by Mimosa Spencer

PARIS (Reuters) – Kering said on Tuesday it anticipated a “significant” drop in its current operating profit in the first half, weighed down by the persistent difficulties of its flagship brand Gucci, whose sales fell in the first quarter.

“Given the deterioration in turnover trends, the group now anticipates a decline in its current operating income for the first half of 2024 of around 40% to 45% compared to the first half of 2023,” said the luxury group led by François-Henri Pinault.

Kering recorded a 10% drop in like-for-like revenue for the first three months of the year, to 4.504 billion euros, compared to the first quarter of 2023.

Gucci’s sales fell 18% to €2.079 billion, following a 4% drop in the previous quarter.

These figures correspond to the order of magnitude revealed to the markets on March 19 by the group: Kering had said it expected a decline of around 20% in Gucci sales over the period due to weak demand in Asia. He had also forecast a decline in total sales of around 10%.

Analysts have since expected a drop in like-for-like sales of 9% and 14% for Gucci, according to a Visible Alpha consensus cited by UBS.

This performance, well behind the 3% organic growth posted by competitor LVMH in the first quarter, illustrates the difficulties encountered by Kering, which seeks to revive the dynamic of Gucci while facing difficulties in key markets, in particular the China where the expected recovery after the lifting of health restrictions linked to Covid collided with the real estate crisis.

“It is not surprising that brands in transition may experience greater difficulties in an environment where demand slows, as consumers focus their spending on must-have brands. The magnitude of the drop in profits is nevertheless surprising to the decline”, judge Bernstein analysts.

THE “FAIRLY POLARIZED” CHINESE MARKET

“The market at the moment in China is quite polarized between customer appetite for very high-end products or for more affordable products,” said Kering financial director Armelle Poulou during a conference call with journalists. .

“Gucci at the moment is more positioned in the middle so does not benefit from this polarization. (…) This is the situation today, it can change quickly,” she added.

The brand also suffers from the fact that Chinese consumers wait to see the new collections arrive in stores, Armelle Poulou noted.

Gucci, which accounts for nearly half of the group’s sales and two-thirds of its operating profit, is undergoing an overhaul under the creative direction of Sabato de Sarno, whose first designs appeared in stores at the mid-February, and seeks to regain ground lost in recent years to rivals such as Louis Vuitton and Dior, owned by LVMH.

“Kering’s performance deteriorated significantly in the first quarter. While we anticipated a difficult start to the year, market conditions, particularly in China, and the strategic repositioning of some of our Houses, starting with Gucci, have increased the pressure on our turnover,” commented François-Henri Pinault in the group’s press release.

“Given this decline and our determination to continue to selectively invest in the desirability and exclusivity of our brands over the long term, we anticipate a significant decline in current operating income in the first half of the year. We are working tirelessly to overcome current challenges and recreate the conditions necessary for long-term sustainable growth,” he added.

Among Kering’s other brands, Yves Saint Laurent saw its sales fall by 6% on a comparable basis, in the first quarter, to 740 million euros, and Bottega Veneta increased its sales by 2%, still on a comparable basis, to 388 million.

On the stock market, Kering shares have lost 18% since the March 19 results warning, while LVMH and Hermès have lost 7.5% and 2.8% respectively.

(Written by Blandine Hénault and Jean-Stéphane Brosse, edited by)

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