Kering's Gucci warning wipes out $7.6 billion in off-market value

(Bloomberg) — Kering SA shares fell after the French luxury group warned that sales of Gucci's biggest brand fell about 20% in the first quarter.

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The stock fell as much as 15% in Paris trading, its steepest intraday decline since 1992, wiping €7 billion ($7.6 billion) off Kering's market value.

The decline in sales at Gucci – more dependent on China than some luxury peers – was due to lower-than-expected declines in the Asia-Pacific region. The fashion group has been trying to revive Gucci, which is losing two-thirds of its profits without success. The warning will prompt fresh speculation about how Kering can undermine trust in its brand.

Controlled by the billionaire Pinault family, Kering has struggled to keep up with rivals such as LVMH Moet Hennessy Louis Vuitton SE and Hermes International SCA as luxury sales have cooled in the past year, particularly in China. LVMH's broad brand portfolio and Hermès' long waiting lists for handbags have made those companies more resilient.

“Gucci has been experiencing some company-specific issues for a few quarters, but this update raises further concerns about the level of consumer spending and China's economy,” analysts at Vital Knowledge wrote in a note to clients.

Also Read: China's Debit Rebound Has Left Luxury Stores Relying on US Demand

Overall, comparable sales at Kering, which owns labels such as Yves Saint Laurent and Balenciaga, would fall about 10% for the period, the company said.

A new designer

Gucci sales slumped in the final months of last year as the label struggled to attract more affluent shoppers to its pricey Double G belts and Princetown slippers. Kering CEO Francois-Henri Pinault warned last month that heavy investments in its labels would pressure the group's results this year.

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Sabato di Sarno was named the brand's new designer last year, and he unveiled his first collection in Milan in September, which showcased a more sleek and minimal aesthetic compared to the flamboyant looks of his predecessor, Alessandro Michele.

Also Read: Sabato di Sarno's Gucci Debut Showcases Miniskirts, Platform Loafers

Gucci has long been one of the most volatile of the major luxury brands in terms of buzz around designers like Michael and predecessor Tom Ford.

Kering's problems coincide with a cooling market for high-end products and lower demand, particularly in China. Asia-Pacific excluding Japan accounted for 35% of group revenue last year, ahead of Western Europe and North America.

“The jury is out on whether the Chinese prefer the quiet luxury of sabato de sarno,” said analyst Luca Solca and colleagues at Bernstein, noting the current trend is a more understated look.

According to Kering, the initial ready-to-wear products of the latest Ancora collection “have been very favorably received”. Their availability will increase in the coming months, the company said.

Kering's unexpected announcement was “a very worrying signal for the luxury goods sector,” wrote Citigroup analyst Thomas Chauvet. Its biggest label said it was hit by “being in the midst of a major design and management shake-up, weak performance of carryover products and limited penetration from early products” of the new collection, which was offered to only a third of the store network. In mid-February, he added.

Meanwhile, Kering has been active on the acquisition front, buying 30% stakes in fragrance giant Creed and Valentino. Earlier this year, it announced the purchase of a building on Manhattan's Fifth Avenue for $963 million, as the hunt for trophy retail assets heats up among luxury players. However, none of these deals materialized and the company is currently heavily dependent on Gucci.

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While Kering has been grappling with issues specific to Gucci, investors in some other fashion companies have been spooked by its warnings. Another company, Burberry Group Plc, fell as much as 6%, while Cartier-owner Richmond fell as much as 4.7%.

Kering said in February that this year's recurring operating income will decline from 2023, particularly in the first half, and that it will be “vigilant and disciplined in terms of its cost structure.”

(Updates with details on China exposure, profit outlook, competitors' shares)

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