Gucci Owner Kering Expects Profit Setback from Fashion House Investments

Gucci owner Kering anticipates a decline in profit this year as it focuses on investing in its fashion houses. This highlights the challenges faced by the luxury group as it aims to reset its core brand in a period of slowing luxury spending.

In the fourth quarter of the previous year, the French luxury giant reported sales of €4.97 billion ($5.35 billion), reflecting a 6% decrease in reported terms compared to the same period a year ago, and a 4% decrease on a comparable basis. Market consensus estimates provided by Visible Alpha anticipated sales of €4.91 billion.

Sales at Gucci, which is the key revenue generator for the group, were down 8%, amounting to €2.53 billion, and down 4% on a comparable basis.

During a conference call discussing the results, Chairman and Chief Executive Francois-Henri Pinault emphasized that the company’s top priority is to bring Gucci back on track. “We are currently at a crucial point in our journey,” he added.

Kering is striving to turn around Gucci in order to catch up with its luxury competitors. Sabato de Sarno was appointed as the creative chief for Gucci in January 2023. However, analysts have noted that this effort is still in its early stages and visible signs of improvement will take time.

The company has stated that its investment strategy will impact this year’s recurring operating profit, which is its preferred profit measure, particularly in the first half of the year. Recurring operating profit is expected to decline from last year’s €4.75 billion, which itself was lower than the €5.59 billion reported in 2022.

Pinault further explained, “Given the uncertain market conditions at the beginning of 2024, our ongoing investments in our fashion houses will exert pressure on our short-term results.”

These investments are happening alongside a normalization of sales growth across the industry after the initial excitement post-pandemic has faded, leading to a demand slowdown caused by high interest rates and inflation, squeezing consumer spending.

Luxury Companies Face Challenges in China

The luxury industry has been experiencing a slowdown in China, one of its largest markets. This economic downturn has impacted the recovery efforts of luxury companies and contributed to the overall decline of the sector.

Experts have highlighted the difficulties faced by brands trying to rejuvenate themselves in the face of sluggish luxury demand. Gucci, in particular, has struggled to match the performance of LVMH’s fashion and leather-goods division, which saw increased sales during the same period.

Gucci’s journey of reinvention is an ongoing process that will require time. The brand’s first collection under Alessandro De Sarno’s leadership is set to be launched later this year, according to analysts at Bernstein.

Despite the challenges faced by the luxury industry, shares in Kering, Gucci’s parent company, experienced a 4.4% increase at 1233 GMT on Thursday. However, the stock has fallen by 28% over the past year.

UBS analysts noted that Kering’s full-year results were not as dire as initially feared. The market was already aware of the revenue declines and reinvestments undertaken by the company.

Kering recorded a full-year net profit of EUR2.98 billion, down from EUR3.61 billion in 2022. Analysts had projected a net profit of EUR3.17 billion, according to Visible Alpha data.

In an effort to stabilize its financial position, Kering has proposed a dividend of EUR14.00 per share for 2023.

The luxury industry’s performance in the results season has been mixed so far. While Richemont and Brunello Cucinelli have benefited from their wealthier customer base, companies like Hugo Boss, Salvatore Ferragamo, and Burberry have reported disappointing results, according to analysts.

LVMH, often seen as a bellwether for the luxury sector, exceeded analysts’ sales forecasts for the previous year and expressed confidence as it entered 2024.

Hermes, a French luxury group, is anticipated to announce its 2023 results on Friday.

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