Gucci brand's revival hopeless? Kering SA's annual profit may hit the lowest since 2016 | Financial Report Insights

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2024.10.23 17:05
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The demand in the luxury goods industry is sluggish, with Gucci, which accounts for half of Kering SA's revenue, experiencing a 25% drop in same-store sales. Kering SA expects an operating profit of approximately 2.5 billion euros for the full year, which may hit the lowest level since 2016. This is already the third profit warning issued by the company this year

European luxury giant Kering SA released its financial report on Wednesday, showing that its performance in the third quarter fell below expectations across the board, with same-store sales of its Gucci brand, which accounts for half of the company's revenue, dropping by 25%. Due to sluggish demand in the luxury goods market, Kering SA expects that its full-year profit for this year may hit the lowest level since 2016, marking the company's third profit warning this year.

Key Financial Data:

Revenue: Kering SA's third-quarter revenue was €3.79 billion, below analysts' expectations of €3.96 billion.

Same-store Sales: Same-store sales in the third quarter fell by 16%, compared to analysts' expectation of a 10.9% decline.

By Brand Data:

Gucci: Gucci's third-quarter revenue was €1.64 billion, below analysts' expectations of €1.75 billion, with same-store sales declining by 25%, compared to analysts' expectation of a 20.7% decline.

Saint Laurent: Third-quarter revenue was €670 million, with a 12% decline in same-store sales.

Bottega Veneta: Third-quarter revenue was €397 million, with a 5% growth in same-store sales.

Other Brands: Third-quarter revenue was €686 million, with a 14% decline in same-store sales.

Performance Guidance:

It is expected that the full-year operating profit will be approximately €2.5 billion, while analysts expect €2.82 billion.

Poor Demand Hinders Gucci's Recovery

Kering SA stated that the poor performance was mainly due to the decline in demand for luxury goods in China, which hindered the recovery of its brand Gucci. According to the financial report, Gucci's same-store sales fell by 25% year-on-year in the third quarter, with Gucci accounting for half of the group's annual revenue and two-thirds of its profit.

The company stated:

"In the coming months, the demand of luxury goods consumers may be significantly affected by major uncertainties.

The Group prioritizes expenditures and measures that support the long-term development and growth of its brands, and is firmly committed to optimizing its cost base, organizational efficiency, and return on investment."

Analysts believe that this performance indicates that Kering SA is facing significant challenges in reshaping its flagship brand Gucci in the face of slowing demand. François-Henri Pinault, Chairman and CEO of Kering SA, stated in the announcement, "We are undergoing profound transformations within the Group, especially at Gucci, at a time when the entire luxury sector is facing unfavorable market conditions." However, the company also mentioned that the reform of Gucci's leather goods category is on track and a range of new products was launched at the end of this quarter.

Furthermore, Kering SA is rebuilding its executive team. Earlier this month, the fashion group promoted former Louis Vuitton executive Stefano Cantino to be the new CEO of Gucci, with the appointment set to take effect on January 1st next year. Cantino joined Gucci in May this year as Deputy CEO. Additionally, the company's Creative Director, Sabato de Sarno, is introducing a new simplified design style while driving product development towards the high-end market

Luxury Industry Overall Slows Down

In July this year, due to a significant slowdown in luxury spending, Kering SA issued its second profit warning, leading to a halving of its net profit in the first half of the year. Since hitting a year-high of 434.50 euros on February 22, Kering SA's stock price has fallen by 46%, with a year-to-date decline of over 41%, potentially marking its worst annual performance since 2008. The company's stock price fell by 1.47% on Wednesday, closing at 230.95 euros.

At the time of Kering SA's warning, the luxury industry as a whole is facing a slowdown. Last week, the key fashion and leather goods division of the luxury benchmark LVMH (including Louis Vuitton and Christian Dior) also disappointed in sales performance in the third quarter, with organic sales declining by 5% year-on-year, leading to a deterioration in demand for high-end fashion this quarter.

Analysts believe that companies in transition are under greater pressure than others, as analysts predict that the cyclical downturn in the luxury industry may last one to two years.

Citigroup recently downgraded its stock rating to neutral. Analyst Thomas Chauvet stated in a research report, "Kering SA has successfully turned around several key brands over the past two decades." However, the execution of luxury brand transformations has become "more complex, lengthy, expensive, and no longer suitable for the public market," as consumers are more inclined towards top brands rather than brands in transition