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After a first-quarter sales warning in March, Kering confirmed on Tuesday that Q1 revenue fell 10 per cent to €4.5 billion on a comparable basis, while Gucci sales dropped 18 per cent. Now, the luxury conglomerate is bracing for slashed profits for the first half of the year, expected to drop between 40 per cent and 45 per cent, compared to the same period last year.
“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 houses, starting with Gucci, exacerbated downward pressures on our topline,” François-Henri Pinault, chairman and chief executive officer said in a statement. “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.”
This profit dip is significantly greater than was expected, says Bernstein managing director Luca Solca, and is likely to further lower Kering shares, which have fallen 8 per cent in the past month. “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,” wrote Solca in an analyst note. “The magnitude of the profit descent, nevertheless, surprises on the downside.”
Gucci was impacted by a “huge drop in traffic in Asia Pacific”, Kering CFO Armelle Poulou told analysts. The increase in products designed by Gucci creative director Sabato De Sarno in the house’s stores was top of mind on Tuesday, as the house bets, in part, on newness. Gradual ramp up will take place in the second quarter and by the fourth quarter, all designs in stores will be designed by De Sarno. “Second quarter shouldn’t improve substantially compared to Q1. We are more confident for the second half,” Poulou said.
Saint Laurent sales dropped 6 per cent, while Bottega Veneta sales increased by 2 per cent and “Other houses”, which includes Balenciaga and Alexander McQueen, declined 6 per cent.
At Saint Laurent, Poulou cited “a very solid Q1 last year” as a comparison, and noted that sales in North America and Greater China weighed on Saint Laurent’s performance. She noted that Saint Laurent will work on broadening the appeal of its men’s line, further enhancing quality particularly in leather goods. High visibility at the Cannes Film Festival should contribute to “support the house image and positioning”, she added. (Saint Laurent announced the creation of a new subsidiary, Saint Laurent Productions in April 2023, and the house will present three films in Cannes next month.)
At Balenciaga, Poulou noted that retail sales are improving in Western Europe, though they haven’t fully recovered. The brand is once again growing in North America, with the Rodeo handbag being a success across multiple regions.
By geography, group retail sales in Western Europe were down 9 per cent, North America was down 11 per cent, Japan was up 16 per cent, and Asia Pacific was down 19 per cent as China remains soft for luxury sales.
By comparison, LVMH’s fashion and leather goods division rose 2 per cent in the first quarter, while sales in Asia excluding Japan declined by 6 per cent. Valentino sales were down 3 per cent. Moncler and Prada are to report their Q1 numbers on Wednesday and Hermès on Thursday.
Asked to comment on the appointment of Alessandro Michele at the creative helm of Valentino, and what it means for Kering (Kering acquired a 30 per cent stake in Valentino from parent company Mayhoola last year), Poulou said: “We are very happy with this appointment obviously, but it’s not our role as minority shareholder to comment on the rationale.”
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