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The French megabrand blew past $12 billion in sales in 2019, but it's not immune to the devastating financial effects of the coronavirus pandemic and expects to see significant contraction well into next year.

PARIS, France — Chanel, owned by the secretive Wertheimer family, kept its finances private for over 100 years, leaving analysts to estimate the performance of what has become one of world’s most successful luxury megabrands. But starting with its 2017 fiscal year, Chanel reversed course, releasing its annual results each June because, the company has said, consumers are demanding greater transparency from the brands they buy.

On Thursday, Chanel announced 2019 sales of nearly $12.3 billion, up 10 percent from $11.1 billion in 2018 — a 13 percent jump when adjusted for currency fluctuations. Operating profit for the period was $3.5 billion, up close to 17 percent on the previous year. While the company cut back on capital expenditures, like new store openings — which accounted for $771 million (or 6.3 percent of total sales) in 2019, down from $1 billion (or 9.1 percent of total sales) the year before — it invested almost $1.8 billion in “brand support activities,” which include advertising, marketing and events like runway shows. Free cash flow was almost $2.3 billion in 2019, up nearly 85 percent year over year.

While the company doesn’t break out sales for individual product categories, it reported a double-digit percentage increase in its fashion segment across regions and lines, which include ready-to-wear, couture, shoes, handbags and other personal accessories, noting that the collections designed by Creative Director Virginie Viard, a longtime right hand of Karl Lagerfeld, who passed away in February 2019, performed particularly well, with ready-to-wear up 28 percent year over year. Viard’s collections, which have received good but not glowing reviews from critics, are more commercial than her predecessor's.

“It was a very easy and smooth transition,” Chanel Global CFO Philippe Blondiaux told BoF. “At the same time, for some [customers], [her designs] are slightly more feminine, simple and easy to wear.”

Sales of watches and jewellery grew by double digits as well, while fragrance and beauty — by far the company’s biggest contributors to overall revenue — experienced “robust” growth, though the brand declined to disclose further details.

Despite the positive momentum, Chanel’s 2020 results are set to be significantly down due to the Covid-19 crisis, which has forced store closures and crushed consumer demand for luxury goods. The company warned the fallout would severely damage sales for the next year or two. (The overall market for personal luxury goods is expected to contract by up to 35 percent in 2020, according to Bain.)

“There are reasons to be increasingly bearish for 2020,” Blondiaux said. “This isn’t not a question of three months, but a question of 12-18 months.”

Chanel’s iron-clad brand may offer some degree of protection, but the company has been cautious in its approach to e-commerce, part of a deliberate strategy to focus on its physical boutiques and maintain the perceived exclusivity of core products.

Government measures to slow the spread of the pandemic forced Chanel — which sells fragrance, cosmetics and certain accessories online but not ready-to-wear and handbags — to temporarily close stores in every region in early 2020. Currently, 15 percent of Chanel’s stores remain closed, mostly in the US, where the pandemic has hit hard.

The company has seen tremendous growth in sales of beauty and fragrance products made via its own online channels, up by 60 percent year to date, with significant spikes in April and May. This, combined with its sales through Alibaba’s Tmall in China, has resulted in a tripling of total online sales in beauty and fragrance, Blondiaux said.

Chanel remains adamant that it doesn’t need e-commerce for fashion and accessories, and that its customers value the in-store experience. Instead, the brand has put an increased emphasis on digitally “augmented” physical retail, making it easier for store employees to sell products virtually through customer relationship management systems, if not a website. (For the first time since it began publishing an annual report, the company used the word “omnichannel” to describe its sales strategy.)

Analysts agree that Chanel may be able to skip traditional e-commerce for core category products, instead using "digitally enabled" sales associates to process transactions, whether that means through SMS, WhatsApp or Instagram direct message. "I wouldn't worry too much about Chanel," said Bernstein analyst Luca Solca.

As lockdowns have eased, Chanel has seen an uptick in sales with local clientele in every region, particularly Asia and Western Europe, but Blondiaux warned that these gains will not be enough to compensate for losses from tourists, both in boutiques and airports. “The duty-free business is so important, but even more for fragrance,” he said. “It’s going to take a lot of time.”

Price hikes for certain Chanel products — including its classic handbags — raised eyebrows in May, given what Covid-19 has done to consumer demand for luxury goods. Some analysts suggested the move appeared designed to pad margins and cushion the impact of lower overall sales volumes after weeks of store closures, with a price hike contribution to top-line growth expected to be in the single digits. But Blondiaux said the price increases were, instead, made as a part of the company’s long-term “price harmonisation” strategy to balance prices across regions, accounting for currency fluctuation and the rising cost of high-quality raw materials.

“We haven’t done this price increase to compensate,” he said. “We regularly have to adjust prices to adjust for the cost of raw materials and changes in currency.”

In the past few weeks, civil rights protests in the US and beyond have compelled consumers and employees alike to hold corporations like Chanel accountable for the lack of diversity in their teams. Chanel hired a chief diversity officer in 2019 but has yet to publicly communicate concrete actions on the topic.

Blondiaux said that managers and leaders have received diversity and inclusion training and that the company had made changes to its recruiting protocols. "We have taken a number of actions over the last few years," he said. “Diversity and inclusion is at the heart of our recruitment process. We all have unconscious biases, and it's really present during each interview. We have to find ways to eliminate them."

Chanel expects a significant decrease in sales and profits — “topline, bottom line and cash flow” — in both 2020 and 2021. But it does not plan to stop investing in the business. Vertical integration — Chanel owns approximately 35 of its suppliers, from a feather specialist to a hatmaker — is key to its future, especially as competitors LVMH and Kering move to exert greater control over their own supply chains.

“That control that we have gained in the last 10 years, is, to a large extent, unique in the fashion industry,” Blondiaux said. In 2020, capital expenditures are expected to reach $700 million, and $800 million in 2021.

Move brings to an end largely ineffective ban aimed at forcing app to comply with secret services

Russia has unblocked Telegram, ending a largely ineffective two-year ban aimed at forcing the messaging app to comply with Moscow’s secret services.

Roskomnadzor, the country’s internet censor, announced on Thursday that it would lift the ban after Telegram’s Russia-born founder Pavel Durov said it had improved its efforts to moderate and remove “extremist propaganda”.

The move is a rare climbdown amid the Kremlin’s increasing attempts to bring online dissent to heel and increase its already broad surveillance powers. It also reflected an admission of the limits of those powers to stop Telegram, which remained widely available and popular even among Kremlin-linked figures themselves.

“Turns out Telegram was blocked this entire time,” Margarita Simonyan, editor of government-funded TV channel RT and state news agency Rossiya Segodnya, wrote on the app. “It didn’t really stop anyone, but this calms things down a bit.”

Telegram’s easy-to-use, customisable interface and focus on privacy has made it beloved of 400m users around the world, ranging from cryptocurrency enthusiasts and protesters in Hong Kong and Iran to jihadis and the far-right.

Roskomnadzor blocked Telegram in 2018 after Mr Durov refused to give the FSB, the successor agency to the KGB, access to its encrypted “secret chats”, which it claimed were used by terrorists. Western governments and independent researchers have also criticised Telegram for being slow to weed out hate and terror groups.

Those efforts, however, were largely fruitless. Though Roskomnadzor took more than 16m IP addresses offline — including its own website — Telegram actually increased its user base in the country from 10m to 30m.

Russian officials, including Kremlin spokesman Dmitry Peskov, remained active on the app despite the ban. Government agencies used it for messaging on the coronavirus pandemic and to co-ordinate efforts to repatriate Russians stranded abroad because of flight restrictions.

“There is a court ruling, and actions to block [the app] were based on it. But you're right, it's true, the situation de facto is different,” Mr Peskov told reporters in April.

Roskomnadzor moved to lift the ban after lawmakers introduced a bill to unblock Telegram earlier this month. Mr Durov responded by saying that “fighting terrorism and the right to private correspondence are not mutually exclusive” and argued that making the app “more convenient” for Russians “would have a positive effect on innovation and national security”.

Russian news agency Interfax cited an anonymous “source in Russia’s power structures” who said that Telegram had not given the intelligence services decryption codes to its secret chats but had co-operated on specific terrorism and extremism-related requests.

The source also claimed that Russia now had additional antiterrorism powers thanks to a plan for a “sovereign internet”, approved last year, that centralises filtration and blocking powers in the hands of Russian censors.

Telegram claimed that handing over decryption keys was impossible because regular chats were divided between the users and held on cloud servers, while its “secret chats” changed the encryption every few minutes and automatically deleted data without storing it.

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Purchase from PAI Partners comes as holidaymakers plan breaks closer to home in wake of pandemic

KKR has agreed to buy Dutch holiday parks company Roompot, in a €1bn deal that marks the latest in a spree of acquisitions by the US private equity group during the pandemic.

The buyout firm will acquire Roompot, which runs campsites and holiday homes in Denmark, the Netherlands, Germany, Belgium, France and Spain, from Paris-based private equity firm PAI Partners, the companies said.

The deal comes even as Roompot has been hit hard by the lockdowns and travel restrictions imposed since the coronavirus pandemic began. Revenues were down about 50 per cent in March and 70 per cent in April compared with the same time last year, according to Moody’s, which this week lowered its credit outlook on the company to negative.

Moody’s said Roompot was vulnerable to the fallout from a possible second wave of coronavirus infections and a prolonged recession, though it had benefited from a “surge in demand” from domestic customers in recent weeks.

“There has been a trend towards staycation [and] this crisis is accelerating that because of the limitations on international travel and people being worried about airports and flights,” said Daan Knottenbelt, partner and head of the Benelux region at KKR, which has $207bn in assets under management.

Holiday parks have an “incredible degree of resilience through recessionary times because people trade down in terms of their discretionary spending”, he said.

The Dutch company generated €82m in adjusted earnings before interest, tax, depreciation and amortisation in 2019, according to Moody’s, indicating a deal price of more than 12 times earnings despite the uncertain outlook.

Roompot had planned to launch a formal sale process in March, but called it off when the pandemic hit so executives could focus on responding to the crisis with new safety and social-distancing measures.

However, KKR approached PAI Partners with a “positive view on the asset” and was “ready to do a deal in a very [quick] manner”, said Gaëlle d’Engremont, a partner at PAI, which has owned Roompot since 2016.

The sale had been expected to fetch about €1bn last autumn, before the pandemic roiled markets, according to local news reports at the time.

“We didn’t accept a discount because of the crisis, because we believe going forward the business will not be affected,” said Ms d’Engremont.

KKR has been the most active private equity firm worldwide since the crisis began, investing in deals worth at least $16.9bn since the beginning of March, according to data from Refinitiv. It is investing from a fund that specialises in longer-term deals where it can own a business for 10 years or more.

Roompot’s sites are open this summer, including playgrounds, swimming pools and even facial treatments, according to its website, and it has introduced disinfectant stations and limits on the numbers of people using facilities.

Cases of Michael Spavor and Michael Kovrig, first detained over 18 months ago, are seen as retribution for Canada’s arrest of a Huawei executive

HONG KONG—Chinese prosecutors have formally indicted two Canadian citizens on espionage charges, more than 18 months after the men were first detained, advancing a pair of cases widely seen as retribution for Canada’s arrest of a well-connected Chinese Huawei executive.

Michael Kovrig, a researcher and former Canadian diplomat, was accused of “probing into state secrets and intelligence” on behalf of foreign actors, while entrepreneur Michael Spavor was accused of “probing into and illegally providing state secrets” to foreign actors, according to separate announcements issued Friday by municipal prosecutors’ offices in Beijing and the northeastern city of Dandong.

Neither office identified the alleged foreign actors.

Messrs. Kovrig and Spavor were first detained on the same day in December 2018 by state-security officials from Beijing and Dandong, respectively. The allegations against the two men can carry heavy prison sentences.

Neither of them could be reached for comment, and it wasn’t known whether they have legal representation. The Canadian Embassy in Beijing referred a request for comment to Ottawa.

Chinese officials haven’t formally linked the two Canadians’ cases. A March 2019 report published on the news website of the Communist Party’s law-enforcement commission accused Mr. Spavor of being an important contact who supplied intelligence to Mr. Kovrig, citing unnamed government agencies.

Legal experts and the two men’s backers have accused China of detaining them to retaliate against Canada’s decision to arrest Meng Wanzhou, the chief financial officer of Chinese tech giant Huawei Technologies Co. and its founder’s daughter.

Ms. Meng’s arrest in December 2018—made at Washington’s request—has embroiled Canada in a broader diplomatic row between the U.S. and China. Shortly after her arrest, a senior Chinese Foreign Ministry official threatened Canada with “severe consequences,” and Messrs. Kovrig and Spavor were detained days later.

U.S. prosecutors have alleged that Ms. Meng took part in bank fraud to circumvent American sanctions against Iran. She has denied the charges and is out on bail in Vancouver awaiting extradition proceedings. Her lawyers told a Canadian court this week that the U.S. has wrongly accused her of lying to banks about the Chinese company’s business ties to Iran.

Washington has mounted a multifront campaign depicting Huawei as a security risk, telling allied and friendly governments that its networking equipment will enable Chinese government espionage. Huawei has said it has never spied on others or been asked to.

Ms. Meng lost an important legal battle last month when a British Columbia judge ruled that the U.S. had met a test to extradite her to the U.S. The judge has agreed to other hearings in the coming months to consider Ms. Meng’s claim that she was unlawfully searched and interrogated before her 2018 arrest at the airport.

Since their detention, Messrs. Kovrig and Spavor have been held in solitary confinement and subjected to frequent interrogations, according to people familiar with their cases. Each man had been allowed regular visits from Canadian consular officials, though those have been suspended because of the coronavirus pandemic.

Messrs. Kovrig and Spavor have each worked in China for several years and share an interest in North Korea. A person who knows both men has said they were acquainted with each other.

Mr. Kovrig, a Mandarin speaker, was on leave from Canada’s diplomatic service and was working as an analyst with monitoring group International Crisis Group. Based in Hong Kong and traveling frequently to China, he was researching North Korean affairs and drafting a report on that country when he was detained, his friends say.

Mr. Spavor led academic, tourist and business delegations on visits to North Korea through his nonprofit Paektu Cultural Exchange. A fluent Korean speaker, he had traveled with Dennis Rodman, the retired American basketball player, to Pyongyang, where they met North Korean leader Kim Jong Un.

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