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After a first-quarter sales warning in March, Kering confirmed on Tuesday that Q1 revenue fell 10 per cent to €4.5 billion on a comparable basis, while Gucci sales dropped 18 per cent. Now, the luxury conglomerate is bracing for slashed profits for the first half of the year, expected to drop between 40 per cent and 45 per cent, compared to the same period last year.
“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 houses, starting with Gucci, exacerbated downward pressures on our topline,” François-Henri Pinault, chairman and chief executive officer said in a statement. “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.”
This profit dip is significantly greater than was expected, says Bernstein managing director Luca Solca, and is likely to further lower Kering shares, which have fallen 8 per cent in the past month. “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,” wrote Solca in an analyst note. “The magnitude of the profit descent, nevertheless, surprises on the downside.”
Gucci was impacted by a “huge drop in traffic in Asia Pacific”, Kering CFO Armelle Poulou told analysts. The increase in products designed by Gucci creative director Sabato De Sarno in the house’s stores was top of mind on Tuesday, as the house bets, in part, on newness. Gradual ramp up will take place in the second quarter and by the fourth quarter, all designs in stores will be designed by De Sarno. “Second quarter shouldn’t improve substantially compared to Q1. We are more confident for the second half,” Poulou said.
