French luxury group Kering expects a 40% to 45% plunge in first-half operating profit, it said on Tuesday, after first-quarter sales declined as wealthy shoppers curbed spending on products from its star label Gucci.
Sales for the three months ending in March were down 10% on a comparable basis at 4.5 billion euros ($4.8 billion).
Kering had warned on March 19 that sales over the period were likely to drop by around 10%, dashing hopes it had stemmed sales declines at Gucci, the century-old Italian fashion house which accounts for half of group sales and two-thirds of profit.
The warning prompted concern in the luxury sector about prospects for China’s rebound – traditionally Gucci’s most coveted market – which has been clouded by a property crisis and high youth unemployment.
Sales at Gucci in the first quarter were down 18%, significantly worse than the 4% decline in the prior quarter, the company reported.
The revenue decline and ongoing investment needed in the brand will hurt first half profits, with Gucci not seeing much improvement in the second quarter, company executives told analysts on a call.
The extent of the anticipated drop in first half profit was larger than expected, however.
“It is not surprising that brands in transition may be experiencing bigger difficulties in a softening demand environment, as consumers concentrate their spend on must-have brands,” analysts at Bernstein said in a note.
“The magnitude of the profit descent, nevertheless, surprises on the downside.”
Traffic in luxury stores in Asia has been especially low, Kering executives said.
“The Chinese market right now is fairly polarized between appetite from clients for the very high end or more affordable products, and Gucci, more positioned in the middle, is therefore not benefiting from this polarisation,” Chief Financial Officer Armelle Poulou told journalists.
She added though that the situation could change quickly.
The label was also suffering as Chinese shoppers wait for its new collection to arrive in stores, said Poulou.
The first designs from new creative director Sabato de Sarno began trickling into stores in mid-February. The designer’s pared-back, sensual styles have marked a departure from the flamboyant approach of his predecessor, Alessandro Michele.
Kering has been pushing the brand upmarket, with a focus on classic leather goods, and says that early products from the new Ancora collection, which include glossy Jackie bags and chunky, platform loafers, have been well received.
Kering shares have dropped 18% since March 19, while rivals LVMH and Hermes are down 7.5% and 2.8%, respectively.
