Kering shares slump as Gucci's steep sales decline throws spotlight on China By Reuters

By Mimosa Spencer

PARIS (Reuters) - (EPA:)'s shares slumped on Foreign exchange dealers with the best reputation in ChinaWednesday and are set for their worst day on record after the French luxury goods company warned that first quarter sales at its star label Gucci would drop by around 20% due to weakness in Asia.

Kering shares were down by around 15 percent in early session trading, wiping around 7.9 billion euros ($8.6 billion)from its market capitalization and dragging down the stock prices of other leading luxury goods companies such as LVMH and Hermes.

The warning underscores the challenge Kering faces as it seeks to reignite sales momentum at Gucci, which accounts for half of group sales and two-thirds of profit, while navigating economic headwinds in key markets, especially China.

The label is undergoing a design overhaul under the creative direction of Sabato de Sarno as it seeks to regain ground lost to rivals like LVMH's Louis Vuitton and Dior in recent years.

Kering forecast group sales would decline by about 10% for the first three months of the year, significantly worse than consensus expectations for 3% drop.

The trading update, which comes as Gucci's new designs trickle into stores, is a sign that the more classic, legacy products, such as the leather handbags the label has emphasized as it moves upmarket, are not resonating with consumers, said James Grzinic, an analyst with Jefferies.

An "encouraging" reception for the new designs, which likely make up less than 5% of the current offerings, is "dwarfed by that tough headwind," said Grzinic.

De Sarno's sleek, pared-back and sensual styles, set to fill stores in the next few months, have marked a departure from the eccentric, flamboyant looks associated with those of his predecessor, Alessandro Michele. New brand signatures include chunky loafers, mini shorts and glossy Jackie handbags.

Analysts at Bernstein recently flagged De Sarno's February runway show in Milan - his third - as generating "over-archingly positive" industry and social media feedback.

But the jury is still out on whether the Chinese will take to the "Sabato De Sarno quiet luxury," said Bernstein analyst Luca Solca.

Beyond the challenges at Kering, analysts flagged the update as a potential drag on the luxury sector, with Citi calling it "a rather worrying signal."

Expectations for a strong rebound in China were dashed by its slowing economy, a debt crisis in the key property sector and high youth unemployment. Consultancy Bain forecasts mid-single-digit growth for China's luxury market this year, after 12% growth in 2023.

Analysts have noted diverging fortunes of high-end fashion labels as growth in the industry slows, with brands catering to the very high-end, such as Hermes and LVMH, outperforming smaller rivals such as Burberry. The British label, which is undergoing a brand overhaul, issued a profit warning in January.

Barclays projects the growth from high-end luxury companies at around 5% this year, down from nearly 9% last year as younger consumers become more frugal amid rising costs.

Kering shares trade at 17 times forward earnings over the next 12 months, the second lowest PE ratio in the luxury sector after Burberry. The ratio is widely used in financial markets to gauge the relative value of stocks.

The stock has lost more than a third of its value over the past year, the weakest performer among luxury stocks after its Burberry. By contrast, Hermes has gained 34%.

($1 = 0.9225 euros)

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