Kering: China’s lockdown takes much of the blame for Gucci’s crimped sales

Fans cherish Gucci for its eccentric exuberance. But its French parent Kering has cause to wish it was a steadier performer. The shares fell 5 per cent on Friday morning on news of the Italian brand’s lower-than-expected 13 per cent growth in first-quarter sales. Year-to-date, Kering share price has fallen by a quarter, nearly twice the decline of the ​​S&P Global luxury index.

China’s pandemic-induced lockdowns take much of the blame. Gucci, which accounts for about half of Kering’s revenues, has more exposure to Chinese customers than some of its peers. About a tenth of the brand’s China network was closed during the last two weeks of March. Restrictions also continue to weigh on consumer sentiment.

But bears worry that Kering’s relative underperformance is not wholly explained by its Chinese exposure. Something may have gone awry with the recipe that delivered spectacular results in the years just before the pandemic. That view — voiced by an analyst in the post-results call — was slapped down as “brutal and unfair” by finance chief Jean-Marc Duplaix. Gucci has all the ingredients for savoury results, he insisted.

Gucci’s creativity is not in doubt. Yet it has to pull off a difficult trick: it needs to broaden its appeal to older, less flamboyant shoppers. But it cannot afford to neglect the Millennials and Generation Z buyers — those born after 1981 — who make almost 60 per cent of luxury purchases.

One could argue that Kering’s shares are inexpensive. They trade on 15 times 2023 earnings, based on Citi estimates, a 25 per cent discount to the luxury sector. Its non-Gucci brands do offer more excitement. First quarter sales at Yves Saint Laurent outstripped expectations with a 37 per cent jump. Along with other fast-growing brands like Balenciaga, margins should expand as growth rates persist.

Even so, the stock will probably stay on the discount rails until conclusive evidence appears that Gucci is not misfiring.