Kering Weakened as Gucci Sales Fall 20%

Kering reported second-quarter sales that fell 11 percent, dragged down primarily by flagship unit Gucci. Sales tumbled by 20 percent in reported terms (and 18 percent on a currency-adjusted basis) as plans to relaunch the label under a new designer and executive team continued to falter.

The group painted a grim picture of the luxury market. Consumers are pulling back their spending on high-end brands after a multi-year surge and the shift is being felt beyond Gucci: Saint Laurent, once the most consistent growth engine in Kering’s portfolio, reported revenues that fell 7 percent on a comparable basis. Sales in the group’s Other Houses unit comprising Balenciaga and Alexander McQueen fell by 6 percent, while Bottega Veneta reported flat revenues.

Falling sales took a toll on margins. The group’s first-half operating profit fell by 42 percent year-on-year.

While the weak numbers came as no surprise (Kering had warned investors sales would continue to decline in line with the previous quarter), a worsening outlook was unwelcome news. Profits are likely to fall by 30 percent in the second half of the year, the company warned, while offering few promises on when its brands would return to growth.

The group is racing to cut costs, cancelling “all store openings that are not immediately indispensable,” chief financial officer Armelle Poulou said. Those cuts could make it even harder to compete with rival brands and groups who are also suffering, but not as severely.

“We didn’t start the year with this vision for the topline,” Jean-Marc Duplaix, Kering’s deputy CEO for finance and operations, said. “In June, we saw a deterioration of trends; that continues in July.”

Sector-Wide Downturn

Kering’s report follows weak results from rival groups LVMH and Richemont, where reported revenues both slid by 1 percent, as well as from Burberry, whose shares plunged to their lowest level in nearly 15 years following a 22 percent drop in quarterly sales.

Outliers so far include Moncler and Brunello Cucinelli, both of which grew by double-digits, while Hermès, Zegna and Prada have yet to report.

In Asia, the industry is navigating low store traffic and depressed consumer confidence in China, as well as tricky-to-navigate currency headwinds in Japan. Customers from China and around the world have been flocking to the island nation following a steep drop in the yen, but brands are wary of penalising local clients with drastic price hikes.

In the US and Europe, store traffic remains depressed by inflation and political uncertainty, as well as customers who are no longer prioritising luxury items as they did during the industry’s post-pandemic boom.

Tourist sales have also been lower than expected in many key luxury shopping hubs from Hong Kong to Paris.

Gucci, Balenciaga

One year into the tenures of Gucci chief executive Jean-François Palus and creative director Sabato de Sarno, a sleeker and more heritage-driven vision for the brand has failed to reignite consumer demand in an increasingly cut-throat luxury market.

Kering says the brand, which accounts for about half of the company’s sales and two-thirds of its profit, is focused on a deep transformation to the organisation and that it will take time for that to translate into sales momentum.

The quality of Gucci’s products and the speed with which it brings them to market have improved, deputy CEO for brand development Francesca Bellettini said. Conversion rates in stores remain resilient even amid softer demand.

Meanwhile, De Sarno’s collections align more easily with the brand’s heritage products than under previous management. “We’re working on animation and not the complete substitution of the carry-over line,” Bellettini explained. “New introductions are going to be complementary — the idea is to create new carry-overs while also working to reanimate SKUs that were successes in the past.”

Still, the dismal numbers — with growth roughly 20 percent lower than rival LVMH’s fashion and leather goods division — will make it harder for Palus and De Sarno to convince an already-sceptical market that they can deliver results. If Kering decides to make radical changes, deputy CEO Stefano Cantino, hired in April from Louis Vuitton, could replace Palus in the top job.

With Gucci’s struggles centre stage, the group is likely to give Balenciaga more time to bounce back from a damaging public relations scandal that coincided with growing customer fatigue for its provocative aesthetic and communications. Kering confirmed its support for both designer Demna and CEO Cedric Charbit, citing the brand’s prior era of success and positive signals like the sell-out success of its Rodeo bag, a Kelly-inspired purse styled with punk accoutrements.

“Balenciaga is quite resilient,” Bellettini said. “We have full confidence in Demna, Cedric and their team, which has already delivered incredible success in the past and will do so again in the future.”

Operating profit fell by 80 percent for the Other Brands division due to communications investments aimed at relaunching Balenciaga, as well marketing support for the transition to a new creative director, Séan McGirr, at Alexander McQueen.