Key Points Summary
Kering Group (the parent company of Gucci)’s financial report for the first half of the year shows that the group has ended nine consecutive quarters of declining revenue and begun to experience a slight increase. Gucci’s revenue decline has narrowed to 3% (although it has been on the decline for 12 consecutive quarters). Other brands such as Bottega Veneta and Saint Laurent, as well as the jewelry and eyewear segments, have performed exceptionally well. The group has improved operational efficiency by closing stores and reducing debt, and the new CEO’s strategy is beginning to show results. However, the Chinese market remains weak, and the key to future recovery lies in Gucci’s ability to win back Chinese consumers.
Detailed Analysis
1. Gucci: Slowing Decline but Still “Healing”; U.S. Market Improves, While China Lags
Gucci’s sales decreased by 3% this quarter, which may still seem like a decline, but it is a significant improvement compared to the 8% in the first quarter and the 10% in the fourth quarter of last year, indicating a stabilization of the trend. Nevertheless, this is the 12th consecutive quarter of decline, suggesting that the brand has not yet fully emerged from its difficulties.
- U.S. Market Recovery: U.S. sales increased by 9%, driven by the success of new handbag models (such as the Borsetto and Paparazzo) and men’s leather goods, indicating that tactical adjustments are having a quick effect.
- Weak Chinese Market: Management acknowledges that “there is still much work to be done in China”—frequent price hikes over the past three years and a lack of product innovation have led to consumer fatigue, resulting in the brand’s share falling far short of its potential.
- Future Expectations: Sales are expected to decline slightly in the third quarter (due to the high base from last year and the fact that Demna’s new collection has not been fully launched), with real growth likely to come in the fourth quarter with the launch of new products.
2. Other Brands Taking on More Responsibility: Kering No Longer Relyes Solely on Gucci
In the past, Kering was largely reliant on Gucci; however, other brands are now playing a more significant role:
- Bottega Veneta: Has seen the strongest growth, with the appointment of an LVMH perfume executive as its new CEO, indicating great potential.
- Saint Laurent: Has returned to growth, with strong sales of clothing and footwear in North America and Western Europe.
- Balenciaga: Its leather goods business has seen double-digit growth, although its clothing division is still in the process of transformation.
- Jewelry Segment: Brands like Bvlgari and Qeelin have experienced a 15% increase; Kering established an independent jewelry department to consolidate resources.
- Eyewear Segment: This segment has always been a stable source of revenue, with a 7% increase. The rise in performance from these brands has reduced Kering’s reliance on Gucci from over 50% to around 40%.
3. Significant Improvement in Operational Efficiency: Closing Stores, Reducing Debt, and Lowering Discount Rates
Kering has taken practical steps to improve efficiency by reducing costs:
- Store Closures: Closed 84 direct-operated stores (84% of the annual target of 100), lowering rent and operational expenses.
- Debt Reduction: Reduced net debt from 8 billion euros to 3.3 billion euros, improving cash flow (2.6 billion euros in the first half, including income from property sales and the Gucci Beauty partnership).
- Brand Value Protection: Reduced discount rates and out-of-store sales, focusing on selling products at full price, resulting in a profit margin of 12.8% (above market expectations). Although customer footfall has decreased, the conversion rate of buyers is higher, and the increase in average transaction value compensates for the decline in sales volume.
4. New CEO’s Strategy Shows Success: Moving Away from Gucci to Find New Growth Drivers
Since the new CEO, Luca, took office last September, the company has adopted a strategy to reduce reliance on Gucci, enhance brand uniqueness, and focus on leather goods and jewelry. This strategy is beginning to bear fruit:
- Independent Jewelry Department: The newly established department has seen rapid growth after resource consolidation.
- Leather Goods Business Recovery: New handbag models in the U.S. market have driven overall growth in this segment.
- Retail Performance: Kering’s direct-retail sales increased by 2% compared to the first quarter, with Gucci’s direct-retail sales declining from 9% to 2%, showing a significant improvement.
5. The Future Depends on Chinese Consumers: Can Gucci Win Them Back?
While overall performance is improving, the Chinese market remains the biggest variable:
- Root of the Problem: Frequent price hikes and lack of design innovation over the past three years have led to consumer fatigue and a decline in interest in the brand.
- Short-term Challenges: The U.S. market’s recovery is temporary (due to new products and men’s clothing), but the Chinese market requires long-term changes—can Demna’s designs resonate with Chinese consumers despite cultural differences? The controversy surrounding the Qixi Festival marketing campaign is a sign of this challenge.
- Market Expectations: If Gucci can once again appeal to Chinese consumers as stylish and worth purchasing, recovery will be faster; otherwise, it may take longer.
Following the release of the financial report, Kering’s stock price increased by 3%, with a market value of 34 billion euros, indicating that the market is generally satisfied with the results. However, long-term recovery will depend on Gucci’s performance in the Chinese market.