Will the Kering Hope Trade Hold Up?

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On the 149th day since Luca de Meo officially took up his role as Kering CEO, markets did it again: They took a glimmer of hope and ran with it despite indications that change will be long, painful and incremental for the French group.

In Kering’s annual results released Tuesday, fourth-quarter revenues fell more slowly than expected (group sales down 3 percent on a comparable basis, down 10 percent at Gucci). Analysts had expected a 10.4 percent drop for the Italian megabrand. Second-half operating profit and scheduled dividends were also slightly higher than forecast.

Shares surged as much as 14 percent, reversing some recent sell-offs prompted by fading hopes for a rebound in China and investors taking profit on the initial impact of de Meo’s arrival. The company’s valuation is now up 67 percent since de Meo’s nomination in June — a remarkable surge in investor confidence, even if below October’s peak.

I guess there’s something about Luca. His reputation as a turnaround guru, his liberal use of sports metaphors, his sense of urgency (I mention the exact number of days since his arrival at his own suggestion: He refers to his three-year turnaround plan as a 1,000-day “Recon’Kering” program). It also helps that Kering’s share price was very depressed: Investors see all of the action on the upside.

“Kering seems to be moving in the right direction, albeit on significantly tempered expectations and at relatively small increments,” Bernstein analyst Luca Solca said. “The question is whether there will be enough substance for the market to continue to believe: very [small] moves in the right direction have been met with sharp share price rises.”

If the topline improvement was fairly modest, some hopeful signs mattered symbolically: Kering’s 3 percent organic sales drop was in line with LVMH’s fashion division, suggesting the group has stopped losing market share to its biggest rival (though both conglomerates continue to lose market share to Hermès). Saint Laurent’s sales were flat after several quarters of decline. The Other Houses division beat expectations as Balenciaga returned to growth and Boucheron accelerated to grow by double digits.

Now the group needs to deliver on its promise to restore growth in sales and profits while substantially reducing its store footprint. The group is already scheduled to downsize its retail network by 100 net stores this year — principally Gucci locations in Asia — with further closures under discussion. That a brand could hope to grow sales while scrapping this many stores suggests a) just how dead the traffic is at some of these underperforming locations and b) just how much the role of stores has fundamentally changed. Big luxury groups are focusing on monumental destinations that drive both volume and image. Smaller outlets that served merely to scoop up traffic in less-prime areas are under pressure.

This earnings report was a bit of a placeholder, as de Meo isn’t set to detail his strategy for the group until an April 16 capital markets day in Florence. Still, in a meeting with reporters the executive provided some insights to how he’s thinking about reconfiguring the group: a smaller retail footprint (leaning more heavily on the e-commerce), group-level synergies among brands, hiring more talent from outside the fashion industry to bring fresh ideas while avoiding lengthy non-competes.

He spoke about needing a more coordinated approach to managing the portfolio: “It’s like a football team, everyone should wear the same jersey but not play the same position. This way all our brands aren’t chasing the same ball,” de Meo said.

Investors love a sports metaphor, but I was surprised to hear this one, since Kering has always claimed to be very attentive in its approach to portfolio management — making sure each brand has a clear message and aesthetic without too much overlap. (Never mind that moving customers’ money from one pocket to another is a good problem to have compared to losing those sales to another group.)

At the same time, Kering’s brands have lost ground in recent years due to an over-reliance on benchmarking — thinking they could raise prices just because competitors did — and groupthink. If its brands’ aesthetics are different, the product line-ups, pricing and distribution networks are relatively standardised. The group is differentiated in the same way Häagen-Dazs is. But lacks some of the structural and strategic differentiation that underpins the strongest brands in the sector — Hermès in particular excels by staying in its own, very fruitful, lane.

At its late 2010s peak, Kering’s brands were all red-hot. But all of them were playing the role of zeitgeist-capturing, youth-converting, fashion-and-heritage crossover concepts converting cultural relevance to scale. The group’s most resilient units, Bottega Veneta and Saint Laurent, have each gently transitioned away from that model in their own way. Gucci sought to rebalance that recipe too radically, and paid the price. I could see a future where one of Kering’s brands really leans into targeting top-spending, ultra-wealthy buyers (Bottega Veneta, perhaps?) while another doubles-down on connecting with youth culture (Balenciaga?). Instead of all of the brands trying to do all of these things at the same time.

The issue is that customers’ tastes vary widely at all ages and income levels, and none of them like to feel they’re being targeted based on those criteria. A more centralised ‘football team’ approach could also divert focus from the long game each luxury brand is playing: more analogous to a very lengthy tennis match with potential clients. You play well, consistently for a long time, then — with the right image, the right product, at the right time — you win the points that count.

Gucci’s Role

None of this vision for Kering’s revival will amount to much if the group can’t turn things around at their biggest brand. Gucci’s operating profit fell 40 percent year on year, but still accounts for more than half of the group total.

Gucci’s sales have roughly halved since their 2022 peak — so it’s tempting to think it’s only up from here. But if CEO Francesca Bellettini and designer Demna are taking their time to unveil their new direction, it’s because the brand requires deep reflection: on what role it should play, both for customers and within the group.

Brands at Gucci’s mega-brand scale usually need to defend a clear position in society: Louis Vuitton signals access, mobility. Chanel signals feminine authority and couture legitimacy; Hermès craftsmanship, permanence and restraint. Under Alessandro Michele and Marco Bizzarri, Gucci stood for bold individuality and fresh, fluid identities — an appealing platform that collapsed after rapid growth and overly-consistent styling made the brand seem neither very individual nor very fresh. Then the brand gave customers whiplash by serving up a sexy, expensive heritage puree under its subsequent team.

Meanwhile, the group has expected Gucci to be its hottest and most radical brand while simultaneously depending on it as a consistent motor of turnover and profit.

Gucci is currently playing catch-up compared to rivals who changed designers last year: Dior has since put on four shows under its new designer; Chanel put on three. Hopefully things will be clarified soon. Gucci’s first full-on runway show by Demna is slated for Feb. 27. And if de Meo has chosen Florence — Gucci’s birthplace — for his big strategy reveal, it’s likely for a reason.