Comeback king Gucci, more challenges await

(Bloomberg Opinion) — Investors knew Kering SA’s first-quarter results would be poor after Gucci issued a warning last month that sales were slowing.

But the scale of the flagship brand’s problem became clear on Tuesday. Excluding currency fluctuations, sales fell 18% in the three months to March 31, in line with expectations. However, the increased investment in Gucci means Kering’s group operating profit will plummet by 40% to 45% in the first half of 2024. The stock price fell by as much as 10%, hitting a six-year low.

Kering is accelerating its transition to a new design and expects improvements in the second half of the year. But its new look is still largely untested, and wealthy customers are unlikely to change their outfits anytime soon, as they show few signs of recovery.

At the heart of Gucci’s problems is its shift from a luxurious aesthetic under former creative director Alessandro Michele to a more refined style under his successor Sabato de Sarno.

De Sarno’s collection has just hit stores, with the luxury clothing and shoes that were sent to the catwalks last September arriving first. Customers loved them, but they accounted for less than 7% of Gucci’s sales in the first quarter, Kering said.

This trend is currently accelerating, with more mainstream items and men’s products joining women’s wear. De Sarno’s designs accounted for 25% of the product range in the second quarter and should increase to that total in the third or fourth quarter.

For shoppers, there’s little point in buying now if what’s available will expire soon. But if the new look wasn’t appealing, consumers, especially in Asia, likely wouldn’t have visited Gucci stores at all. This hit demand for classic lines like Jackie handbags and Horsebit loafers, which the market wasn’t expecting. The brand’s first-quarter sales in the region, excluding Japan, fell 28%.

And while Kering doesn’t expect things to improve significantly this quarter, Chinese shoppers were just emerging from coronavirus restrictions and were more eager to shop at the same time in 2023. It’s getting more difficult.

When Michele unveiled his designs in 2015, having spent more than a decade with Gucci, he was able to achieve his vision without much disruption. But the designer’s grandma-chic aesthetic was now completely outdated, and the transition to the De Sarno era meant a further rupture.

Not only has Kering been forced to get rid of unwanted items, but Gucci has also been forced to react more quickly, such as reinvigorating its handbag range. Doing all of this requires significant investment in things like advertising, which puts pressure on profits.

Kering expects Gucci sales to start improving in the second half of the year as De Sarno’s assortment expands and comparisons with 2023, when Chinese shoppers were spending revenge, disappear. . This should ease profit pressure, with Kering expecting group operating margins to be 1-1.5 percentage points higher in the second half of the year than in the first half.

So there’s a good chance this is the nadir. But the danger is that Gucci’s new line isn’t exciting enough to attract shoppers. It’s worth remembering that when Michele’s collection arrived, it immediately became a hot topic. That seems to be missing this time.

Gucci, on the other hand, is in a more difficult position than its competitors because it targets wealthy shoppers rather than the ultra-rich. LVMH Moët Hennessy Louis Vuitton SE, the owner of Louis Vuitton and Loewe, is appealing to a wider audience after a strong run.

In fact, Kering argued that part of Gucci’s predicament is that its products are not seen as investment or particularly affordable in China, leaving it caught in the middle.

Therefore, the need for further improvement work at Gucci cannot be ruled out. Kering recently appointed Stefano Cantino, who was in charge of image and communications at Louis Vuitton, as deputy to the brand’s chief executive Jean-François Palus. However, Bloomberg News reported this week that some investors want group co-deputy chief executive Francesca Berrettini to replace Kering CEO François-Henri Pinault. Reported. Another option would be for Berrettini to take the reins of Gucci. It’s too early to talk about creative changes, but the longer Gucci’s downturn drags on, the more likely this will be on the agenda.

Gucci should not be destroyed. It remains a huge brand, with sales of around 10 billion euros ($10.7 billion) last year. He also had two successes, first under Tom Ford and then under Michelle. And even though many investors are betting on third time luck, expectations remain low. Only Burberry Group Ltd. is worth less, with shares trading at around 15 times forward earnings.

But considering Gucci has been shining for so long, planning a comeback ahead of the natural ebb and flow of fashion cycles seems like a big task even for the comeback king.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer goods and retail industries. Previously, he was a reporter for the Financial Times.

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