Posted By Uma Rajagopal
Posted on February 8, 2024
Kering to put more money into reviving Gucci brand
PARIS (Reuters) -Kering will invest in reviving its star label Gucci this year, likely affecting 2024 margins, as it prepares for the first designs from new creative director Sabato de Sarno to hit stores.
The label has lagged rivals for the past two years, prompting a reshuffle that saw chief executive Marco Bizzarri depart, but has also been hit by a drop in consumer spending.
Chief Executive Francois Henri Pinault told analysts the group would continue investing in its brands, even if it meant lower margins:
“This will cause some pressure on our result in the short term, and I am absolutely determined to make this short-term pain pay off in the long term.”
The measures will include increasing advertising and promotional spend to more than 8% of sales, executives said – some of it back de Sarno’s first designs.
Analysts were broadly supportive, crediting Pinault for prioritising long-term growth.
“Indications that margins would have to be sacrificed to fuel the reinvention points to a continuing and ongoing effort that is not for the short term,” said analysts at Bernstein.
After a post-pandemic splurge that fuelled stellar sales growth for high-end fashion over two years, consumers have been reining back, particularly the younger, less wealthy clientele who are more vulnerable to rising inflation.
FOCUSING ON HIGH-END CUSTOMERS
Like other luxury groups, Kering is therefore focusing on products aimed at high-end rather than “aspirational” customers.
Sales at the French group, which also owns fashion brands Bottega Veneta and Balenciaga and jeweller Boucheron, fell 4% to 4.97 billion euros ($5.36 billion) in the final three months of the year, despite improvement in the United States and Europe. That was broadly in line with expectations for 4.94 billion euros, according to consensus estimates cited by RBC.
Analysts expressed relief that recent sales declines appeared to have been stemmed.
“Gucci is not performing worse than expected, which is a relief,” said Piral Dadhania, analyst with RBC.
Shares in Kering, which have underperformed those of its peers, were up 4.3% in mid-morning in Paris while its rival Hermes, which reports on Friday, rose 2.1% and LVMH was up 1.4%.
Kering’s 12-month forward price-to-earnings ratio, based on projected earnings, is 15.6, LSEG data shows, trailing LVMH at 24.2 and Hermes at 47.7.
Gucci’s performance improved over the fourth quarter, when it was down 4% year-on-year, compared with a 7% decline in the third quarter. The label’s recurring operating margin stood at 33.1% for the full year, compared to 35.3% in the first half.
($1 = 0.9276 euros)
(Reporting by Mimosa Spencer; Editing by Matt Scuffham and Michael Perry)
