Kering has announced disappointing first-half 2024 results, with group revenues down 11% to £7.9 billion (â¬9.0 billion) compared to the same period last year. The recurring operating income has taken an even steeper fall, dropping by 42% to £1.4 billion (â¬1.6 billion).
Gucci's dismal performance is primarily responsible for the group's struggles. Sales for the Italian luxury brand declined by 20%, dropping from £4.5 billion (â¬5.1 billion) in the previous year to £3.5 billion (â¬4.1 billion), while recurring operating income plunged by 44% to £900 million (â¬1 billion).
Gucci experienced a decline in all regions except Japan, where sales rose by 12% due to an increase in tourist spending. However, Japan only contributes 9% to total sales, failing to offset the significant drops in North America (18%), Western Europe (15%) and Asia-Pacific (30%), which together account for nearly half of Gucci's sales.
The only bright spot for Kering was its Eyewear and Corporate segment, which includes the newly established Kering Beauté division. This segment saw a 23% revenue increase to £1 billion (â¬1.1 billion). However, its contribution to the bottom line remained negligible at £90 million (â¬101 million).
Despite its recent struggles, Gucci remains Kering's most significant earner, representing 45% of revenues and 63% of operating income in the first half of 2024.
Gucci's Reinvention Underway
Kering Chairman and CEO François-Henri Pinault has urged investors to be patient as he works to revitalise the luxury houses under his leadership, particularly Gucci.
"In a challenging market environment, we are working diligently to create the conditions for a return to growth," Pinault stated. "While the current situation might affect the pace of our efforts, our commitment and confidence are stronger than ever."
However, investors have not shared Pinault's optimism. Kering's share price on Euronext Paris surged to £260 on Tuesday before the earnings announcement but plummeted to £220 on Thursday, a 15% drop, following the release of the disappointing results.
Despite the headline-grabbing decline, Gucci's promised reinvention is just beginning, and the positive impact will soon be visible. Pinault, along with his newly formed executive and creative team â including Gucci president/CEO Jean-François Palus, creative director Sabato De Sarno (both appointed in 2023) and newly installed deputy CEO Stefano Cantino (formerly of LMVH) â are still finding their rhythm. Nevertheless, they share a common goal: to elevate Gucci and make it the leading luxury brand once again.
Gucci's Fall From Grace
In 2019, Gucci held the position of the world's second most valuable luxury brand, trailing only Porsche and surpassing Cartier, Louis Vuitton, Chanel, and Hermès, according to Brand Finance.
Now, it has slipped to fifth place, with Porsche, Louis Vuitton, Chanel, and Hermès surpassing it. However, taking a step back can sometimes be necessary for a greater leap forward, and Gucci is poised for a significant comeback soon.
Danny Younis, executive director of the Sydney-based Automic Group, believes that the naysayers are wrong to label Gucci's struggles as a systematic failure of strategy. He acknowledges that many of Gucci's challenges have been self-inflicted â "excessive short-termism" â but also highlights the broader industry-wide issues impacting many luxury brands.
"Gucci's exponential and remarkable growth rate was clearly unsustainable," Younis said, noting that sales have tripled since 2012. He adds, "Luxury's trajectory is never perfect, and almost every brand has faced significant hurdles. Gucci is no different, but its situation isn't dire."
"The brand's desirability and emotional appeal have diminished, but they can be restored within two years or less. Remember, Gucci remains one of the few brands with a â¬10 billion turnover."
Signs of a Renaissance
Part of Gucci's strategic retreat involves refocusing on its core strength: Italian leather goods expertise. Ironically, this focus shifted during Tom Ford's tenure when Gucci transitioned from a luxury brand to a fashion-first brand.
"It moved from highlighting leather craftsmanship â the pedigree that Italians are renowned for â to emphasising fashion," explains Philippe Mihailovich, founder of brand consultancy HauteLuxe and co-author of "Haute âLuxuryâ Branding."
"Everyone adored Tom Ford's clothing and design aesthetic. It achieved significant commercial success, but suddenly Gucci became synonymous with the world of Tom Ford and his fashion," he continues.
In the early days under former creative director Alessandro Michele, Mihailovich noticed signs of a return to the brand's Italian roots. "He introduced cultural references and reverence for the Italian Renaissance." However, he seemed to be sidetracked by venturing too far into pop culture.
"Instead of the designer being the guide and interpreter for the brand's world, the designer became almost bigger than the brand. It no longer resembled a serious luxury brand; it lost its essence," he continues.
Enter Sabato De Sarno, a seasoned luxury designer who has worked for Prada, Dolce & Gabbana, and Valentino before joining Gucci as design director.
"I'm very excited about Sabato. He is meticulous, understands quality, and knows that a luxury brand is about timelessness. He has the ability to pull the brand back upwards again," Mihailovich says.
De Sarno's debut collection, titled Gucci Ancora ("Also now, also then"), offers a glimpse of the more refined Italian elegance to come. The collection features a rich Burgundy red â reminiscent of Barolo or Chianti â which further emphasises its Italian heritage.
Gucci Ancora is now hitting stores and has been well-received, but it only accounted for about 25% of revenue during the second quarter. CFO Armelle Poulou reported during the earnings call that the performance of "carryover" merchandise, especially handbags, dragged down Gucci's results.
However, this is expected to improve as the year progresses with the introduction of four new handbag collections starting in September. "We are working on the interaction between newness and iconic lines, optimising pricing and availability, and ensuring that quality is flawless," she said.
The collections will span both high-end luxury price points and so-called aspirational, entry-level prices. The company recognizes the importance of providing new customers an entry point to the Gucci brand, so they are not abandoning lower-end price levels, but they may still increase them slightly to drive the aspirational dream for the brand.
Operationally, the brand is taking steps to enhance distribution, improve time-to-market and sell-through rates. Furthermore, stricter cost controls have been implemented, and various planned store projects are being reassessed and cancelled or postponed if deemed "not immediately essential."
A Long-Term Vision for Sustainability
Becoming too popular can be detrimental to a luxury brand, and this might be partly to blame for Gucci's recent downturn. Kering's over-reliance on Gucci and its star creative directors to drive sales and profits also contributed to the problem. LMVH, with its more diversified organisational structure, avoids such a situation.
A positive sign is that while Kering still heavily relies on Gucci, its contribution to sales and profits is now more balanced than in 2019 when it represented 63% of revenues and 83% of profits. This opens opportunities for other Kering brands to shine, including Yves Saint Laurent, Bottega Veneta, Balenciaga, and Alexander McQueen.
"We are not going to compromise long-term growth for short-term easy cuts," Poulou stated during the earnings call. "Our priority is to rekindle healthy revenue growth, and the key word here is 'healthy.'"