Kering Tumbles On Profit Warning As Gucci Revamp Stumbles 

Gucci owner Kering SA’s problems in mainland China are only mounting as the French luxury giant issued a profit warning. As a result, shares of the company in Paris plunged to a six-year low. 

Lackluster Chinese demand for the luxury goods maker, which includes the Gucci, Balenciaga, Bottega Veneta, Yves Saint Laurent, Creed, and Alexander McQueen brands, sparked turmoil in Paris trading on Wednesday. Shares were down as much as 10%, tumbling to lows not seen since October 2017. 

Kering said its sales in the first quarter dropped 11%, citing “tough market conditions” in its Asia-Pacific unit, particularly in China, one of the world’s largest luxury goods markets. 

• Group first-quarter revenue: €4,504 million, down 11% as reported and down 10% on a comparable basis

“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 topline,” Francois-Henri Pinault, chairman and chief executive officer of Kering, wrote in a statement.

Pinault continued, “In view of this revenue decline, together with our firm determination to continue investing selectively in the long-term appeal and distinctiveness of our brands, we now expect to deliver sharply lower operating profit in the first half of this year. All of us are working tirelessly to see Kering through the current challenges and rebuild a solid platform for enduring growth.”

Here’s a snapshot of the first quarter earnings (courtesy of Bloomberg):

• Comparable revenue -10%, estimate -10.2% (Bloomberg Consensus)

• Gucci revenue on a comparable basis -18%, estimate -19.4%

• Yves Saint Laurent revenue on a comparable basis -6%, estimate -6.75% 

• Bottega Veneta revenue on a comparable basis +2%, estimate -0.05% 

• Other Houses revenue on a comparable basis -6%, estimate -4.23% 

• Eyewear & corporate revenue on a comparable basis +9%, estimate +18.1%

• Revenue EU4.50 billion, -11% y/y, estimate EU4.47 billion 

• Gucci revenue EU2.08 billion, -21% y/y, estimate EU2.05 billion

• Yves Saint Laurent revenue EU740 million, -8.2% y/y, estimate EU737.1 million

• Bottega Veneta revenue EU388 million, -1.8% y/y, estimate EU381.5 million

• Other Houses revenue EU824 million, -7.4% y/y, estimate EU834.4 million

• Eyewear & corporate revenue EU536 million, +24% y/y, estimate EU517 million

In the financial outlook, Kering warned that, considering “deterioration revenue trends,” the company now expects “a decline of 40 to 45% in first-half 2024 recurring operating income compared to the first half of 2023.” 

In February, Pinault stated, “Our priority is to get Gucci back on track,” adding that this “won’t happen overnight.”

Kering has scrambled to turn the sinking ship around, as Gucci accounts for half the group’s sales. 

Here’s what Wall Street analysts are saying about Kering’s profit warning amid fears the revamp of Gucci is faltering (list courtesy of Bloomberg): 

Deutsche Bank (buy, PT cut to €460 from €540)

• Kering has followed up its surprise first-quarter revenue pre- release with a bigger-than-expected flow-through into first-half Ebit guidance, analyst Adam Cochrane says

• There are “limited green shoots” with regards to Gucci at this stage, and will have to wait until the third or even fourth quarter to see if the Sabato proportion of the collection hit 30-40%

RBC Capital Markets (outperform, PT cut to €430 from €440)

• While Gucci’s margin cut is “optically bad,” it was well- anticipated and largely in the price, analyst Piral Dadhania says

•  Performance is currently challenged, with no improvement in second-quarter trading, but the market will likely focus on sequential revenue growth improvement driven by new product introductions

Bryan Garnier (neutral, PT cut to €350 from €405)

• Kering was even worse than expected, says analyst Loic Morvan, even amid marginal signs of improvement at the top and bottom- line in the second half

Jefferies (hold, PT cut to €360 from €370)

• Kering’s update confirmed Ebit under pressure in the first half, with Gucci’s recovery expected to be only gradual over this year, writes analyst James Grzinic

• Analyst is encouraged that the group is seeking external partners for real estate holdings, but triangulating Gucci’s renaissance remains a “challenging affair”

Morgan Stanley (equal-weight, PT cut to €365 from €405)

• Management’s tone was cautious on the call regarding the sales and profit trajectory for the remainder of the year, analyst Edouard Aubin writes

• The warning is more a function of incremental operating deleverage rather than proactive investments behind the brands

Citi (buy, PT €470)

• Citi analyst Thomas Chauvet says that Gucci’s design transition and new brand aesthetics might be slower-than- expected in driving brand heat and store traffic

• The greatest source of uncertainty this year is the shape of demand in subsequent quarters, and its impact on profitability

Bloomberg Intelligence

• Gucci’s rebuild is dragging toward 2025, analyst Deborah Aitken says, adding that overhaul efforts are taking longer, while Kering’s second-biggest brand YSL is also weaker, which requires deeper investment

• Sabato de Sarno’s collection will take until the third quarter for fuller own-retail store visibility, pushing the resumption of growth to 2025

This all plays into the slowdown of the global luxury market, reflected in the MSCI Inc. index of global luxury stocks, finding three lower highs since peaking during the Covid mania of late 2021. 

Another ominous sign is the flashing red from the watch market just days ago. 

Swiss Watch Exports Crash In China & Hong Kong https://t.co/i2LXXHa5aK

— zerohedge (@zerohedge) April 19, 2024

The underperformance of luxury results from shoppers who are pulling back on spending, especially in Asia, as the Chinese economic recovery has yet to impress anyone.