Shares in French luxury group Kering experienced a decline of 16% in 2023, while its competitor LVMH saw an 8% gain and Hermès saw a significant jump of 33%. Despite being the second largest luxury company in the world and home to well-known fashion brands such as Gucci, Yves Saint Laurent, and Bottega Veneta, Kering’s stock price has struggled.
Throughout the year, Kering invested €1.7 billion (£1.5 billion) to acquire a 30% stake in Italian house Valentino, formed a partnership with Qatari investment group Mayhoola, recruited new designers for Gucci and McQueen, reshuffled leadership, and made various acquisitions. However, these efforts did not translate into an improvement in the stock price, particularly after disappointing sales numbers were reported for Gucci, its flagship brand, as well as other brands within the group.
One major concern lies with Gucci, which represents nearly 70% of Kering’s profits. While the majority of Kering’s brands cater to aspirational clientele in developed markets, which are currently underperforming economically, the brand’s global recognition and Kering’s control over distribution should mitigate the impact. However, decisions made during the pandemic to protect margins and cash flow instead of investing in marketing have hindered Gucci’s performance.
Kering’s share price currently trades at a lower price-to-earnings multiple compared to its competitors, indicating that investors are skeptical about its ability to stage a comeback. Despite this skepticism, Kering has shown significant growth in revenue and earnings over the past five years. With revenue reaching €20 billion in 2022 and Gucci accounting for half of it, the brand remains highly profitable.
However, there are challenges ahead for Kering. Bottega Veneta saw a decline in profit margins, and Balenciaga faced reputation damage due to a controversial ad campaign. Additionally, Kering’s decision to rationalize its wholesale business impacted overall sales. The company has also endeavored to strengthen its beauty and eyewear businesses, although these ventures will likely require more time to make a substantial impact.
According to analysts, a brand turnaround typically takes 12 to 18 months to yield results. While Kering’s focus on luxury has improved profitability, its emphasis on protecting margins during economic downturns has limited growth potential. Gucci’s underperformance and the weak position of the overall industry further complicate Kering’s path to recovery.
Kering’s full-year results for 2023 are expected to be released on February 8. Despite the challenges it faces, Kering’s global recognition, access to talent, and control over distribution provide a favorable foundation for potential future success. The company’s ability to address the underperformance of Gucci and navigate industry headwinds will determine whether it can make a comeback in the luxury market.
