1,947.5m Comparable change +43.4% Gucci posted 2,832 million in revenue in the first half of 2017, up 43.4% year on year at comparable exchange rates. Revenue growth came to 48.3% in the first quarter and the second quarter figure was 39.3% a remarkable performance given the unfavourable basis of comparison and the fact that revenue for the second quarter of 2016 was boosted by promotions whereas there were no promotional offers during the second quarter of First-half 2017 Sales in directly operated stores 85% 15% Wholesale sales and other revenue (including royalties) 2,832.5m Retail sales generated in directly operated stores surged 46.2% at constant exchange rates, fuelled by increasingly higher footfall and improved productivity in the brand s stores. This performance should be viewed in relation to the brand s overall number of stores, which was slightly lower than in the first half of Sales generated in the wholesale network climbed 32.7% on a comparable basis. Excluding the negative impact of performance from the Watches category whose product offering is still being repositioned sales for this distribution channel rose at the same pace as those generated in directly operated stores. All of the brand s main markets saw sales growth during the period and Gucci won further market share among distributors First-Half Report Kering

20 2 Financial information for first-half 2017 Activity report Revenue by region Asia Pacific 36% In view of the proportion of Gucci s sales that are generated in directly operated stores (84.7% in the first half of 2017), the following revenue analysis by region only concerns in-store business. In the brand's mature markets, Western Europe posted the highest increase in revenue from directly operated stores, with year-on-year growth reaching 66.2% on a comparable basis. Thanks to its broader and younger customer base, Gucci was able to reap the benefits of the upturn in spending by domestic customers in the region and, thanks to its renewed appeal, was able to position itself as one of the most purchased brands by tourists visiting Europe. In North America, comparable-basis sales climbed 36.6%, driven by the brand s success with millennials and a more traditional clientele, thanks to the depth and breadth of Gucci s product offering. In Japan, in-store sales advanced by a brisk 15.8% on a comparable basis. This performance confirms the success of communication and merchandising measures launched in 2016 with a view to winning over domestic customers to the brand s new aesthetic. In emerging markets, revenue surged 48.5% year on year at constant exchange rates, with all regions contributing to this excellent performance, including Asia Pacific, which reported a 50.7% revenue hike. Growth in Mainland China and South Korea topped 50% and both Hong Kong and Macau registered very strong sales increases. Revenue by product category Other 8% Watches & Jewelry 4% Ready-to- Wear 13% Other 7% Japan 8% Leather Goods 54% Shoes 21% Western Europe 29% North America 20% In an operating context where the reworking of Gucci s product offering was almost fully completed, all of the brand s main product categories contributed to sales growth in directly operated stores in the first half of For Leather Goods, the work on revisiting the product offer and replacing older collections was completed for Gucci s handbag lines in The sales figure for handbags in the first six months of 2017 attests to the success of the new lines and carryovers designed by Alessandro Michele. The designs of small leather goods and luggage collections were reworked later on in the brand s transformation process but the first-half 2017 sales figures for these items were very positive and demonstrate that the work on repositioning the product offer is paying off. Sales of Ready-to-Wear collections rose sharply once again, with in-store growth now evenly balanced between men s and women s lines. The excellent sales momentum experienced by the Shoes category continued in the first six months of 2017, driven by the new models presented each season since the 2016 Cruise collection. Royalties returned to growth in the first half of 2017, spurred by the reworking of the brand s eyewear offering since the Gucci license was transferred to Kering Eyewear on January 1, However, royalties in the Perfume and Cosmetics category continued to contract ahead of new product launches and promotion of the existing product range following the acquisition by Coty of Procter & Gamble Prestige, completed in October The first perfume created with Alessandro Michele (Gucci Bloom) will be launched in the second half of First-Half Report Kering 18

21 Financial information for first-half 2017 Activity report 2 Recurring operating income Gucci's recurring operating income soared 69.0% on a reported basis in the first half of 2017, coming in at 907 million, and its recurring operating margin widened by 440 basis points to a record 32.0%. This year-on-year jump in recurring operating margin was partly due to a slight rise in gross margin propelled by excellent levels of sales in directly operated stores and the absence of promotional offers during the period. However, the main growth driver was the favourable leverage effect as revenue grew at a much higher rate than operating expenses. This was the case despite the fact that Gucci continued to make the necessary investments during the period to support the brand s development by increasing the budget for in-store expenses on communications and information systems in line with the sector s accelerating digital transformation. The impact of these initiatives was offset by strict cost control measures for other expense items. EBITDA topped 1 billion in the first half of 2017 and the EBITDA margin was 35.6%. Store network and operating investments Store network 520 Dec. 31, June 30, 2017 As of June 30, 2017, Gucci operated 514 stores directly, including 214 in emerging markets. A net six stores were closed during the period. The brand now has an overall network that is adapted to its operations in terms of store numbers and its current focus is on increasing organic growth by pursuing its refurbishment programme for existing stores. Gucci's gross operating investments amounted to 77 million in the first half of 2017, up 9.2% on the same period of The 2017 figure mostly corresponds to the refurbishment programme aimed at gradually introducing the new store concept across all of the brand s network. Gucci expects to step up its operating investments programme during the second half of First-Half Report Kering

22 2 Financial information for first-half 2017 Activity report Bottega Veneta (in millions) First-half 2017 First-half 2016 Change Revenue % Recurring operating income % as a % of revenue 25.0% 25.4% -0.4 pts EBITDA % as a % of revenue 28.8% 29.2% -0.4 pts Gross operating investments % Average FTE headcount 3,355 3, % In 2016, Bottega Veneta s management team launched action plans aimed at: re-energising the leather goods offering; developing other product categories; guaranteeing the brand s exclusivity by optimising distribution; and increasing the brand s penetration with local customers in mature markets through more effective communications. Against a more favourable market backdrop for luxury goods, Bottega Veneta delivered a satisfactory performance in the first half of 2017, giving encouraging signs as to the quality of its action plans and the speed of their implementation. However, the benefits of these plans will be felt over the long term and the brand s first-half results confirm that 2017 is likely to be a year of transition and consolidation for Bottega Veneta. Revenue First-half 2017 First quarter Second quarter m Reported change First-half % First-half m Comparable change +2.0% In the first half of 2017, Bottega Veneta s revenue rose 2.0% year on year on a comparable basis. First-half 2017 Sales in directly operated stores 83% 17% 590.4m Wholesale sales and other revenue (including royalties) With a view to preserving its high-end positioning and exclusivity, Bottega Veneta's preferred distribution channel is its directly operated stores, which accounted for 83.3% of the brand's total sales in the first six months of Revenue generated in directly operated stores increased by a solid 3.6%, both in the first and second quarters of the 2017 First-Half Report Kering 20

23 Financial information for first-half 2017 Activity report 2 year. This performance was achieved despite the decision to significantly reduce the scope and scale of in-store promotions in order to protect the brand s exclusivity. Sales generated in the wholesale network contracted 5.1% in the first half of As in 2016, Bottega Veneta continued to reorganise this distribution channel during the period with the aims of avoiding the risk of saturation in points of sale and only working with the highest-quality partners. Revenue by region Asia Pacific 42% In view of the proportion of Bottega Veneta s sales that are generated in directly operated stores, the following revenue analysis by region only concerns in-store business. Western Europe was the region where Bottega Veneta experienced the most positive sales momentum in the first half of 2017, with revenue up 13.7% on a comparable basis driven by a sharp increase in sales to domestic customers in the region s main markets. In Japan, the downward trend seen throughout 2016, due to a decrease in purchases by Chinese tourists, continued into the first six months of Consequently, sales in Japan decreased 2.1%, although purchases by Japanese customers remained more or less stable year on year. In North America the brand continued to be adversely affected by low tourist numbers and the aggressive promotional strategies of department stores, despite more encouraging trends during the second quarter. This caused the region s sales to retreat by 6.7% for the full six months. In emerging markets, Bottega Veneta's sales were up 3.4% year on year based on comparable data. Sales growth was solid in South Korea and Mainland China for the period overall despite a slowdown in the second quarter caused mainly by a high basis of comparison and a drastic reduction in in-store promotions compared with the previous year. However, market conditions remained challenging in Hong Kong, where Bottega Veneta s performances were particularly affected by the change in customer profile in view of the brand s high-end price positioning. Revenue by product category Other 2% Other 5% Japan 15% Ready-to-Wear 5% Shoes 8% Western Europe 27% North America 11% Leather Goods 85% All Bottega Veneta product categories registered sales rises in directly operated stores in the first half of Growth was particularly buoyant for Ready-to-Wear and Shoes, demonstrating how the development measures put in place over the past few years for these categories are now paying off. In the Leather Goods category which is still Bottega Veneta s core business sales of handbags rose during the period, notably for carryovers, thanks to a successful new strategy for the brand s iconic lines. Conversely, small leather goods and men s lines experienced more mixed results. Overall, the brand s decision to revise its sales promotion policy has weighed on the short-term performance of the Leather Goods category First-Half Report Kering

24 2 Financial information for first-half 2017 Activity report Recurring operating income Bottega Veneta s recurring operating income edged up by 2 million to 147 million in the first six months of Recurring operating margin narrowed by 40 basis points as reported to 25%. This slight decrease was attributable to the targeted and controlled increase in certain operating expenses arising from the initiatives implemented to enable Bottega Veneta to enter a new phase in its development and ensure that it will be in a position to use its current transition period as a springboard for future growth. EBITDA amounted to 170 million and the EBITDA margin contracted by 40 basis points to 28.8% a level that is nonetheless very high for the industry. Store network and operating investments Store network 255 Dec. 31, June 30, 2017 As of June 30, 2017, Bottega Veneta had 260 directly operated stores, including 113 in emerging markets. There were five net store additions during the period. Bottega Veneta has put in place a programme to streamline its store network which includes not only store closures but also relocating certain stores, opening a limited number of flagship stores, and developing the brand s presence in certain regions or networks (such as travel retail). Within this context and in view of the need to refurbish its existing store network, Bottega Veneta has increased its operating investment budget. In the first half of 2017 the brand s operating investments amounted to 21 million, up 6 million on the first half of 2016, when the level of operating investment was particularly low. Yves Saint Laurent (in millions) First-half 2017 First-half 2016 Change Revenue % Recurring operating income % as a % of revenue 23.0% 19.9% +3.1 pts EBITDA % as a % of revenue 26.3% 23.5% +2.8 pts Gross operating investments % Average FTE headcount 2,486 2, % Yves Saint Laurent has been the Group s second-largest Luxury brand in terms of revenue since 2016, and during the first six months of 2017 it continued down the growth path both in terms of sales and profitability. The first half of 2017 saw the successful launch of Anthony Vaccarello s first women s ready-to-wear collection (Summer 2017) and in-store deliveries of the Fall 2017 collection began at the end of the second quarter. The brand s new Creative Director is revisiting the product offering while keeping to Yves Saint Laurent s signature motifs and respecting its history and traditions. The transition process which has started with the Ready-to-Wear and Shoes categories is being closely managed and overseen by the brand s executive teams First-Half Report Kering 22

25 Financial information for first-half 2017 Activity report 2 Revenue First-half 2017 First-half First quarter Second quarter m 710.8m Reported change Comparable change First-half % +28.5% Despite a high basis of comparison, the brand s revenue growth in the first half of 2017 came to 28.5%, outstripping the 24.3% recorded for the equivalent period of With a year-on-year increase of 23.7% in the second quarter, Yves Saint Laurent s revenue growth has now topped 20% for fifteen quarters in a row. First-half 2017 Revenue from retail sales in directly operated stores advanced 30.7% on a comparable basis, led by a very strong increase in same-store sales. This performance is first and foremost due to Yves Saint Laurent s timeless brand appeal and the quality of its store network in which it has invested heavily for almost five years. It also reflects the success of the measures put in place to efficiently allocate and restock items within the store network and ensure that customers have an excellent in-store experience. Wholesale sales advanced 21.1% based on comparable data. Performance in the first half of 2017 was boosted by deliveries of the Summer 2017 collections in the first quarter whereas deliveries of the Fall- Winter 2017 collections only began at the end of the second quarter. The wholesale channel is still obviously strategically important for Yves Saint Laurent as it represents a perfect fit with its retail business. Revenue by region Other 7% Asia Pacific 27% Sales in directly operated stores Japan 8% 69% 31% Wholesale sales and other revenue (including royalties) Western Europe 36% North America 22% 710.8m In view of the increasing proportion of Yves Saint Laurent s sales that are generated through directly operated stores (69.4% in first-half 2017), the following revenue analysis by region only concerns in-store business. Yves Saint Laurent notched up revenue rises across all major regions in the first half of Sales in the brand s traditional markets rose 25.1% on a comparable basis, propelled by higher numbers of local customers and increased customer loyalty, as well as by the brand's heightened appeal amongst tourists, within a context of improved tourist numbers in the first half of Western Europe led the way, with a 38.8% increase in revenue generated in directly operated stores. Performance remained robust in North America, where year-on-year growth reached 17.1%. In Japan, sales rose 5.5% as they were hampered by a generally less buoyant market environment for luxury goods brands and the fact that Japanese customers traditionally take longer to come to terms with new artistic directions than customers in other regions First-Half Report Kering

26 2 Financial information for first-half 2017 Activity report In emerging markets, sales generated in directly operated stores were up 40.9% year on year. In the Asia Pacific region (excluding Japan) which accounted for more than three-quarters of the brand's total sales in emerging markets growth was extremely strong in all of Yves Saint Laurent s main markets, especially in Mainland China where stronger brand appeal drove a 66.9% surge in sales. Performances delivered by the wholesale network were consistent across regions, with a particularly satisfactory showing in North America where the brand outperformed market trends. Revenue by product category Other 9% Ready-to-Wear 19% Leather Goods 58% Shoes 14% All of Yves Saint Laurent s main product categories registered very solid sales growth in the first six months of The Leather Goods offering which the brand strives to constantly renew and refresh, with a dedicated creative team remained highly popular, both with long-standing and new customers. This category posted the highest year-on-year increase for the six months ended June 30, Ready-to-Wear sales which once again occupied an essential place in the brand's product offering saw a balanced weighting of sales between women's and men's collections. Although revenue increased, the first half of 2017 marked a transition period for this category, with the successful launch of collections designed by Anthony Vaccarello and the gradual withdrawal of certain styles based on past collections. The brand's third leading product category Shoes reported a strong sales rise, thanks to the work launched by Anthony Vaccarello on re-energising the offering. Revenue from licensed product categories rose at a similar pace to that from directly managed product categories, with royalties once again boosted during the period by the extensive reworking of offerings carried out by L Oréal for perfumes and cosmetics and Kering Eyewear for eyewear ranges. Recurring operating income Yves Saint Laurent ended the first half of 2017 with recurring operating income of 164 million, versus 109 million in the corresponding prior-year period, representing a year-on-year increase of 50.0%. Recurring operating margin rose 310 basis points as reported to 23.0%. This further improvement in profitability demonstrates how the brand has now attained a size that enhances the positive impact of its operating leverage and will enable it to come closer to its medium- to long-term goal of achieving an annual recurring operating margin of 25%. EBITDA rose by 58 million to 187 million and the EBITDA margin was 26.3% First-Half Report Kering 24

27 Financial information for first-half 2017 Activity report 2 Store network and operating investments Store network 159 Dec 31, June 30, 2017 As of June 30, 2017, the Yves Saint Laurent brand directly operated 172 stores, including 76 in emerging markets. There were 13 net store openings during the period, including airport duty free stores, in line with the brand s store network expansion plan which encompasses the travel retail sector. Yves Saint Laurent s gross operating investments rose 12 million year on year to 31 million in the first half of 2017, reflecting the brand s store opening and refurbishment strategy. However, the overall level of investments remained contained (representing less than 5% of sales) and the year-on-year increase was more than offset by growth in EBITDA. Other Luxury brands (in millions) First-half 2017 First-half 2016 Change Revenue % Recurring operating income % as a % of revenue 4.0% 6.0% -2.0 pts EBITDA % as a % of revenue 7.7% 9.8% -2.1 pts Gross operating investments % Average FTE headcount 5,819 5, % Revenue First-half 2017 First quarter Second quarter m Reported change First-half % First-half m Comparable change +10.1% Sales generated by Other Luxury brands whose scope of consolidation remained unchanged during the period rose 10.1% at constant exchange rates in the first half of The Couture & Leather Goods brands posted a very solid 13.4% revenue increase, despite a negative contribution from Brioni. Sales of Watches & Jewelry brands rose by a very satisfactory 5.9%. The wholesale network was once again the main distribution channel for Other Luxury brands, accounting for 53.3% of sales. This proportion reflects the differing stages of development of the Couture & Leather Goods brands as well as the specific distribution characteristics for Watches & Jewelry. Overall, sales generated in the wholesale network increased 5.1% year on year on a comparable basis, with very good First-Half Report Kering

28 2 Financial information for first-half 2017 Activity report performances delivered by Balenciaga and Alexander McQueen but a year-on-year decline reported by Brioni, which is currently restructuring its distribution system. First-half % 57% Sales in directly operated stores Wholesale sales and other revenue (including royalties) 897.5m Retail sales in directly operated stores climbed 20.6%, with all brands experiencing positive trends, including Brioni. Balenciaga was the star performer, registering higher growth in all of its regions and product categories. Revenue by region Other 10% Asia Pacific 19% Japan 9% Western Europe 46% North America 16% Sales of Other Luxury brands were up across all regions in first-half 2017, except for North America where they decreased 3.3% due to low volumes of purchases in US department stores. Western Europe posted a 15.7% revenue rise, powered by brisk sales momentum in the United Kingdom, a recovery in France, and good performances in the region s other main markets. Japan also turned in a positive showing, with revenue up 7.2% thanks to strong demand from Japanese customers for Demna Gvasalia s collections for Balenciaga. In emerging markets year-on-year growth amounted to 11.1%, closely reflecting the trends seen in the Asia Pacific region (excluding Japan) where sales were up 11.9%. Performance in this region was fuelled by an ongoing sales recovery in Mainland China and South Korea and improved business volumes in Hong Kong and Macau. Revenue by product category Leather Goods 20% Shoes 15% Other 8% Readyto-Wear 30% Watches & Jewelry 27% Recurring operating income The Watches market seemed to stabilise overall during the first half of 2017 although the situation remained volatile from one month to the next. Within this context and in light of all the measures put in place to improve the performance of the Group s Watches brands, sales of this product category decreased during the period but by a very contained amount and there were even positive trends in many countries. Excluding Watches, all other product categories reported sales growth for the six months ended June 30, Recurring operating income for Other Luxury brands retreated by 13 million year on year to 36 million in the first half of 2017 and recurring operating margin narrowed by 200 basis points to 4.0%. The decrease in profitability compared with the first half of 2016 was due to a higher cost base for Boucheron and, to a lesser extent Pomellato, due to the Group s decision to invest in its Jewelry brands and cultivate their organic growth by strengthening their structures, increasing their marketing and communications expenses, and on a more long-term basis supporting their store opening strategy First-Half Report Kering 26