On September 1, 2004, the Pinault-Printemps-Redoute Supervisory Board, chaired by Patricia Barbizet, met to examine the Group's financial statements for the six months ended June 30, 2004, as approved by the Management Board and certified by the Statutory Auditors.
Commenting on Pinault-Printemps-Redoute's performance in the first half of 2004, Serge Weinberg, Chairman of the Management Board, stated: “Our first-half results are tangible evidence of the soundness of the strategic shift implemented by the Group over the last 18 months. The outstanding operating results and marked improvement in free cash flow of the 'New PPR' underscore the strong performance of the Group, which combines sustained organic growth, high and growing profitability, and strong cash flow generation. Renewed buoyancy in Luxury Goods and increased operating efficiency in the Retail sector give us great confidence for the future.”
Strong growth in sales on a comparable basis
Reported Group sales of € 11,370.5 million in the first half of 2004 reflect a negative impact of € 1,359.3 million attributable to changes in the Group structure, € 253.7 million from exchange rate fluctuations and a negative calendar effect of € 80 million. Sales were up 5.9% on a comparable basis in terms of Group structure, exchange rate and number of days. The 7.4% increase in pro-forma sales of the “New PPR” was attributable to sales growth of 6.7% in Retail and 11.1% in Luxury Goods. In France, Retail sales rose 5.5% on a comparable basis in terms of Group structure, exchange rate and number of days, while the stronger consumer spending environment enabled Retail companies to gain market share in most product categories. Retail sales outside France rose 7%, reflecting the Retail companies continuing international expansion. E-commerce posted spectacular growth of 39.7%, confirming its outstanding potential and its ability to attract new categories of customers to the Group's brands. Luxury Goods sales increased during the period from November 2003 to April 2004, reflecting strong sales performances by the Gucci Division, up 13.7%, Yves Saint Laurent, up 12%, and particularly Bottega Veneta, up 45.8%.
Robust operating performance
Reported operating results confirm the soundness of the strategic shift undertaken by the Group. The increase in reported gross margin, up 0.6 point to 38.5%, and operating margin, up 0.3 point to 5%, were mainly attributable to the Group's strategy of focusing on its most profitable activities.
Pro-forma operating results were underpinned by strong gross margin and tight cost control.
On a pro-forma basis, gross margin grew by 6.7% to € 4,380.2 million, driven by improved margins at Rexel, up 5.8%, and a 6.9% increase in gross margin at the 'New PPR', as purchasing efficiencies helped offset various unfavorable mix effects. The pro-forma gross margin remained stable at 38.5%.
The increase in pro-forma payroll expenses was limited to 4.1% thanks to substantial productivity gains. The ratio of payroll expenses to gross margin improved by 1 point to 37.7%. Other operating income and expenses rose 6.4% on a pro-forma basis, primarily due to new business development.
Underpinned by these positive developments, pro-forma Group EBIT rose by 15.6%, driven by improved operating performances at Rexel, up 18.8%, and the 'New PPR', up 14.6%. Despite disappointing results in February-April, the Luxury goods activities recorded a 33% increase in EBIT in the first half. The Gucci brand reported a 6.1% increase in EBIT while Bottega Veneta, Boucheron and the designer brands considerably reduced their operating losses. Retail division EBIT grew by 4.7%, thanks to productivity gains and tight cost control. Nearly all of the Retail companies recorded growth in operating results for the period.
Pro-forma operating margin rose by 0.4 point to 5%. This significant increase was driven by improved operating profitability at Rexel, up 0.5 point to 4.1%, and the “New PPR”, up 0.3 point to 5.4%, due to a sharp rise in Luxury Goods, up 1.9 point.
Marked improvement in financial income
Net financial expenses declined 9.7% to € 153.2 million, primarily reflecting lower average net financial indebtedness during the half -year as a result of earlier strategic disposals.
Strong growth in results
– Non-recurring expenses amounted to € 12.7 million and encompassed: € 195.4 million in net gains on the sale of assets, primarily linked to the sale of an additional 14.5% stake in the consumer credit business; restructuring expenses of € 59 million, of which € 51 million in Luxury Goods; and other non-recurring items including the write-down of certain Luxury Goods assets, for € 147.7 million, and Rexel assets, for € 35.5 million, along with the reversal of provisions on treasury stock in the amount of € 29.1 million.
– The Group's tax expense of € 117.3 million for the period included an € 8.5 million tax charge on non-recurring income and a € 40.5 million tax charge arising from the capital gain on the sale of the 14.5% stake in the consumer credit business. The effective tax rate came to 26% versus 25% in the second half of 2003.
– Net income of consolidated companies rose 30.1% to € 286 million in the first half. Group net income surged 61.5% to € 191.1 million. Excluding non-recurring items, Group net income stood at € 202.7 million, up by 0.3%.
Financial structure and cash flow
Free cash flow from operations improved by € 375.6 million compared to the same period last year. This sharp improvement reflects: an increase in the Group's net cash from operating activities to € 531.3 million over the period, up 4.6% on a reported basis and 15.1% after adjusting for disposals; a sharp decline in working capital requirements, notably in Luxury Goods and the reduction in net capital expenditure (€ 187.4 million in H1 2004 vs € 233.3 million), in line with Group strategy.
Consolidated shareholders' equity amounted to € 7,540.9 million at June 30, 2004, a drop compared with June 30, 2003, due to the increased stake in Gucci Group. Shareholders' equity – Group share rose by 6.1% to € 6,949.2 million.The change in Group net indebtedness at June 30, 2004 was mainly attributable to the previously announced impact of the acquisition of minority interests in Gucci Group in April and May 2004.
Highlights of the first half of 2004: Strategic shift continues
– Successful completion of offer to purchase Gucci Group shares:
Pursuant to the commitment made in September 2001, Pinault-Printemps-Redoute completed an offer to purchase all of the outstanding Gucci Group shares not already owned by the Group. Following the tender offer, Gucci Group shares were delisted from the New York and Amsterdam stock exchanges, and Pinault-Printemps-Redoute now holds 99.39% of the share capital of Gucci Group. Pinault-Printemps-Redoute has initiated proceedings with the Commercial Court in Amsterdam for the withdrawal of Gucci Group shares.
– New management team and organisation at Gucci Group:
Alessandra Facchinetti, John Ray and Frida Giannini have been appointed as creative directors of Gucci's womenswear, menswear and accessories, respectively. Stefano Pilati has been appointed creative director of Yves Saint Laurent.
Robert Polet assumed his functions as Chief Executive Officer of Gucci Group as of July 1, 2004.
– Sale of an additional stake in Finaref:
As part of its program to dispose of non-strategic assets, Pinault-Printemps-Redoute sold an additional 14.5% stake in its consumer credit business to Crédit Agricole in late March. The Group will retain a 10% stake in Finaref as part of a long-term partnership in the business.
Other highlights of the period
– Retail division expands and optimizes its commercial operations
Retail companies continued to expand in France and abroad.
While continuing its strategy of new store openings with a strong emphasis on international development, Conforama is actively pursuing the deployment of its new store format, with extremely positive results. Fnac is reinforcing its leading positions mainly in cultural goods and the most innovative technological products in France and is expanding its footprint abroad. In addition to opening new stores in established markets, Fnac recently signed a partnership agreement with the Greek retailer, Marinopoulos Group.
Redcats is accelerating the development of its leading brands in France and consolidating the presence of its home-grown brands on overseas markets, particularly in Europe. In the US, Redcats USA is implementing an action plan to restore sales growth through a combination of innovative marketing and merchandising initiatives and the introduction of a new overstocks activity, which will help offset the phase-out of its activities with Sears. Printemps is boosting sales through its program to reallocate selling space and the development of its Sports division and Madelios.
CFAO is successfully pursuing its development in North Africa and consolidating its leading positions in its core businesses in the automobile, pharmaceuticals and high technology sectors.
– Reinforced financial structure
In late March, the Group completed a € 650 million bond issue with a 5.25% coupon, maturing in 2011. This was followed by an additional € 150 million tranche in July 2004. The Group thus continues to strengthen its financial structure by diversifying its sources of funding and extending the maturity of its debt.