Kering just delivered depressing first-half 2024 results. Group revenues at $9.8 billion (€9.0 billion) were off 11% from same period last year and worse, recurring operating income tanked 42% to $1.7 billion (€1.6 billion).
Gucci’s dismal performance pulled the Group down. Gucci was off 20%, from $5.6 billion (€5.1 billion) last year to $4.4 billion (€4.1 billion) and recurring operating income took a 44% dive to $1.1 billion (€1 billion).
In all regions, Gucci was down as measured by performance in its directly operated stores except Japan, which saw a 12% rise in sales from an uptick in tourist traffic.
But Japan contributes only 9% to sales, so it couldn’t offset an 18% drop in North America and a 15% decline in Western Europe, which represent about one-fourth of sales individually, or the 30% retreat in Asia-Pacific where about one-third of Gucci sales are made.
Kering’s only bright spot was its Eyewear and Corporate segment, which includes the newly-formed Kering Beauté division, with revenues up 23% to $1.2 billion (€1.1 billion). But its contribution to the bottom line was a negligible $110 million (€101 million).
On both the top and bottom lines, Gucci is Kering’s biggest money maker, representing 45% of revenues and 63% of operating income in the first half of 2024.
Gucci’s Reinvention Just Starting
Chairman and CEO François-Henri Pinault asked for patience while he gets his luxury houses in order, most especially Gucci.
“In a challenging market environment, which adds pressure on our top line and profitability, we are working assiduously to create the conditions for a return to growth,” his statement read. “While the current context might impact the pace of our execution, our determination and confidence are stronger than ever.”
Instant-gratification investors didn’t share that confidence. Kering’s price per share on Euronext Paris reached a high of $322 on Tuesday before reporting and opened at $275 on Thursday, the day after, a 15% drop.
Yet beneath the headlines, Gucci’s promised reinvention is just beginning and the results will shortly begin to show. Pinault and his newly formed executive and creative team, led by Gucci president/CEO Jean-François Palus and creative director Sabato De Sarno, both appointed in 2023, and supported by newly installed deputy CEO Stefano Cantino, who hailed from LMVH, are still learning to play well together.
However, they share a common mission: to elevate the Gucci brand and make it first among equals.
Fall From Grace
Gucci held that position in 2019 when it was ranked the world’s number two most valuable luxury brand, after number one Porsche and ahead of number three Cartier, number four Louis Vuitton, number five Chanel and number six Hermès, according to Brand Finance.
Now, it stands at number five with Porsche, Louis Vuitton, Chanel and Hermès above it. But sometimes, you must take a step or two back to leap forward. And Gucci is poised to make that big leap shortly.
“The naysayers are wrong to suggest this is a systemic and entrenched failure of strategy,” believes Danny Younis, executive director of Sydney, Australia-based Automic Group and formerly with Shaw and Company.
He admits that many of Gucci’s problems have been self-inflicted – “Too much short-termism” – that have been compounded by broader structural industry-wide issues that are challenging many luxury brands. “Gucci’s exponential and stellar pace of growth was clearly unsustainable,” he said, noting that sales have accelerated 3X since 2012.
“Luxury’s trajectory is never flawless and just about every brand has faced significant challenges. Gucci is no different, but it’s not dire,” he continued.
“The desire for – and emotion of – the brand has deteriorated but can be restored within two years or less. Remember Gucci remains one of the few €10 billion turnover brands out there.”
Greenshoots
Part of Gucci’s step back is to retrench around what made Gucci great in the first place: it’s Italian leather goods expertise. Ironically, it started to step away from that back in Gucci’s Tom Ford days when the shift from its luxury footing to being a fashion-first brand started.
“It moved from speaking about leather craftmanship – the pedigree Italians are known for– to being about fashion,” shared Philippe Mihailovich, founder of brand consultancy HauteLuxe and co-author of Haute ‘Luxury’ Branding.
“Everyone loved Tom Ford clothing and his design aesthetic. It became a big commercial success, but all of a sudden Gucci became the world of Tom Ford and Gucci became about his fashion,” he continued.
In the early days under previous creative director Alessandro Michelle, Mihailovich saw signs of a return to the brand’s Italian roots – “He brought a cultural reference to and reverence for the Italian Renaissance.” But then he seemed to get sidetracked by venturing too far into pop culture.
“Instead of the designer being the guide and interpreter for the world of the brand, the designer became almost bigger than the brand. It no longer looked like a serious luxury brand; it lost its essence,” he continued.
Enter Sabato De Sarno, who had been a luxury journeyman with Prada, Dolce & Gabbana and Valentino before stepping into the design director’s position at Gucci.
“I’m very excited about Sabato. He is into the details, knows about quality and understands a luxury brand is about timelessness. He has the ability to pull the brand back upwards again,” Mihailovich said.
De Sarno’s first collection is entitled Gucci Ancora, which means “Also now, also then.” It gives a taste of more Italianate elegant refinement to come and is resplendent in a deep Burgundy red color – perhaps the color of Barolo or Chianti is a more fitting description.
Gucci Ancora is just hitting the stores and been well received but represented only about 25% of revenue during the second quarter. CFO Armelle Poulou reported during the earnings call that the performance of “carryover” merchandise, especially handbags, pulled Gucci results down.
But that should be overcome as the year advances with the introduction of four new handbag collections starting in September. “We are working on the interaction between newness and iconic lines, optimizing pricing and availability and making sure quality is flawless,” she said.
The collections will cover both elevated true-luxury price points and so-called aspirational, entry-level prices. The company recognizes the importance of giving new customers an on-ramp to the Gucci brand so it is not abandoning lower-end price levels, but may still elevate them slightly to drive the aspirational dream for the brand.
Operationally, the brand is moving to enhance distribution, improve time-to-market and sell-through. In addition, tighter cost controls have been put in place and various planned store projects are being reassessed and canceled or postponed if not deemed “immediately essential.”
Managing For Long-Term Sustainable Growth
In a weird way, becoming too popular can be the kiss of death for a luxury brand. That may be partly to blame for Gucci’s recent fall from grace, as was Kering’s over-reliance on Gucci and its star creative directors to bring in sales and profits. LVMH doesn’t let that happen under its more diversified organizational structure.
So a sign of health might be that while Kering still depends on Gucci to carry more than its fair load, its contribution to sales and profits is now more balanced than in 2019 when Gucci contributed 63% of revenues and 83% of profits. This may give other Kering brands an opportunity to shine, like Yves Saint Laurent, Bottega Veneta, Balenciaga and Alexander McQueen.
“We are not going to compromise the long-term for short-term easy cuts,” Poulou said in the earnings call. “Our priority is to rekindle healthy revenue growth and the operative word here is ‘healthy.’”
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