Kering Warns of Sharp Profit Decline at Gucci in First Half of 2024

Kering SA, the French luxury conglomerate that owns Gucci, has issued a sobering warning that its operating profit is expected to plummet by 40% to 45% in the first half of 2024 compared to the same period last year. The company cited significant challenges in the luxury market, particularly a slowdown in demand from China, as the primary factors behind the grim forecast.

In the first quarter of 2024, Kering reported a 10% decline in overall sales on a comparable basis, with Gucci, its flagship brand, seeing an 18% drop in revenue. "Kering's performance worsened considerably in the first quarter," the company stated, attributing the decline to "sluggish market conditions, notably in China, and the strategic repositioning of certain of its brands, starting with Gucci."

Gucci, which accounts for over half of Kering's revenue and two-thirds of its operating profit, has been undergoing a brand repositioning under its new creative director, Sabato De Sarno. However, the revamp has yet to yield positive results, with the brand struggling to retain its market share as even affluent consumers tighten their belts amid economic uncertainty. "Gucci's revenue dropped double-digits in the first quarter of 2024, which Kering blamed on the 'ongoing normalization' in the luxury sector," the company reported.

Kering's other fashion houses, including Saint Laurent and Bottega Veneta, also experienced revenue declines, although its Eyewear and Corporate segment, which includes the Beauté division, saw a 24% increase in sales. Despite this bright spot, the overall picture remains grim, with Kering's shares plunging 7.8% following the announcement of the lower profitability outlook.

Why this matters: Kering's profit warning raises concerns about the health of the luxury market, particularly in China, which has traditionally been a key driver of growth for high-end brands. The challenges faced by Gucci, once a darling of the luxury industry, underscore the difficulties in maneuvering a rapidly evolving and increasingly competitive market, even for established players.

Analysts have lowered their earnings per share estimates and price targets for Kering's stock, citing the challenges in Gucci's turnaround journey. "The extent of the anticipated drop in first-half profit was larger than expected, prompting analysts to remain cautious about Kering's turnaround journey," the company acknowledged. As the luxury conglomerate works to reignite sales at Gucci through an aesthetic reset and a focus on leather goods, the execution risk remains high, and a significant improvement in the brand's performance may not materialize until 2025.

Key Takeaways

• Kering warns of 40-45% plunge in H1 2024 operating profit vs 2023.
• Gucci, Kering's flagship brand, saw 18% Q1 2024 revenue decline.
• Gucci's brand repositioning has yet to yield positive results.
• Kering's other brands also experienced revenue declines in Q1 2024.
• Kering's profit warning raises concerns about luxury market, especially in China.