Gucci store
Kering has been trying to revitalise Italian label Gucci through a focus on higher end products under new management / Image source: Adobe
  • French conglomerate flags slowdown
  • Asia Pacific disappoints
  • Gucci turnaround remains uncertain

European luxury stocks were marked down on Wednesday after French conglomerate Kering (KER:EPA) warned its first-quarter sales were expected to tumble by 10%, dragged down by its flagship brand Gucci which is in the early stages of a turnaround.

Kering shares plunged 15% to €362.3 in early Paris trading on the earnings alert pinned on weaker demand from China, with the negative read-across leaving shares in LVMH (MC:EPA), Hermes (RMS:EPA) and Richemont (CFR:SWX) out of fashion with investors.

The Chinese market is extremely important for UK-listed Burberry (BRBY), which cheapened 4.1% to £11.81, while high-end timepiece seller Watches of Switzerland (WOSG) ticked 5.4% lower to 346.7p on the news.

TURNAROUND ONGOING AT HOUSE OF GUCCI

Paris-based Kering, which also owns brands including Saint Laurent, Bottega Veneta, Balenciaga and Alexander McQueen, warned that based on current trends it expects to suffer a 10% year-on-year organic sales decline for the first quarter with Gucci revenue anticipated to be down nearly 20%.

Kering, which had expected the first half to be ‘challenging’, said this disappointing performance ‘primarily reflects a steeper sales drop at Gucci, notably in the Asia-Pacific region’.

Controlled by the billionaire Pinault family, Kering has been trying to revitalise Italian label Gucci, which represents around half of group sales, through a focus on higher-end products under new management and a new creative director, Sabato De Sarno, but with limited success thus far.

Kering’s warning contrasts with the performance of rivals LVMH, the world’s largest luxury goods group, and Birkin handbag maker Hermes, which both delivered double-digit sales growth in their most recent quarters.

JTC touches new 12-month high on strong outlook

ALARM BELLS RINGING FOR BURBERRY?

The Asia Pacific-induced downgrade from Kering and subsequent sell-off of British luxury brand Burberry is also a short-term setback for investors who followed our recent ‘buy’ call on the rainwear to leather goods seller.

However, we still believe the risk/reward balance is favourable with the trench coat-to-tote bag purveyor’s sell-off overdone and too much doom and gloom priced into a stock which is cheap relative to its own history.

Tougher luxury market conditions are a headwind, yet Burberry is pulling self-help levers including elevation of the brand to raise margins closer to those of LVMH and Hermes whilst pushing ahead with revenue-enlivening store refurbishments.

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Issue Date: 20 Mar 2024