PARIS — As France’s Parliament debates an austerity budget to tackle its gaping deficit, Kering is extending its own arsenal of cost-cutting measures to counter an expected 50 percent drop in operating profit this year.
Layoffs, store closures and contract renegotiations are all on the menu as the French luxury conglomerate seeks to right its ship after a tougher-than-expected third quarter that saw its star brand Gucci again miss expectations amid a sharp slowdown in China and Japan.
“Our absolute priority is to build the conditions for a return to sound, sustainable growth, while further tightening control over our costs and the selectivity of our investments,” François-Henri Pinault, chairman and chief executive officer of Kering, said in a statement after the market close on Wednesday.
The group, which also owns brands including Saint Laurent, Bottega Veneta and Boucheron, reported revenues fell 15 percent to 3.79 billion euros in the three months to Sept. 30, representing a decline of 16 percent in comparable terms.
The figures were below a Bloomberg-compiled consensus of analyst estimates, which had called for an 11 percent drop in comparable sales amid the downturn in China and ongoing political turmoil worldwide.
Organic sales at Gucci declined 25 percent in the third quarter, versus analysts’ predictions for a 21 percent drop. In reported terms, revenues fell 26 percent to 1.64 billion euros.
Comparable sales at Saint Laurent were down 12 percent, while the “other houses” division — which groups brands including Balenciaga, Alexander McQueen and Boucheron — posted a 14 percent drop.
Inside Gucci’s store on Multrees Walk in Edinburgh, Scotland.
Bottega Veneta was a bright spot, with a 5 percent gain. The brand performed well in the U.S., Europe and the Middle East, powered by handbags, including the hugely popular Sardine style.
By comparison, organic sales at LVMH Moët Hennessy Louis Vuitton’s key fashion and leather goods division fell 5 percent year-over-year in the third quarter, also missing market expectations.
A New Team at Gucci
Gucci is in the middle of a turnaround process under creative director Sabato De Sarno, with Stefano Cantino poised to take over as CEO on Jan. 1, marking the second senior management change in two years.
Against that backdrop, Kering said it expects recurring operating income of around 2.5 billion euros in 2024 at group level, versus 4.75 billion euros last year.
It cited the larger-than-expected slowdown in the third quarter and “the major uncertainties likely to weigh on demand among luxury consumers in the coming months.” Gucci accounted for almost 64 percent of operating profit in the first half.
“At the risk of stating the obvious, the self-help Kering story seems yet to warrant investor commitment, no matter how apparently cheap,” Bernstein analyst Luca Solca wrote in a note after the results.
Chief financial officer Armelle Poulou said that despite a slight improvement in trends in September and October, Kering expects no substantial improvement in the fourth quarter, meaning gross margins will remain under pressure.
As a consequence, spending on advertising and promotion should be flat in 2024, accounting for a high-single-digit percentage of sales. With every dollar counting, some projects will be put on hold, while ad campaigns are designed to do double duty.
For instance, Gucci’s cruise 2025 campaign — shot by Nan Goldin and featuring stars like Debbie Harry — prominently features its new handbag launches in addition to serving as an institutional campaign situating the brand’s roots in London, Poulou said.
On that note, she appeared to confirm the departure of Gucci’s chief brand officer Alessio Vannetti, reported by BoF last week.
“We will be happy to welcome some new senior executives to lead the communication function, and that should be announced in due course, but we expect the new leadership structure in communication to be fully operational by the end of 2024,” she said.
Overall, De Sarno’s designs accounted for 35 percent of the brand’s revenues in the third quarter, up from 25 percent in the prior three-month period.
Hopes for Handbags
Management pinned high hopes on the introduction of four new Gucci handbag lines in September.
The most accessible is the GG Emblem, which retails for $2,490. The medium Blondie top-handle bag costs $4,200, while the oversize B bag is priced at $4,100. A soft version of the Horsebit bag is expected to play a bigger role during the holiday season, Poulou said.
“The new offer is resonating very well with existing customers,” she reported. “Where we have still some work to do and some challenges in the current macro environment is more about recruiting new customers, and that is also linked to the fact that the traffic is very much down in many regions, especially in Asia-Pacific.”
Retail revenue fell 30 percent in Asia-Pacific in the third quarter, 15 percent in North America and 11 percent in Western Europe, Kering said.
Sales in Japan eked out a 3 percent increase, following a 27 percent jump in the prior quarter, while the rest of the world progressed 2 percent.
The fortunes of luxury stocks have been closely tied to China’s economic stimulus measures designed to counter weakness in domestic demand amid a slumping property market and high youth unemployment.
The world’s second-largest economy will grow by 4.8 percent this year, down from the previous projection of 5 percent in July, the International Monetary Fund said in its latest “World Economic Outlook” report.
Kering revenues from Chinese nationals were down 35 percent at group level in the third quarter, and it’s too early to know when the government stimulus measures will bear fruit, Poulou said.
On the heels of a disappointing Golden Week holiday, Kering is now looking to downsize its directly operated store network, especially in Greater China.
“The idea is to close the smaller stores or the ones that are not in the best location, and probably extend the size of some of the best stores in order to get the right footprint,” Poulou said.
It will also continue to close outlets, especially in Asia-Pacific, and reduce its wholesale network as it battles the gray market, the executive said.
Meanwhile, a deal to bring in investors as majority owners of some of its stores in New York City and Paris should be signed by year-end and is expected to yield 1.4 billion euros in cash, she added.
In the meantime, the cost-cutting continues apace.
“We have raised the efficiency and productivity in retail with some headcount reductions, especially at Gucci,” Poulou said.
“We are renegotiating some supplier contracts, for example, we made changes to transport and logistic arrangements that delivered substantial savings, and we chase inefficiency and duplication leveraging on our previous investments,” she added.
“And of course, we are very strict in terms of corporate spending. All those efforts are efforts that are not one-off and that will be sustainable going forward,” she said.
She noted that French Prime Minister Michel Barnier’s plan to raise the corporation tax should have limited impact on Kering’s effective tax rate at group level, since most of its operations are based in Italy. LVMH, on the other hand, estimated the cost of the measure at 700 million euros to 800 million euros.
With luxury in a cyclical slump that analysts predict could last for one or two years, companies in turnaround mode are feeling the pressure more than others.
Kering’s share price has fallen by 46 percent from its intra-year peak of 434.50 euros on Feb. 22. Reflecting pessimism about the company’s prospects, Citi recently downgraded the stock to neutral.
“The magnitude of Kering’s [third-quarter] sales miss and [quarter-on-quarter] slowdown mirrors that of LVMH’s fashion and leather division, hence not a major surprise in our view, although it will likely be the luxury sector’s worst revenue performance this quarter,” analyst Thomas Chauvet said in a research note on Wednesday.
Backstage at Bottega Veneta spring 2025.
“The impact of our cost optimization initiatives, like our efforts to rebuild healthy, sustainable top-line growth, will not materialize overnight, but we are all pushing in the right direction, and we are all committed to a successful outcome,” Poulou countered.
“We want to make 100 percent sure that top-line growth, when it returns, is based on absolutely sound premises,” she said.
