Gucci, the King of Comebacks, Has More Challenges Ahead

(Bloomberg Opinion) -- After a warning last month that Gucci sales had slumped, investors knew that Kering SA’s first-quarter performance wasn’t going to be pretty.

But the scale of the problems at the flagship brand were laid bare on Tuesday. Sales excluding currency movements fell 18% in the three months to March 31, in line with expectations. But heftier investment in Gucci means Kering’s group operating profit will plunge between 40% and 45% in the first half of 2024. The shares fell as much as 10%, to the lowest for six years.

Kering is turbocharging the shift to new designs and expects an improvement in the second half. But with its new look still largely untested, and its affluent customers showing little signs of recovery, a quick outfit change looks unlikely.

At the heart of Gucci’s problems is the transition from its opulent aesthetic under former creative director Alessandro Michele to sleeker styles under his successor Sabato De Sarno.

De Sarno’s collection is only just hitting stores, with the high-end clothing and shoes sent down the catwalk last September arriving first. While customers liked these, they made up less than 7% of Gucci sales in the first quarter, Kering said.

This is now ramping up, with more mainstream items and men’s products joining womenswear. De Sarno’s designs should increase from making up 25% of the range in the second quarter to its entirety by the third or fourth.

For shoppers, there’s little point in buying now if what’s available will soon be out of date. But it seems that without the draw of the new look, consumers, particularly in Asia, didn’t bother visiting Gucci stores at all. That hurt demand for classic lines, such as Jackie handbags and horsebit loafers, which the market hadn’t been anticipating. The brand’s sales in the region, excluding Japan, fell 28% in the first quarter.

And Kering doesn’t expect things to improve much in the current quarter, which is made more challenging by the fact that in the corresponding period in 2023, Chinese shoppers had just been freed from Covid restrictions and were eager to shop.

When Michele unveiled his designs in 2015, having spent more than a decade with Gucci, he was able to achieve his vision without significant disruption. But the designer’s granny chic aesthetic is now firmly out of fashion, and so moving to the De Sarno era has meant more of a rupture.

Not only is Kering being forced to clear unwanted items, it is having to move quicker at Gucci, for example reigniting its handbag selection. All this takes significant investment, for example, on advertising, hence the drag on profits.

Kering is assuming that Gucci’s sales will start to improve in the second half, as De Sarno’s range expands and as comparisons are no longer with the period in 2023 when Chinese shoppers were revenge spending. This should ease the profit pressure, and Kering expects the group operating margin to be 1 to 1.5 percentage points higher in the second half of the year than the first.

So, there is a good chance this is the nadir. But the danger is that Gucci’s new lines are simply not exciting enough to entice shoppers. It’s worth remembering that when Michele’s collection arrived, there was an instant buzz. That seems to be lacking this time round.

Meanwhile, Gucci is in a more difficult position than rivals, as it caters to affluent rather than super-rich shoppers. LVMH Moet Hennessy Louis Vuitton SE, owner of Louis Vuitton and Loewe, which performed better, appeals to a broader audience.

Indeed, Kering blamed part of Gucci’s plight on being caught in the middle in China, with its products being seen neither as an investment nor particularly affordable.

Consequently, the need for more remedial work at Gucci can’t be ruled out. Kering recently appointed Stefano Cantino, previously in charge of image and communication at Louis Vuitton, as deputy to the brand’s Chief Executive Officer Jean-Francois Palus. But Bloomberg News reported this week that some investors would like to see group co-deputy CEO Francesca Bellettini succeed Kering CEO Francois-Henri Pinault. Another option would be for Bellettini to take the reins at Gucci. It’s too soon to be talking about creative change, but the longer the Gucci slump lasts, the more likely this will be on the agenda.

Gucci shouldn’t be written off. It is still a huge brand, generating almost €10 billion ($10.7 billion) of sales last year. It has also enjoyed two successful iterations, first under Tom Ford and then Michele. And despite many investors betting that it will be third time lucky, expectations remain low. The shares trade on a forward price-to-earnings ratio of about 15 times, with only Burberry Group Plc less valuable.  

But given that Gucci burned so bright for so long, engineering a revival ahead of the natural ebbs and flows of the fashion cycle looks like a huge task — even for the king of comebacks.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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