Kering: Growth in China Fails To Offset Expected Declines in North America; Gucci Appeal Lackluster

We don’t expect to change our EUR 650 fair value estimate for narrow-moat Kering KER as the firm reported weak revenue trends in the first quarter.

Revenue was up 1% on a comparable basis, versus 6% for our full-year forecasts. The comparison base gets easier as the second- and fourth quarters were hit by lockdowns in China and sales in North America started decelerating in second-quarter 2022.

The flagship Gucci brand was up 1% in terms of comparable revenue, continuing to lag its big peers (LVMH’s fashion and leather division was up 18% and Hermes’ revenue up 23%). North America led the declines, down 19% for the brand (down 18% for the group with declines in all brands), with weakness in more aspirational consumer clusters and the online business. Sales in Europe grew by double digits for Gucci, while sales in Asia increased 6% (negative 26% in the fourth quarter). Gucci continues to be hit by dwindling brand momentum after years of strong growth. New designer collections may provide impetus to the brand and the Kering group has financial firepower to invest in brand communication to boost appeal (in 2022 marketing spending was increased by 200 basis points as a percentage of sales versus 2019 levels). That said, in our experience fashion cycles last about 5 years, so in a downside scenario there could be a few more years of underperformance for Gucci. We also believe there could be more margin pressure on Gucci in the current and next year, counter to management’s expectation for a stable or slightly increasing margin, as more investment into relaunching the brand may be needed as well as the write-down of some inventory (inventory days up to 316 in 2022 from 269 in 2021).

Other brand performance was also rather modest in the quarter, hit by wholesale rationalization (down 21% for luxury brands), with Saint Laurent the one bright spot (up 8%, and 14% at retail) and Kering eyewear another (11%). Bottega Veneta’s revenue was flat and other brands were down by 9%.