By Mimosa Spencer and Tassilo Hummel

PARIS, Oct 22 (Reuters) - Kering's overall group sales

fell 5% on a like-for-like basis, the French group said on

Wednesday, beating market expectations thanks to the performance

of its smaller brands despite ongoing troubles at flagship label

Gucci.

A 14% drop in Gucci's sales marked a seventh consecutive

quarterly double-digit decline for the brand, which accounts for

more than half of group profit, but Kering's comments on

improvement in key markets China and the United States further

fuelled newfound optimism in the sector.

In the first trading update under newly-appointed CEO Luca de

Meo, hired to accelerate a turnaround after two years of falling

sales, Kering said revenue in the July to September period

reached 3.42 billion euros ($3.98 billion).

Analysts expected group sales to fall 9.6% with Gucci down

about 15%, according to Visible Alpha data. Smaller houses Yves

Saint Laurent and Bottega Veneta performed more strongly than

expected, lifting overall group results.

"Kering's third-quarter performance...remains far below that

of the market," de Meo said in a statement. "We are working

relentlessly on our turnaround, as shown by our recent

decisions," he added.

Kering shares have risen 85% since de Meo's hire was

announced in June, well ahead of a 12% gain for the STOXX Europe

Luxury 10 over the same period, as investors bet on

rapid restructuring and a refocus on core fashion.

CHINA TRENDS IMPROVE

De Meo, a former Renault boss whose package included a 20

million euro sign-on bonus in addition to fixed and variable

annual pay, is racing to streamline the group, cut debt and

steer resources toward Gucci's revival.

This week, the firm announced the $4.7 billion sale of its

beauty arm to L'Oréal with de Meo flagging more deals to come.

Trends in China improved markedly over the last quarter,

Kering's Chief Financial Officer Armelle Poulou told journalists

on a call, echoing similar remarks from LVMH and

Hermes.

"Our performance remained negative in China but showed

substantial sequential improvement," Poulou said, adding that

other regions also improved.

LVMH last week reported better-than-expected quarterly sales,

sparking a rally in luxury stocks on hopes the sector's

prolonged slump in China and among aspirational consumers was

easing.

Under the creative direction of former Balenciaga designer

Demna, appointed this year amid a wider reshuffle in the

industry, Gucci last month rolled out a fast-track "see now, buy

now" approach in a bid to regain momentum.

The collection was praised by fashion observers and led to an

uptick in store traffic, but Kering warned it would take time

before the new styles would help significantly lift sales.