Gucci Owner Kering Expects Sharp Drop in Operating Profit After China Weighs on Sales — 2nd Update

By Andrea Figueras

Kering expects sharply lower operating profit in the first half after sales slumped in the first three months as the company grapples with sluggish demand, particularly in China.

The French luxury-goods giant said Tuesday that it anticipates a decline between 40% and 45% in first-half recurring operating income compared with the year-earlier period, while it continues to invest in its fashion houses.

The company booked revenue of 4.50 billion euros ($4.80 billion) for the first quarter, down 11% in reported terms compared with the year-earlier period. The result came in line with analysts' forecasts of EUR4.51 billion, according to a poll of estimates compiled by Visible Alpha. On a comparable basis, revenue fell by 10%.

"Kering's performance worsened considerably in the first quarter," Chairman and Chief Executive Francois-Henri Pinault said.

Sales at star brand Gucci--the largest contributor to the group's revenue--dropped 21% in reported terms to EUR2.08 billion, in line with Visible Alpha consensus. On a comparable basis, Gucci revenue fell 18%, hit particularly by a sharp decline in the Asia-Pacific region.

However, the company pointed out that the brand's new collections, which have gradually become available in stores since mid-February, have been very well received, particularly in the ready-to-wear and shoes categories.

"While we had anticipated a challenging start to the year, sluggish market conditions, notably in China, and the strategic repositioning of certain of our houses, starting with Gucci, exacerbated downward pressures on our topline," the CEO said.

Last month, the company warned that first-quarter sales were expected to decline on year by around 10% at the group level and nearly 20% at Gucci.

Most luxury names are facing a slower-than-expected recovery in China--one of the industry's largest markets--with some analysts saying Kering's warning was a reminder that consumer confidence and discretionary spend in the country remain weak.

In February, Kering issued its first profit warning of the year, expecting results to take a hit in 2024 from planned investments in its fashion houses, as it seeks to reinvigorate Gucci with Sabato de Sarno as the brand's creative chief. However, some analysts said signs of improvement could take time.

The investments coincide with a normalization of sales-growth trends across the industry after the postpandemic boom gave way to a slowdown in demand due to high interest rates and inflation that have weighed on less-affluent consumers.

While a sluggish start to the year was already anticipated for luxury-goods firms, first-quarter earnings are expected to continue to show diverging trends between companies.

Those more exposed to high-end customers are expected to achieve better results, since these shoppers are more resilient in times of macroeconomic slowdowns, while names that cater to a status-seeking clientele could face a tougher outlook. The latter represent the majority of Kering's client base, S&P Global Ratings analysts said in a research note.

Coupled with the wider slowdown, some analysts noted that companies that were seeking to revamp their brands could face even more challenges, as consumers have become more selective, favoring well-established brands.

Write to Andrea Figueras at andrea.figueras@wsj.com

(END) Dow Jones Newswires

April 23, 2024 13:09 ET (17:09 GMT)

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