(Bloomberg) — Kering SA shares plunged after the French luxury group warned that sales at Gucci, its biggest brand, have fallen about 20% in the first quarter.
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The stock dropped as much as 15% in Paris trading, its steepest intraday decline since 1992, wiping more than €7 billion euros ($7.6 billion) from Kering’s market value.
The sales slump at Gucci — more dependent on China than some luxury peers — was owing to a steeper-than-expected drop in the Asia-Pacific region. The fashion group has been trying to revitalize Gucci, the Italian label that accounts for about two-thirds of profit, without success. The warning will likely prompt renewed speculation over how Kering might lessen its reliance on the brand, whose fortunes have swung sharply over the years in response to changing tastes.
Controlled by the billionaire Pinault family, Kering has struggled to keep up with rivals like LVMH Moet Hennessy Louis Vuitton SE and Hermes International SCA as luxury sales have cooled over the past year, especially in China. LVMH’s broader brand portfolio and Hermes’s long waiting lists for handbags have made those companies more resilient.
“Gucci has been encountering some company-specific problems for a few quarters, but this update will raise further worries about the state of consumer spending and China’s economy,” analysts at Vital Knowledge wrote in a note to clients.
Read More: China’s Tepid Rebound Has Left Luxury Shops Relying on US Demand
Overall, comparable sales at Kering, which also owns labels like Yves Saint Laurent and Balenciaga, will be down about 10% for the period, the company said.
New Designer
Gucci sales fell in the final months of last year as the label struggled to lure more wealthy shoppers to its pricey Double G belts and Princetown slippers. Kering Chief Executive Officer Francois-Henri Pinault warned last month that heavy investments in its labels will put pressure on the group’s results this year.
Sabato De Sarno was named as the brand’s new designer last year and he unveiled his first collection in September in Milan, which showed a more elegant and minimalistic aesthetic compared to the flamboyant looks of his predecessor, Alessandro Michele.
Read More: Sabato De Sarno’s Gucci Debut Shows Miniskirts, Platform Loafers
Gucci has long been one of the most volatile of the major luxury brands, its fortunes rising and falling based on buzz around designers like Michele and a predecessor, Tom Ford.
Kering’s troubles coincide with a cooling market for high-end goods and in particular weak demand in China. Asia-Pacific excluding Japan made up 35% of group revenue last year, more than Western Europe and North America.
“The jury is out on whether the Chinese will like the Sabato De Sarno quiet luxury,” analyst Luca Solca and colleagues at Bernstein said, referring to the current trend for more understated looks.
Early ready-to-wear products from the latest Ancora collection are meeting with a “highly favorable reception,” according to Kering. Their availability will increase in coming months, the company said.
Kering’s unexpected announcement is a “rather worrying signal for the luxury goods sector,” wrote Thomas Chauvet, an analyst at Citigroup. Its biggest label is suffering from “being in the midst of a major design and management transition, with weak performance of carryover items and limited penetration from early products” of the new collection, which had been delivered to only a third of the store network as of mid-February, he added.
In the meantime, Kering has been active on the acquisition front, buying fragrance maker Creed as well as a 30% stake in Valentino. Earlier this year, it announced a purchase of a building on Manhattan’s Fifth Avenue for $963 million as the hunt for trophy retail assets heats up among luxury players. Yet none of these deals is transformational, leaving the company heavily dependent on Gucci for now.
Though Kering has been struggling with issues specific to Gucci, investors in some other fashion companies were spooked by its warning. Burberry Group Plc, another company in a transition phase, dropped as much as 6%, while Cartier-owner Richemont fell as much as 4.7%.
Kering said in February that recurring operating income this year will decline from 2023, particularly in the first half, and said it will remain “vigilant and disciplined with regards to its cost structure.”
(Updates with details on China exposure, profit outlook, rivals’ shares)
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