Kering Issues New Profit Warning After Net Profit Halved in H1

Story updated July 24 at 10:51 GMT

PARIS — Kering issued another profit warning after the drastic slowdown in luxury spending halved its bottom-line profits in the first six months of the year.

The French luxury group said Wednesday it expects operating profit to decrease by 30 percent in the second half, after falling 42 percent in the first semester to 1.58 billion euros, in line with the guidance it gave in April.

Net profit plunged 50 percent to 878 million euros, falling short of a company-compiled analyst consensus forecast of 930 million euros. 

While senior executives said they have embarked on a cost-cutting drive and made progress with the turnaround of star brand Gucci, they no longer expect any margin improvement in the second half.

“There was a deterioration of the trends in June that so far are persisting in July,” Jean-Marc Duplaix, deputy chief executive officer in charge of operations and finance at Kering, told analysts and reporters in a webcast.

“In this very volatile environment, it’s very difficult to predict what will happen in August and September, so I won’t predict anything when it comes to the trends for the rest of the quarter,” he added.

Kering, whose stable of brands also includes Saint Laurent, Balenciaga and Bottega Veneta, based its outlook for earnings before interest and taxes on forecasts for a gradual improvement in revenue trends at group level, mostly in the fourth quarter, said chief financial officer Armelle Poulou.

“Healthy Revenue Growth” Key

“We are frustrated by the current environment, which slowed down our execution,” she said. “Our priority is to rekindle healthy revenue growth, and the operative word here is healthy.” 

A lot of that hinges on progress at Gucci, which is undergoing a revamp under CEO Jean-François Palus and creative director Sabato De Sarno. 

The Italian brand again fell short of expectations, with organic sales down 19 percent in the second quarter, versus analysts’ predictions for a 17 percent drop. In reported terms, revenues were down 20 percent to 2 billion euros. 

By comparison, organic sales at LVMH Moët Hennessy Louis Vuitton’s key fashion and leather goods division rose 1 percent year-on-year in the three months to June 30.

Gucci was impacted by a drop in traffic that weighed mainly on its carryover styles, which represented three-quarters of revenues in the second quarter. 

Management is pinning its hopes on the introduction of four new handbag lines in September, alongside a collection of ready-to-wear essentials building on De Sarno’s best-performing designs so far.

Despite Kering’s ongoing brand elevation strategy, the introductions will cover all consumer and price segments, said Francesca Bellettini, deputy CEO in charge of brand development. “We always have to have an eye on the entry prices,” she said. 

“Each launch is going to be planned consistently with a communication strategy that speaks to the right consumer segment,” Bellettini added, noting that campaigns will be closely tied to the delivery of products in stores. 

“Our goal is to create through the new introductions, new carryover, but also work on the key skus that were bestsellers in the past to reanimate them,” she added.

Margins at Gucci were impacted by ongoing investment in communications and stores, as well as efforts to improve quality and inventories, Bellettini said. “We are not going to compromise the long term for short-term easy shortcuts,” she said. 

As it streamlines its distribution and offer, the brand is seeing positive signals, including stable conversion rates and a good response to the new collections, particularly among existing customers, she added. In addition, Gucci has shortened its time to market by a month.

All three executives emphasized that Kering was working hard to find savings and increase efficiency.

“We have enhanced cost control across the board,” Poulou said. “We have activated new processes to assess all projects and cancel or postpone all openings that were not immediately essential.”

Continued Investment

Kering chairman and CEO François-Henri Pinault said the group nonetheless will continue to invest to enrich its offer, intensify the impact of its communications, and reinforce the exclusivity of its distribution. 

“We make certain that every one of these investments creates value for the long term,” he said in a statement. “While the current context might impact the pace of our execution, our determination and confidence are stronger than ever.”

Group revenue was down 11 percent in the second quarter, both in reported and comparable terms, to 4.51 billion euros, Kering said.

Retail revenue fell 25 percent in Asia Pacific in the second quarter, and declined 11 percent in North America, 8 percent in Europe and 2 percent in the rest of the world, it reported. 

Conversely, sales in Japan jumped 27 percent during the period as discount-seeking Chinese consumers took advantage of the weakness of the yen.

Comparable sales at Saint Laurent were down 9 percent in the second quarter, while Bottega Veneta gained 4 percent, and the “other houses” division — which groups brands including Balenciaga, Alexander McQueen and Boucheron — posted a 5 percent drop. 

Saint Laurent saw a deceleration in retail sales in the second quarter, with trends worsening in China. It opened 12 stores during the first half, which have yet to deliver a return on investment.

Bottega Veneta delivered record first-half revenues, but its operating profit fell 28 percent amid ongoing investments in the brand experience, including the opening of a “creative and cultural residence” in a Venetian palazzo that caters to its very important clients.

While Boucheron and Pomellato posted double-digit increases in retail sales in the second quarter, and Balenciaga cemented its gradual recovery, Alexander McQueen had a challenging quarter as its transitions to a new creative direction under Seán McGirr.  

Kering eyewear and corporate, which includes the group’s fledgling beauty division, recorded a 5 percent increase in organic sales in the second quarter. 

With luxury in a cyclical slump that analysts predict could last for one or two years, companies in turnaround mode are feeling the pressure more than others.

Even LVMH, the sector leader, has taken a hit. It reported on Tuesday that net profit fell 14 percent in the first half and revenues declined 1 percent in the second quarter, sending its shares down by up to 6 percent on Wednesday as part of a broader luxury stock sell-off. 

Duplaix noted that he and Bellettini have made sweeping changes among Kering’s executive ranks in a bid to set it up for a brighter future.

“I think now we have more or less all the right people on board, at least among the key executives. The setup is strong. Now we have to make it work,” he said.