(News Bulletin 247) – The luxury group’s shares are suffering this Tuesday after warning that its sales will fall by around 10% in the first quarter on a comparable basis.

Alongside the British Burberry, Kering has the reputation of representing one of the two sick men of luxury, at least on the stock market level.

The company’s communication on Tuesday evening is unlikely to change this image among investors. Taking the market by storm, the company led by François-Henri Pinault issued a heavy warning on its revenues.

The former PPR indicated that it anticipated a decline in its revenues on a comparable basis of around 10% over the first three months of the year. This turns out to be much stronger than the drop anticipated by the independent research firm AlphaValue, which expected a decline of 0.5%, when the consensus of analysts was more broadly at -4%.

This poor performance is mainly due to the flagship brand Gucci, which last year represented around half of Kering’s revenues and around 70% of its current operating profit.

Due in particular to weak dynamics in the Asia-Pacific region, the Italian label’s sales are expected to decline by 20% on a comparable basis, Kering warned. Analysts had anticipated a plunge in sales for the transalpine brand but not as pronounced. The consensus cited by AlphaValue retained a drop of 7% on a comparable basis.

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Consumer wait-and-see attitude?

Kering did not specify the extent of Gucci’s decline in Asia-Pacific. But given the company’s communication, Stifel estimates that they collapsed by more than 30% year-on-year in the first three months of the year.

“Chinese consumers are perhaps expecting something new from Gucci’s new creative director (Sabato de Sarno, Editor’s note), whose new collection has only been available in certain Gucci stores since mid-February,” explains the bank. “The availability of its new collections will be gradually increased until the end of June, thanks to greater marketing reinvestment,” continues Stifel.

Gucci is currently in the midst of a transition. To breathe new life into the brand, Kering recruited last year a young Italian artistic director, Sabato de Sarno, a defector from Valentino, who took over from Alessandro Michele.

Its first collection, Ancora, was presented during the fall fashion week in Milan for women and in January, also in Milan, for men.

“The first products from the Ancora collection began to be available in certain Gucci stores since mid-February and mainly in the ready-to-wear category. The new collection, whose deployment should gradually accelerate over the coming months, receives a very good reception”, assured Kering on this last point.

Last year, Kering also appointed Jean-François Palus, previously deputy general manager of the group, to the position of CEO of Gucci in order to strengthen operations.

All luxury under pressure

For now, Kering’s heavy warning has been harshly punished on the stock market, with shares falling 14.3% around 10:30 a.m. It’s difficult to know whether Kering’s sales plunge is solely linked to the company’s intrinsic difficulties or whether it illustrates a certain weakness for luxury.

“The entire sector could be down tomorrow (Wednesday, Editor’s note) due to concerns about a slowdown in China, particularly after the strong performance (stock market of the sector, Editor’s note) since the start of the year, which brought its valuation in line with the 5-year average compared to the market, despite the slowdown in growth”, explains UBS in a note published Tuesday evening.

LVMH and Hermès shares were in fact pulled down this Wednesday by the fall in Kering shares, with respective declines of 3% and 1.6%.

The second semester as a justice of the peace?

Coming back to Kering, Royal Bank of Canada considers that this warning means that Gucci’s margins should come under pressure in the first half as well as for the whole of 2024, which could push the company’s management to reconsider the low is its profitability forecast for the Italian brand (a drop of at least around 5% in current operating profit in 2024).

“However, with Gucci still at the beginning of its turnaround and new products expected to expand over the coming months, we believe more time is needed to gauge customer response. Specifically, By the middle of the year, 30% (or all) of Gucci’s seasonal products will have adopted the new Sabato De Sarno aesthetic, and we hope to see better visibility then (advertising, marketing, adoption by celebrities and influencers, etc…)”, develops Royal Bank of Canada.

Stifel is being cautious, while Kering will have to reinvest in its brands, especially Gucci, to drive its growth strategy. “We believe it is more difficult for Gucci to quickly turn around its brand while improving it, as industry trends soften and normalize,” the bank explains.

“Investors believe in the long-term ability of Kering’s portfolio to generate strong results, but they need to see evidence of Gucci’s ability to regain market share lost to its main rivals in 2020- 23 or at least to see some encouraging signs in the new Sabato de Sarno collections: this should first be more evident in the second half of 2024, in our opinion”, she elaborates.

“The stock (Kering) remains a story for the second half when we will be able to better assess the results of the new creative direction of the brand,” adds UBS.

“The indication of a very favorable reception of the new collections is certainly encouraging but given the acceleration of the decline in sales in the first quarter which affects the pre-existing and therefore the permanent products, the transition to a new Gucci promises to be difficult”, concludes Oddo BHF