Kering shares drop after Gucci slump prompts profit warning

Kering shares drop after Gucci slump prompts profit warning

Kering SA shares tumbled after the luxury group warned that profit will plunge in the first half of the year on slumping sales at Gucci, its biggest brand.

The stock slid as much as 8.9% in early Paris trading to the lowest since 2018. Kering’s 20% share slump this year contrasts with gains by French rivals LVMH and Hermes International.

Kering is struggling to revive the fortunes of Gucci, which accounts for more than two-thirds of its operating profit. The luxury group last year named a new Gucci creative director, Sabato De Sarno, whose designs began entering stores in February. Kering has warned the turnaround will take time as the market for luxury goods cools.

“The market in China is currently quite polarized between an appetite of customers for the really high-end segment or for more affordable products,” Kering Chief Financial Officer Armelle Poulou told reporters Tuesday. “Gucci, being more positioned in the middle, is not benefiting from this polarization.”

Kering warned that recurring operating income will drop between 40% and 45% in the first six months of this year. That’s after comparable sales at Gucci tumbled 18% in the first quarter on slack demand in China.

Chinese customers are in a “wait-and-see” mode as the distribution of the new collections ramps up, Poulou said. So far the new designs “have been very well received, particularly in the ready-to-wear and shoes categories,” Kering said. It expects all of Gucci’s products by the third quarter to be from the new collections, Poulou added.

In the meantime, Gucci is working on its handbag offering, a crucial category. It has plans to accelerate new launches this year, Poulou said during a call with analysts.

The company continues to lag behind LVMH Moet Hennessy Louis Vuitton SE, the owner of some 75 luxury brands including Christian Dior and Tiffany & Co. LVMH delivered 3% organic revenue growth in the first quarter. Hermes International, which has also withstood the downturn better than most peers, will report sales on Thursday.

“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,” Luca Solca, analyst at Sanford C. Bernstein, wrote in a note. “The magnitude of the profit descent, nevertheless, surprises on the downside.”

Sales at Kering fell 10% on a comparable basis in the first quarter, in line with the warning the group issued in March. Yves Saint Laurent, its second-largest brand, saw comparable sales decline 6%, while Bottega Veneta rose 2%, buoyed by double-digit growth in North America, Western Europe and the Middle East.