By Andrea Figueras and Adria Calatayud
Some of Europe's largest luxury groups are struggling in a stalling Chinese economy, with sector bellwether LVMH and Gucci owner Kering flagging weak sales there in the first quarter, though smaller peers are thriving.
China has been a growth engine for the industry for years as its economy boomed and a flourishing middle class splurged on luxury goods. However, a sluggish recovery from the Covid-19 pandemic, compounded by a downturn in the real-estate market, have clouded the sector's prospects in the world's second-largest economy.
Kering said sluggish market conditions, particularly in China, hurt its first-quarter sales. The company on Tuesday reported revenue of 4.50 billion euros ($4.80 billion) for the first quarter, down 11% in reported terms compared with the year-earlier period and down 10% on a comparable basis. It also warned that first-half recurring operating profit will fall between 40% and 45% due to deteriorating top-line trends and investments in repositioning its brands.
"We knew 2024 was not going to be an easy year under the best of circumstances for reasons that have largely to do with the China market and with the strategic realignment of our houses," Kering Chief Financial Officer Armelle Poulou said during an earnings call. "The first half of the year is already proving even tougher than we expected."
The warning sent Kering's stock sharply lower on Wednesday. In late European trading, shares fell 6.3%, while British peer Burberry--which is also undergoing a turnaround process--saw its shares drop by 2.75%.
For Kering, a sector-wide weakening in China was amplified by the specific challenges facing its core brand Gucci following a recent change in its creative direction, Stifel analyst Rogerio Fujimori wrote in a note to clients. Gucci's brand perception needs to be fixed in China, where it isn't considered as sufficiently exclusive, the Stifel analyst added.
Meanwhile, Louis Vuitton, Dior and Hennessy owner LVMH last week said organic revenue grew 3% in the first quarter, with rises in all regions except its so-called Asia excluding Japan region, which includes China.
As the first-quarter reporting season unfolds, analysts are looking out for signs of a divide in luxury brands' performance between those exposed to so-called aspirational consumers and those that cater to wealthier clients. Birkin bag maker Hermes's first-quarter update is slated for Thursday and other peers including Richemont are due to report next month.
Smaller peers Prada and Brunello Cucinelli bucked the trend with higher sales in Asia. Prada posted a 16% rise in Asia-Pacific retail sales at constant currency, while Brunello Cucinelli last week said sales in Asia increased 16% with growth in all major markets including China.
Chinese consumers continue to buy, but the market is becoming more polarized, Barclays analysts said in a research note, noting that some luxury brands seem to be more attractive than others.
LVMH's Louis Vuitton and Loro Piana as well as Prada's namesake and Miu Miu brands are particularly popular among Chinese customers, Barclays said.
Prada has been able to enhance its popularity on Chinese social media, thanks to a smart use of digital communication and customer engagements, while other brands have been stagnating, AlphaValue analysts said in a note.
During the first quarter of the year, Miu Miu and Prada were the most popular brands among consumers globally, according to The Lyst Index, which ranks fashion's hottest brands and products.
While the luxury sector got off to a sluggish start to the year, Chinese demand will likely be the biggest swing factor between the best and worst performers, Bank of America analysts said.
Write to Andrea Figueras at andrea.figueras@wsj.com and Adria Calatayud at adria.calatayud@wsj.com
(END) Dow Jones Newswires
April 24, 2024 11:07 ET (15:07 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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