Gucci: an icon of luxury in its lowest hours

Kering is going through a bad time. He admits it even to his president, François-Henri Pinault. The French luxury empire, one of the most important groups in the sector, launched a profit warning to the market, warning of a sales evolution in the first quarter of the year that was 10% lower than that expected a few months ago. The bad streak is not new and is mainly due to the poor results in the Asian region of its flagship brand, Gucci, mainly in China. In addition to the Italian firm, the one with the most weight in its catalog, the company controls other houses such as Yves Saint Laurent, Bottega Veneta or Balenciaga.

The company’s bad times have taken its toll on the stock market. On March 20, a day after the luxury empire warned of the poor quarterly figures, its shares plummeted up to 12% in the session. A black day, which was one of the worst sessions in its history, with a loss of more than 6,000 million euros in market capitalization. Kering is one of the main engines of the CAC 40, the main index of the French stock market along with L’Oréal, LVMH and Hermès. In the last 12 months, the shares lose 35% of their value.

The group’s income for the first quarter of 2024 will be published on April 23, after a year described as “difficult” by Pinault, president of Kering since 2005. Although the company’s turnover reached 19,566 million euros in 2023, it fell 4% (2% in comparable terms) compared to 2022, when revenues were 20,351 million euros. The net profit for the last year, for its part, decreased by 17%, and stood at 2,980 million euros.

The figures highlight the difficulties that the French company is going through in the Chinese market, one of its main growth drivers and where the economic recovery after the end of the draconian zero covid measures has not fully arrived. The Asian giant seeks to reactivate an economy weighed down by a depressed real estate market, low domestic demand and high youth unemployment figures. Fears of a slowdown among Chinese shoppers have hit Gucci hard, which accounts for more than half of Kering’s sales and more than two-thirds of its profits. The Asian region (without Japan) accounts for 39% of the Italian brand’s turnover. For the Kering group, the contribution to total income is 35%.

reassuring message

The situation is worrying. In 2023, Gucci’s turnover fell 6% compared to the previous year (2% in comparable terms), standing at 9,873 million euros. And for the first quarter of 2024, the luxury group anticipated that sales of the Florentine house founded in 1921 will be 20% lower than last year in comparable terms. The company, however, wanted to send a reassuring message: “The new collection has had a very favorable reception.”

Kering has been reorganizing itself for several months around its flagship brand. “The priority is to get Gucci back on track,” although “that will not happen overnight,” admitted Pinault after the presentation of the annual results. The changes have already begun. In July 2023, the billionaire appointed his then right-hand man, Jean-François Paulus, as the new president of the Italian firm. The French luxury group also decided to part ways with its iconic artistic creator, Alessandro Michele, and replace him with Sabato de Sarno.

His first collection, Ancora, premiered at Milan Fashion Week in September, changing the direction of the brand and betting on new, more classic bases. It was in March that this new line arrived in large cities in China, trying to court consumers with the deployment of ephemeral stores and events with influencers locales.

The coming months will be decisive to know if Kering managers have made the right move. “The market still doesn’t know if the Chinese will like quiet luxury [quiet luxury, en inglés] of Sabato De Sarno,” Bernstein analysts indicate in a note recently distributed to their clients. “The bad news from Kering is company-specific, but it is also a good reminder that consumer confidence and discretionary spending in China are weak,” they add. For its part, the consulting firm Bain & Company has warned that “after a general rebound last year, the Chinese luxury market is expected to grow at a mid-single-digit rate in 2024.”

Betting on the goose that lays the golden eggs has its risks. Over the years, the French company has been reducing—albeit minimally—its guccidependency. But its other brands have not filled these spaces with the necessary strength to compensate for the lower contribution of the Italian firm. The group’s second brand, Yves Saint Laurent, which accounts for around 16% of Kering’s turnover, saw its revenue fall 4% last year. The revenue of the third largest brand, Bottega Veneta, fell by 5%. The “other houses” category, which includes, among others, the Spanish brand Balenciaga, whose image was damaged after a controversial marketing campaign, in turn recorded a decrease in income of 9% last year. The only subsidiary of the group that performed well was Kering Eyewear, with a record increase in revenue of 38%.

In addition to the changes at Gucci, Kering launched a beauty division that it seeks to expand in the coming years, and took its first step with the acquisition of high-end perfume maker Creed in June 2023. Last summer it also announced the purchase of a 30% stake in the famous fashion brand Valentino, for 1.7 billion euros, to the Qatari fund Mayhoola. The objective is to continue investing in the different houses of the conglomerate. The impact of this investment strategy, as recognized by the group’s president, will weigh on short-term results.