Fresh concerns for luxury market as Gucci owner issues profit warning

Shares in France’s Kering fell sharply on Wednesday after the Gucci owner issued a downbeat trading update, sparking fresh concerns for the health of the luxury market. 

Kering, led by François-Henri Pinault, told investors that dwindling revenues meant first half recurring operating income is expected to come in between 40 to 45 per cent lower compared to the same period last year. 

Pinault said the group’s performance ‘worsened considerably’ in the first quarter.  

Under pressure: François-Henri Pinault is the chief executive of Gucci owner Kering 

The group’s Paris-listed shares fell over 9 per cent on Wednesday morning, reaching their lowest level in over six years. 

This sparked a 2.8 per cent fall in Burberry shares to 1,131.76p, bringing losses to more than 57 per cent over the last year. 

Kering’s revenue for the first quarter of 2024 fell 10 per cent on a comparable basis to €4.5billion, as sales at its key luxury brand Gucci suffered an 18 per cent slide.

The group said: ‘The revenue drop includes a negative currency effect of 3 per cent and a positive scope effect of 2 per cent resulting from the consolidation of Creed.’ 

Wealthy shoppers curbed spending on products from the group’s star brand Gucci, reflecting a wider slowdown in luxury buying.

In the crucial Chinese market, a property crisis and high youth unemployment have weighed on Chinese shoppers’ appetite for high end fashion and the company does not expect much improvement in the second quarter.

Downturn: Lower Gucci sales in China have hit Kering’s bottom line hard

Gucci, the century-old Italian fashion house, which accounts for half of group sales and two-thirds of profit, is undergoing an overhaul. 

Bosses are seeking to reignite sales with an aesthetic reset, led by creative director Sabato de Sarno, and place an emphasis on leather goods.

On Wednesday, executives said early products from the new Ancora collection, which include glossy Jackie bags and chunky, platform loafers, have been well received, but stores will not be fully stocked with the products until later this year.

Pinault, said: ‘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. 

‘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.’

Analysts at Jefferies lowered the retailer’s earnings per share estimates by 8 per cent, noting ‘triangulating Gucci’s renaissance remains a challenging affair’.

While management is positive about margin recovery in the second half as the new Gucci collection becomes more available, analysts at JPMorgan said the execution risk was high.

Analysts at JP Morgan, said: ‘We think it is too early to turn more constructive on this turnaround journey.’

Leading labels such as LVMH´s Louis Vuitton and Dior, as well as Chanel and Hermes, have been widening their lead with smaller, cheaper brands as high living costs make consumers more reluctant to spend. 

Victoria Scholar, head of investment at Interactive Investor, said: ‘Kering has been struggling with sluggish market conditions particularly in China. 

‘But there’s only so much weakness that can be explained away by China – Kering’s shares have sharply underperformed rivals like LVMH and Hermes, both of which have been able to weather the storm much better. 

‘Kering’s unique problem is that fickle fashionistas have been shifting their preferences away from its most important brand, Gucci towards other luxury rivals instead and the Paris group is suffering badly as a consequence.

‘Kering shares already tumbled last month after the French conglomerate issued a profit warning. A series of analysts including Morgan Stanley, RBC, Jefferies and JP Morgan have all cut their price targets on the stock today in a worrying sign of diminishing confidence towards the luxury conglomerate.’