Heard on the Street: Gucci's New Look Falls Flat -- WSJ

By Carol Ryan

Guccis revamped image was unveiled less than six months ago and already looks a bit frayed.

Shares in the luxury brands Paris-listed owner Kering dropped 14% Wednesday morning, the stocks biggest one-day fall since 2008, after the company warned that Guccis first-quarter sales will be 20% lower than the same period of 2023.

This is much worse than the 4% decline that analysts were expecting for the Italian brand. Citi estimates that the sharp slowdown at Gucci will reduce Kerings operating profit by 15% in 2024. Signs that demand has been weak in Asia dragged down other luxury stocks, although the problem seems specific to Gucci.

The Italian brand began an image overhaul last year after shoppers tired of Guccis trendy, but it turns out, not timeless, designs. Between 2016 and 2021, the labels loud, maximalist collections were a hit with luxury customers, but subsequently lost steam.

More sober designs by the brands latest creative director, Sabato de Sarno, arrived in stores in the middle of February. Although it will take time to fully replace Guccis old collectionsde Sarnos designs are still only around 5% of whats available in Gucci boutiques based on UBS estimatesshoppers initial response seems lukewarm. Weak demand in China doesnt bode well considering Gucci relies on Chinese shoppers for more than a third of its sales.

Revamping the Italian label was always going to be risky. Gucci generated half of Kerings total sales in 2023 and 70% of its operating profit. But Kering needed to do something. The companys share price has halved in value since its peak in autumn 2021, making it one of the luxury industrys worst-performing stocks in recent years.

It may be that Guccis new designs will be a slower burn than the brands last major overhaul in 2015. Back then, sales took off within six months of former designer Alessandro Micheles first fashion shows.

Kerings stock looks cheap compared with rivals, changing hands at 15 times estimated earnings. But the company will need to spend heavily on advertising and store refurbishments to generate buzz about the new Gucci collections, which could lower profit margins. Until there are signs that shoppers like what they see, luxury investors should shop elsewhere.

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March 20, 2024 07:00 ET (11:00 GMT)

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