Yahoo Finance Kering Forecasts 40-45% Drop in H1 Operating Profit as Gucci Sales Tumble
Updated April 23 at 4:57 p.m.
PARIS — Kering expects its profits to take a sizable hit as Asian consumers shun its star brand Gucci, setting back efforts to reboot the ailing label under its new designer.
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In light of deteriorating market conditions, the French luxury group now forecasts first-half operating profit will plummet by 40 to 45 percent year-over-year, it said Tuesday as it reported first-quarter results.
Kering sent shudders through the market last month when it issued a rare profit warning, signaling a tougher-than-expected turnaround for Gucci, the maker of Jackie handbags and horsebit loafers, and causing its shares to plunge 12 percent the following day.
The figures published after the market close on Tuesday showed group revenues fell 11 percent to 4.5 billion euros in the three months to March 31, representing a decline of 10 percent in comparable terms, as flagged by the company.
Analyst estimates had called for a 10.2 percent drop in like-for-like sales at Kering amid a wider luxury slowdown and geopolitical uncertainty.
Organic revenues at Gucci, which is undergoing a revamp under chief executive officer Jean-François Palus and creative director Sabato De Sarno, were down 18 percent in the first quarter, above the Bloomberg-compiled consensus estimate of minus-19.4 percent.
“Kering’s performance worsened considerably in the first quarter. While we had anticipated a challenging start to the year, sluggish market conditions, notably in China, and the strategic repositioning of certain of our houses, starting with Gucci, exacerbated downward pressures on our top line,” Kering chairman and CEO François-Henri Pinault said in a statement.
Organic sales at Saint Laurent were down 6 percent in the first quarter, Bottega Veneta gained 2 percent, and the “other houses” division — which groups brands including Balenciaga, Alexander McQueen and Boucheron — posted a 6 percent drop.
Kering eyewear and corporate, which includes the group’s fledgling beauty division, recorded a 9 percent increase in comparable sales.
By comparison, organic sales at LVMH Moët Hennessy Louis Vuitton’s key fashion and leather goods division rose 2 percent year-over-year in the first quarter, reflecting the resilience of its star brands Louis Vuitton and Dior.
The trading update is likely to compound Kering’s woes, with executives flagging no substantial improvement in the second quarter.
Luca Solca, analyst at Bernstein, noted the operating profit forecast was 24 to 30 percent lower than a consensus compiled by Bloomberg.
“It is not surprising that brands in transition may be experiencing bigger difficulties in a softening demand environment, as consumers concentrate their spend on must-have brands. The magnitude of the profit descent, nevertheless, surprises on the downside,” he said in a research note.
However, Solca praised management for sticking to its drive to rationalize the wholesale channel as part of its longer-term brand elevation strategy, even if it means sacrificing revenues in the immediate future.
Kering said group retail sales fell 11 percent, with Asia-Pacific recording a 19 percent drop, North America down 11 percent and Western Europe posting a 9 percent decline.
Japan was a bright spot, with sales rising 16 percent as tourists took advantage of the weak yen, while the rest of the world was up 6 percent, driven by the good performance of the Middle East.
Revenues from Chinese consumers were down almost 20 percent during the period, chief financial officer Armelle Poulou told analysts and reporters in a conference call.
“China is the worst area of difficulty for Gucci at the moment and probably all the weaknesses of the brand are exacerbated in China,” she said.
“Gucci at the moment is not in the sweet spot in terms of positioning, being perceived not enough high-end or not enough affordable, but this context can change and things can change rapidly,” she added.
“Regardless of the environment, we have decided to continue investing in our brands but we are even more selective, even more demanding when it comes to assessing the return on every investment we make in products, in stores, in communications,” the executive said.
Pinault has attempted to limit uncertainty around Gucci’s direction by announcing earlier this year that Palus would remain in place, instead of serving in a transitional capacity as initially planned.
Gucci has also appointed a number of senior executives, most recently bringing on former Louis Vuitton communications executive Stefano Cantino as deputy CEO, a new role in which he will share with Palus the responsibility to define and implement the brand strategy. Cantino is due to start in May.
Poulou said that although new collections accounted for less than 7 percent of Gucci’s sales in the first quarter, the market reaction to new items including the Jackie Notte handbag and the Re-Web sneaker was “very encouraging.”
De Sarno’s collections should account for 25 percent of new products in stores in the second quarter, and by the second half, his designs will represent all the seasonal items on offer, she added.
Gucci hopes to drive traffic by accelerating its handbag introductions in particular. At the same time, it plans to close outlet stores in the Asia-Pacific region and Japan, although it is holding off in order to clear inventories of old stock designed by former creative director Alessandro Michele.
While the brand regularly upgrades its store network, it won’t introduce a new store concept until late 2025 or early 2026, said Claire Roblet, Kering’s director of financial communications and market intelligence.
As a result of the prolonged handover period, Gucci’s ranking in the Lyst index of fashion’s hottest brands tumbled to number 11 in the fourth quarter of 2023 from number two a year earlier.
But Citi’s Thomas Chauvet said with the arrival of more new collection items in stores, a step-up in marketing efforts and the impact of senior hires, the label could see sequential sales improvement this year.
“While Gucci’s brand turnaround might materialize at a slower pace than expected, we think it is relatively well understood and largely reflected in valuation,” the analyst said.
The Kering results come on the heels of figures from Valentino, in which Kering holds a 30 percent stake, showing revenues fell 3 percent in 2023 amid a “challenging global context for the luxury industry.”
Hermès International is the next big luxury player scheduled to report first-quarter results, on Thursday.
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