Kering upbeat on Gucci prospects and China

PARIS (Reuters) - France’s Kering offered up a bullish view of the Chinese market and said its star brand Gucci started 2019 on a good footing, in what is already shaping up to be a year of contrasting fortunes across the luxury goods industry.

Along with Louis Vuitton owner LVMH, the Paris-based conglomerate defied fears of cooling demand for high-end handbags and fashion in China as the economic backdrop soured in the fourth quarter.

Kering shares reversed earlier losses and were up 2.8 percent by 1230 GMT on Tuesday after the firm said favorable trends at Gucci, which accounts for over 80 percent of its operating income, had stretched into January.

“It was a good start to the year for Gucci, very good, in line with the trends seen in the fourth quarter,” Kering’s Chairman and Chief Executive Francois-Henri Pinault, the son of the group’s founder, told a news conference. “In terms of the momentum with Chinese clients, it’s very strong.”

Chinese shoppers make up over a third of global demand for luxury goods but shifting spending patterns are hitting some companies more than others, with purchases increasingly repatriated to mainland China, in part due to a weaker yuan.

Some U.S.-based groups like Coach-owner Tapestry have felt the pinch from a fall in tourist shopping, while Hong Kong’s big watch market suffered, affecting the likes of Swatch.

Kering’s comparable sales rose 24.5 percent on a reported basis to 3.8 billion euros ($4.29 billion) in the October to December period, while annual profits hit a record 3.7 billion euros. The group hiked its dividend by 75 percent to 10.5 euros per share.

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The group has its own challenges, however. With new designer Daniel Lee, it is trying to draw a line under sliding sales at high-end handbag maker Bottega Veneta. Kering said early orders for his ranges were encouraging.

Meanwhile, the group faces a potential 1.4 billion euro tax bill for allegedly avoiding tax on earnings generated by Gucci in Italy and billed to a Swiss subsidiary.

Kering is disputing the basis of the claim and the amount. Pinault said the affair should be wrapped up this year but declined to comment on how big a potential settlement could be.

More broadly, Kering’s reliance on Gucci has raised questions over the sustainability of the brand’s recent sales boom, the result of a flamboyant revamp under designer Alessandro Michele that made it a hit with younger shoppers.

Pinault said Gucci could do better in areas like its perfume lines, adding that the brand still had room to grow its in store and e-commerce sales.

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.

The brand’s fourth quarter comparable sales rose by 28 percent, a slowdown from 35 percent in the previous three months but still far faster than most industry rivals.

With a growing cash pile estimated by analysts at Berenberg at around 10 billion euros, Kering is seen as a potential industry consolidator. The group said on Tuesday it was focused on developing existing labels but was in a financial position to seize on potential opportunities.

Reporting by Sarah White and Pascale Denis; Editing by Kirsten Donovan