Kering sees profits rise, but massive fine looming

French luxury group Kering has had a spectacular 2018: the parent holding of Gucci and other luxury brands increased its turnover by 29.4 % and net profits even doubled. Still, there are dark clouds on the horizon: the company is facing a multi-billion euro fine.

Profits double, margin rises

Last year, Kering sold 13.67 billion euros worth of luxury apparel and accessories. As a result turnover increased by 29.4 % on a comparable basis. The fashion group is performing as expected and did well in every market. Kering calls it “sustainable” growth, indicating that 2017 was already a very strong year, so the base for comparison was already very high.

Net profit doubled to 3.71 billion euros, while gross profits rose by 46.6 % to 3.94 billion euros – a new record for Kering. Over the past two years, operational profits also doubled. In addition, the operational margin saw a sharp increase at 28.9 %. Finally, Kering has a strong cashflow of almost 2.96 billion euros.

Gucci remains strongest brand

Gucci remains the group’s most important brand, but Saint Laurent, Balenciaga and Alexander McQueen also had a strong year. The former brought in 36.9 % more turnover on a comparable basis. Saint Laurent improved by 18.7 %. Only Bottega Veneta was less successful, losing 3.4 % as they were looking for a new creative director.

CEO François-Henri Pinault responds enthusiastically. “2018 was a great year for Kering and its houses. We outperformed the industry by a considerable margin. In a generally favourable but increasingly complicated market, Kering generated 2.8 billion euros of additional turnover and 1.3 billion euros of extra EBIT compared to 2017.”

1.4 billion euros of taxes evaded?

Despite all the good news, Kering is also being threatened by a dark cloud. The luxury group allegedly evaded taxes through a Swiss subsidiary. The French group was forced to admit to a looming fine of 1.4 billion euros, according to the tax authorities’ preliminary investigations. 

The problem lies with Swiss subsidiary Luxury Goods International (LGI), which channeled off international revenue, mostly from wholesale to department stores and Gucci’s retail partners. A large amount of orders from Milan and Paris are said to have been billed in Switzerland between 2011 and 2017.

Kering formally denies the allegations and is as yet unwilling to set anything aside for the possible fine. The group claims the Swiss company is a legitimate business that employs 600 people for supplies, billing and logistics. French and other tax authorities are aware of the subsidiary’s business model, the group says.