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Kering's Shares Fall on Lower Profitability Outlook

By Andrea Figueras

 

Shares in Kering dropped after the owner of Gucci said it expects sharply lower operating profit in the first half, as it grapples with sluggish demand in China.

At 0829 GMT shares traded 7.8% lower at EUR322.75. Shares in peer Burberry--which is also in the midst of a turnaround process--fell 2.5%.

The French luxury-goods giant said late Tuesday that it forecasts a decrease 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 sales drop didn't come as a surprise, since the company already anticipated the decline in March. However, the expected hit to profitability was more pronounced than expected, which could prompt cuts to consensus estimates, Stifel analyst Rogerio Fujimori said in a research note.

Sales at star brand Gucci--the largest contributor to the group's revenue--dropped 21% in reported terms to EUR2.08 billion, hampered particularly by a sharp decline in the Asia-Pacific region.

Most luxury names are facing a slower-than-expected recovery in China--one of the industry's largest markets--due to domestic economic woes.

"The challenging environment in Asia, particularly in China, will continue to weigh on the group's performance for the year ahead," AlphaValue analyst Jie Zhang wrote in a note to clients.

Kering is undergoing a turnaround process, as it seeks to reinvigorate Gucci with Sabato de Sarno as the brand's creative chief.

"It is still too early to buy the stock," Stifel said, adding that green shoots for Gucci's new collections are yet to be seen in coming quarters.

Despite the impact on results, the company is seen as taking the right steps to change the brand's direction, Deutsche Bank said. "We are encouraged by the fact that management has continued the necessary investment rather than overzealously cut the cost base," Deutsche Bank analyst Adam Cochrane said in a note.

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.

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.

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 names.

 

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

 

(END) Dow Jones Newswires

April 24, 2024 05:00 ET (09:00 GMT)

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