By
Bloomberg
Published
February 9, 2024
Investors are looking for the next game-changing story in the luxury sector. Kering SA, owner of Gucci, seems to be a good fit.
But as the company warned Thursday that investing in its brands will mean a decline in operating profits this year, that long-awaited revival is still some way off.
Kering's first priority is to rejuvenate Gucci. After her extravagant designs under former creative director Alessandro Michele fell out of style, she is pivoting toward a more elegant aesthetic under her successor Sabato de Sarno, whose styles will hit stores shortly.
Underscoring the challenge, Gucci's fourth-quarter 2023 sales, excluding currency fluctuations and mergers and acquisitions, fell 4%, compared with a 9% rise in the fashion and leather goods division. from LVMH. Hermes International SCA is also expected to perform well when it reports on Friday.
Despite the traumatic last few years, Gucci still generated almost €10 billion in revenue last year. But it needs to attract more high-end customers, increasing the brand's appeal, limiting the availability of some products and strengthening its range of leather goods.
He is assembling a new team, which he confirmed on Thursday would be led by Jean-Francois Palus, who was named Gucci CEO on an interim basis last year, supported by Kering deputy CEO Francesca Bellettini. Consequently, it is spent on the supply chain, advertising and events and updating the brand's stores.
Kering deputy chief executive Jean-Marc Duplaix said Gucci's vision needed to be implemented in the long term, and not in a “stop and go” manner. Consequently, given that De Sarno's collection will only hit stores this month, gradually ramp up through June, and, interestingly, be limited to a few wholesale partners, Gucci's retail sales growth should be moderate this year, particularly in The first semester. Operating profit would decline by at least a mid-single-digit percentage, Duplaix said.
Kering said it had seen a good reception for De Sarno's products and was winning over wealthier buyers.
But, as we learned from Burberry Group Plc's recent profit warning, it is extremely difficult to reposition a brand and take it upmarket, in a luxury environment that is transitioning from the breakneck sales of the past three years to something more vulgar.
While luxury shoppers crave new things (promising for Gucci if they can get it right), they also tend to gravitate toward the most desirable names, rather than taking a chance on a second-tier brand. And LVMH is ensuring that its houses, led by Louis Vuitton and Dior but also including Loewe and Celine, which compete directly with Gucci, remain in the minds of consumers.
Kering wants to maintain Gucci's duality of heritage and fashion style. But there are questions about whether De Sarno's designs are distinctive enough. Bernstein analysts have highlighted similarities with competitors such as Tom Ford and Prada SpA's flagship brand and its sister brand, Miu Miu.
While Michele's aesthetic may not have been to everyone's taste, her arrival in 2015 changed the course of fashion, breaking the prevailing minimalism and ushering in a more opulent era. It's still early days, but De Sarno doesn't seem to be having the same impact.
Kering's to-do list isn't limited to Gucci. It is also trying to revitalize Balenciaga after an advertising scandal in late 2022. And it is taking steps to make its other houses, including Bottega Veneta and Yves Saint Laurent, more exclusive, reducing the number of third-party stores that sell them. , taking a toll on its performance in 2023.
And let's not forget that Kering is also integrating Creed, the high-end perfume business it acquired last year, with the aim of using it as a platform to launch premium fragrances for its brands and then build a broader beauty offering. Oh, and there's that 30% stake in Valentino.
Kering reorganized its management team last year, but even so, tackling such a daunting range of tasks in a less than ideal luxury environment is a stretch. With so much riding on Gucci's potential turnaround, there can be no room for error.
Even with Thursday's rise, Kering shares have fallen about 28% over the past year, lagging behind its big luxury rivals.
They trade at a forward price-to-earnings ratio of about 15 times, a discount to Cie Financiere Richemont SA's 20 times and LVMH's 24 times.
Thursday's stock rise shows investors don't want to miss out. After all, Gucci has climbed out of the abyss twice before, first with Tom Ford and then with Michele, and Kering is a master at combining creative talent, with a keen eye for what will sell in stores, backed by astute marketing. . Meanwhile, beauty could provide another source of income, less subject to the ups and downs of the fashion cycle.
If Kering can close the valuation gap with its rivals, then shareholders' faith will be justified. But her change seems more like a trend that takes time to catch on, than a viral fashion hit.
