HomeBusinessGucci's steep sales decline shines a spotlight on China

Gucci’s steep sales decline shines a spotlight on China

By Mimosa Spencer

PARIS (Reuters) – Kering shares fell on Wednesday after the French luxury goods company warned that sales at its star label Gucci would fall by about 20% in the first quarter due to weakness in Asia.

Kering shares fell about 13 percent in early session trading, dragging down the share prices of other leading luxury goods companies such as LVMH and Hermes.

The warning underlines the challenge Kering faces in trying to revive sales momentum at Gucci, which accounts for half of group sales and two-thirds of profits, while dealing with economic headwinds in key markets, especially China.

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

The group’s expected sales decline of around 10% for the first three months of the year is significantly worse than consensus expectations of a 3% decline.

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The trade update, which comes as Gucci’s new designs trickle into stores, is a sign that the more classic, legacy products like leather handbags that the label has emphasized as it becomes more expensive are not resonating with consumers, says James Grzinic, an analyst at Jefferies.

An “encouraging” reception for the new designs is “overshadowed by the strong headwinds,” Grzinic said.

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

Analysts at Bernstein recently flagged De Sarno’s February runway show in Milan – his third – as having “overall positive” feedback from the industry and social media.

But the jury is still out on whether the Chinese will opt for the “quiet luxury of Sabato De Sarno,” 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.”

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Expectations for a strong recovery in China have been undermined by the country’s real estate crisis and high youth unemployment. Consultancy Bain predicts mid-single-digit growth for China’s luxury market this year, following 12% growth in 2023.

(Reporting by Mimosa Spencer; Editing by Lincoln Feast/Sudip Kar-Gupta)

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