Gucci’s steep sales decline throws spotlight on China

By Thomson Reuters Mar 20, 2024 | 2:02 AM

By Mimosa Spencer

PARIS (Reuters) – Shares of Kering are expected to open down on Wednesday, after the company warned first quarter sales at its star label Gucci would drop by around 20% due to weakness in Asia.

The warning underscores the challenge Kering faces as it seeks to reignite sales momentum at Gucci, which accounts for half of group sales and two-thirds of profit, while navigating economic headwinds in key markets – especially China.

The label is undergoing a design overhaul under the creative direction of Sabato de Sarno as it seeks to regain ground lost to rivals like LVMH’s Louis Vuitton and Dior in recent years.

The group’s forecast sales decline of around 10% for the first three months of the year is significantly worse than consenus expectations for 3% drop.

The trading update, which comes as Gucci’s new designs trickle into stores, is a sign that the more classic, legacy products such as leather handbags the label has emphasized as it moves upmarket, are not resonating with consumers, said James Grzinic, an analyst with Jefferies.

An “encouraging” reception for the new designs is “dwarfed by that tough headwind,” said Grzinic.

De Sarno’s sleek, pared-back and sensual styles have marked a departure from the eccentric, flamboyant looks associated with those of his predecessor, Alessandro Michele. New brand signtures include chunky loafers, mini shorts and glossy Jackie handbags.

Analysts at Bernstein recently flagged De Sarno’s February runway show in Milan – his third – as generating “over-archingly positive” industry and social media feedback.

But the jury is still out on whether the Chinese will take to the “Sabato De Sarno quiet luxury,” said Bernstein’s Luca Solca.

Beyond the challenges at Kering, analysts flagged the update as a potential drag on the high-end sector, with Citi calling it “a rather worrying signal.”

Expectations for a strong rebound in China have been dashed by the country’s property crisis and high youth unemployment. Consultancy Bain forecasts mid-single-digit growth for China’s luxury market this year, after 12% growth in 2023.

(Reporting by Mimosa Spencer; Editing by Lincoln Feast.)