Kering Warns Profit to Tumble Following Gucci Woes in China

Kering has been trying to turn around Gucci, which accounts for more than two-thirds of its operating profit.

(Bloomberg) — Kering SA warned that profit will plunge in the first half of the year as the crisis at Gucci, its biggest brand, deepens.

Recurring operating income will drop between 40% and 45% in the first six months, Kering said in a statement Tuesday. That’s after comparable sales at Gucci tumbled 18% in the first quarter on slack demand in China.

Kering is struggling to revive the fortunes of Gucci, which accounts for more than two-thirds of its operating profit. The luxury group last year named a new Gucci creative director, Sabato De Sarno, whose designs began entering stores in February. Kering has warned the turnaround will take time to bear fruit as the market for luxury goods cools.

“The market in China is currently quite polarized between an appetite of customers for the really high-end segment or for more affordable products,” Kering Chief Financial Officer Armelle Poulou told reporters Tuesday. “Gucci, being more positioned in the middle, is not benefiting from this polarization.”

The situation could evolve quickly because Chinese customers are in a “wait-and-see” mode as the distribution of the new collections ramps up, she said. So far the new designs “have been very well received, particularly in the ready-to-wear and shoes categories,” Kering said in the statement. Kering expects all of Gucci’s products by the third quarter to be from the new collections led by De Sarno, Poulou added.

In the meantime, Gucci is working on its handbag offering, which is a crucial category. It has plans to accelerate new launches this year, Poulou said during a call with analysts.

The company continues to lag behind LVMH Moet Hennessy Louis Vuitton SE, its larger French rival and the owner of some 75 luxury brands, including Christian Dior and Tiffany & Co. LVMH delivered 3% organic revenue growth in the first quarter. Hermes International SCA, which has also withstood the downturn better than most peers, will report sales on Thursday.

“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,” Luca Solca, analyst at Sanford C. Bernstein wrote in a note. “The magnitude of the profit descent, nevertheless, surprises on the downside. It seems clear that Kering is intent on ‘cleaning up the house’ and establishing a stronger base for the future.”

Kering’s American depositary receipts fell as much as 5.3% after the profit warning. The company’s shares are down 12% this year in Paris trading, trailing a 9% advance in LVMH and a 23% gain by Hermes.

Sales at Kering fell 10% on a comparable basis in the first quarter, in line with the warning the group issued in March. Yves Saint Laurent, its second-largest brand, saw comparable sales decline 6%, while Bottega Veneta rose 2%, buoyed by double-digit growth in North America, Western Europe and the Middle East.

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(Updates with comments from CFO call with analysts)

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