Investing is not immune to passing fashions. In recent years, it has mainly been a macro game, with Fed tea-leaf readers, consumer-spending trackers and China analysts much in demand. Big shifts have sunk whole sectors and lifted others — think AI and defence. Luxury groups, too, rode a post-pandemic spending wave. No longer: it is time to bring back the untrendy art of stock picking.
Look no further than Kering’s dramatic sales warning this week. The French giant, controlled by billionaire François-Henri Pinault, expects first-quarter sales down 10 per cent — compared to consensus expectations of a 3 per cent fall — driven by a near 20 per cent collapse at Gucci. Worse still, the group blamed the slump on the all-important Asia-Pacific consumer, the health of which keeps sector investors up at night.
That’s given rise to a predictable slew of luxury concerns. Kering slumped 12 per cent on Wednesday. But shares in LVMH, Richemont and Dior were off too, on fears that the softening of China’s luxury growth might turn into a crash.
It would be wise to avoid jumping to macro conclusions. As Lex has pointed out, Chinese consumer spending showed signs of resilience over the all-important New Year period. Rival Prada, earlier this month, pointed to an encouraging start to the year. At Kering, stripping out Gucci’s performance suggests that smaller brands such as Bottega Veneta and Saint Laurent are holding up better. There is ample evidence that Gucci’s stumble is of its own making.
The brand is in a tricky spot. It is attempting to reshape its aesthetics from loud fashion to new creative director Sabato de Sarno’s quieter luxury. But the new collection, which Kering has been promoting heavily, only accounts for a small proportion of the items in store.
Gucci still belongs to the select club of megabrands with $10bn or more of sales. But the combination of falling sales and margin compression could lop 20 to 25 per cent off forecasts for the brand’s full-year operating profit, think Citi. Worse, empty stores speak to waning desirability, an ephemeral asset that is hard to recover once it is lost.
There is one lesson that can be extrapolated from Gucci’s plight. Brand momentum matters, and luxury turnarounds are hard to pull off — especially in softening markets. Burberry and Ferragamo should take note. Investors, meanwhile, no longer have the luxury of buying into a megatrend. It is time to consider each brand’s prospects individually.