(News Bulletin 247) – The parent company of Gucci and Bottega Veneta saw its sales contract by 10% on a comparable basis in the first quarter and does not expect a real improvement in the second quarter. Its current operating profit is expected to fall by 40% to 45% over the first six months of the year.

Mass was already said for Kering’s first quarter. In March, the luxury group issued a heavy warning on its revenues, warning that they would fall by 10% on a comparable basis, and around 20% for its flagship brand Gucci.

Ultimately, the activity published by Kering on Tuesday evening turned out to be in line with these indications. Quarterly turnover fell by 11% on a published basis and by 10% on a comparable basis. For Gucci alone, which represents around 45% of revenues, the fall amounts to 18% on a comparable basis.

Although this drop in activity had been well reported by the group, Kering shares were still suffering this Wednesday, falling by 8% around 10:10 a.m.

The surprise comes from the more precise indications given by the company on Tuesday evening on its prospects. Kering confirmed that it expects a decline in current operating income in 2024 compared to last year.

The group has, above all, clarified the extent of the plunge in its results anticipated over the first six months of the year, thus estimating that its current operating income will fall by 40% to 45% over one year.

A stronger impact than expected

It’s not illogical. Gucci is the Kering brand that is suffering the most. However, it represented 70% of its current operating profit in 2023. And Kering’s financial director, Armelle Poulou, explained to analysts that the company was not expecting a real improvement in the trend of its activity in the second quarter compared to the first. . “The group is not showing overwhelming optimism for the second quarter,” notes Oddo BHF.

As a result, the fall in Gucci’s revenues should logically be close to that of the first quarter over the entire half-year. And with Gucci’s operating leverage, that is to say results that vary more than sales, the impact on current operating income is significant. Especially since the company continues to invest in “the desirability” of its brands, recalled its CEO, François Henri-Pinault.

However, Deutsche Bank emphasizes that the “flow trough”, or the impact of the drop in sales on current operating income, is stronger than expected by the market. An observation shared by Stifel.

Royal Bank of Canada, for its part, estimates that the indications given by Kering should result in a drop in the consensus (the average estimate of analysts) of 15% on the current operating profit forecast for 2024.

China, the great example of Gucci’s difficulties

To quickly return to Kering’s activity in the first quarter, the fall in turnover was marked in all major regions with the exception of Japan, where the weakness of the yen led many tourists to benefit from advantageous prices. .

Kering suffers especially in “Asia-Pacific” and more precisely in China. Armelle Poulou explained that the Chinese “cluster”, that is to say the sales of Chinese customers in China but also abroad, had experienced a fall of almost 20% in the first quarter. To give an idea, LVMH for its part indicated during the week that this same “cluster” had increased by 10% on its own sales during the first three months of the year.

Armelle Poulou recognized that Gucci’s difficulties were “exacerbated” in China where a “polarization” of customers is observed. Clearly, the market is more dynamic among the wealthiest customers as well as among the youngest, who aspire to more affordable products.

However, Gucci does not have the ideal positioning, explained the financial director. The Italian brand is perceived as “not high-end enough” and “not affordable enough”, detailed Armelle Poulou.

A hoped-for rebound in the second half

Kering can therefore draw a line under the first part of 2024, both financially and probably on the stock market. Since the start of the year, the stock has plunged 20%, showing the second biggest drop in the CAC 40.

Much will be decided in the second half of the year for the group’s stock market future. Kering’s momentum will depend on its ability to relaunch Gucci. However, the products from the first collections of the young and new artistic director, Sabato de Sarno, only arrived in March and in a handful of stores.

Armelle Poulou explained that around 30% of the new products would be in stores at the end of June. The good reception of Sabato’s paw from Sarno will thus be more visible in the third and fourth quarters.

“Performance is currently hampered by the lack of improvement in current second quarter sales, but the market should focus on improving the sequential growth (from one quarter to the next, editor’s note) of the turnover thanks to the introduction of new products, in our opinion”, judges Royal Bank of Canada.

Armelle Poulou also indicated that Kering’s operating margin would be significantly better in the second half than in the first. The group expects an improvement from one semester to the next of 1 to 1.5 percentage points.