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French luxury group grapples with a difficult turnaround at its biggest brand as demand dips in key Chinese market

Kering posted a further decline in sales at Gucci and warned operating income would almost halve this year as it grapples with a difficult turnaround at its biggest brand and deteriorating demand for luxury goods in the key Chinese market. 

The Paris-listed group said on Wednesday that like-for-like sales fell 25 per cent in the three months to September at Gucci, worse than expected by analysts. It also marked a sharper decline than in previous quarters and the fifth straight quarter of falling like-for-like revenues. 

For the group as a whole, sales were down 16 per cent like-for-like, coming in at €3.8bn.

The analyst consensus from Bloomberg was for group revenues of €3.96bn, or a 10.9 per cent fall on a like-for-like basis. For Gucci there were predictions of a €1.75bn or 20.66 per cent like-for-like fall.

Gucci accounts for around half the group’s revenues and two-thirds of operating profit.

Unusually for the luxury sector, Kering has issued several profit warnings this year and last warned in July that second-half operating income would be down 30 per cent. 

The trend confirms a broader slowdown in demand from shoppers in China. Kering rival LVMH, the world’s largest luxury group and owner of Louis Vuitton and Dior, reported a fall in sales last week sparking concerns that the sector faces a prolonged period of volatility and muted growth. 

Cosmetics maker L’Oréal also posted disappointing sales growth this week after Chinese demand dipped, with consumer confidence low despite government stimulus measures. 

Few brands have been shielded from the downturn in the Chinese economy, with the exception of Birkin-bag maker Hermès whose products are considered the pinnacle of high-end luxury. Hermès reports third-quarter sales on Thursday. 

Shares in Kering have fallen more than 40 per cent since the start of the year, contrasting with a 16 per cent drop at LVMH. 

Gucci’s poor performance over the past year is putting pressure on chief executive François-Henri Pinault of the controlling billionaire Pinault family to fix underlying issues at the brand and show its once potent earnings machine can deliver. 

Envied in recent years for its industry-busting sales growth under previous designer Alessandro Michele, the frenzy for Gucci’s flamboyant designs eventually faded.

Earlier this month Kering appointed Stefano Cantino, a former Vuitton and Prada marketing specialist, as chief executive, promoting him after he joined Gucci in a deputy role in May. He has a mission to boost Gucci’s flagging performance alongside designer Sabato de Sarno who has adopted a sleeker aesthetic.

Chancellor Olaf Scholz’s industrial policy comes under attack following decision by Wolfspeed

Chancellor Olaf Scholz’s ambitions to turn Germany into a powerhouse in the chip industry have suffered a fresh blow after US tech company Wolfspeed shelved plans to build a factory in the country, prompting the opposition to claim his industrial policy was in tatters.

Wolfspeed put plans for the €3bn factory in Saarland, a region near the French border and once a byword for industrial decline, on ice in response to cooling European demand for electric vehicles that use its chips.

The move comes just weeks after Intel put off a plan to build a €30bn factory in the east German city of Magdeburg. The project, which was to receive €9.9bn in government grants, would have been the largest foreign investment in Germany’s postwar history.

Scholz had championed the Wolfspeed and Intel projects as proof that Germany was establishing itself as a major force in the semiconductor industry, lavishing billions of euros in subsidies to attract the biggest players.

“Yet another government prestige project has been pulped,” said Julia Klöckner, MP for the opposition Christian Democrats. “The subsidy bubble has popped and allows just one conclusion: the Scholz coalition’s economic policy has failed.”

Wolfspeed and the economy ministry declined to comment.

The investments were also seen as pivotal to the EU’s plans to double its share of the global chip market from less than 10 per cent today to 20 per cent by 2030.

Those ambitions were driven by growing concern in Europe about the fragility of global supply chains and the continent’s huge reliance on Taiwan and South Korea for chips that are an essential ingredient of an increasing range of industrial and consumer goods.

Wolfspeed had also suffered serious technical problems at some of its US factories, according to person familiar with the matter. The company’s share price has slumped 65 per cent since the start of this year.

“The project is not being abandoned, but is being pushed back to an undetermined point in the future, mainly due to market developments,” said Anke Rehlinger, prime minister of Saarland. 

As well as Intel and Wolfspeed, Scholz’s government routinely touted plans by TSMC, the world’s largest contract chipmaker, to invest €10bn in a new factory in the eastern city of Dresden, together with Dutch semiconductor maker NXP and Germany’s Bosch and Infineon. The plant has been promised €5bn in subsidies. 

Infineon is also spending €5bn on a new chip plant in the same city, which has emerged as one of Germany’s biggest tech hubs.

Wolfspeed had planned to build a plant in Ensdorf to produce silicon carbide chips, which are widely used in electric vehicles, especially in power electronics components such as inverters, converters and on-board chargers. It would have been a joint venture with ZF, a major German auto supplier.

The project was originally estimated to cost around €2.7bn, and to receive €515mn in state support — €360mn from the federal government and €155mn from the government of Saarland. ZF was supposed to contribute €170mn.

Scholz hailed the planned factory as a symbol of the revival of Saarland. Joining Wolfspeed CEO Gregg Lowe to present the project in early 2023, he said the “industrial revolution is returning to Ensdorf”.

The factory, which would have been built on the site of a former coal-fired power station, would, he said, deliver several “positive effects — for Saarland, for Germany, for Europe and for transatlantic co-operation”.

German media reports said that ZF had decided to end its involvement in the project.

But in a statement, ZF denied that it was the reason the factory had been postponed. “Wolfspeed is responsible for the project,” it said, adding that ZF had always provided “intensive and active support” for the plan.

It said it would not comment on “the precise content of the partnership and funding instruments”.

Economists said the decisions by Intel and Wolfspeed showed the government’s policy of using billions of euros in state support to draw investments by global tech giants had failed.

“Such subsidies . . . don’t address the real obstacles to investment in Germany,” said Oliver Holtemöller of the Leibniz Institute for Economic Research, Halle. He said Scholz’s government should focus instead on “economic policies that improved the business environment for all companies, including those that have not even been founded yet.”

Trying to prise Commerzbank from UniCredit’s jaws would be a distraction the lender cannot afford

Deutsche Bank, it would appear, is keen on domestic consolidation — just not yet. The German bank is right to dampen speculation that it might elbow its way into the fraught potential takeover of rival Commerzbank by Italy’s UniCredit. As its latest set of results show, its turnaround has barely begun. There is plenty of knitting for it to stick to. 

The lender has undeniably made progress under Christian Sewing, chief executive since 2018. Its revenues are on track to reach about €30bn this year, up more than a third since 2020. While its costs are still high, at 69 per cent of income, the proportion has fallen almost a fifth. 

But there are still plenty of niggles, including the outsize contribution from Deutsche’s investment bank and persistently disappointing loan loss provisions.

The bank is reasonably well capitalised, with a core tier 1 equity ratio of 13.8 per cent. It may well hit its target of a return on tangible equity of at least 10 per cent next year.

Trouble is, that is about the bare minimum that shareholders require, and far behind the European pack. Indeed, the sector’s average return on tangible equity next year will be 13 per cent, according to Andrea Filtri at Mediobanca, with top performers nudging 15 per cent. While Deutsche Bank’s stock has rallied almost 70 per cent over the past 12 months, the bank is still valued at a measly 0.5 times its tangible book value. The next leg of its turnaround will require it to explain how it bridges the gap with rivals. 

Trying to prise Commerzbank from UniCredit’s jaws would be a distraction for Deutsche — one that it cannot afford. 

Its smaller rival is not so small any more. Commerzbank has zoomed to a market value of more than €19bn, compared with Deutsche’s own €32bn. It is also more highly valued, trading at a premium on next year’s earnings of more than 20 per cent to its larger rival.

Deutsche has limited excess capital, meaning it would have to pay for any acquisition with newly issued shares. But it would have to issue so many that its earnings per share would fall, according to a Barclays analysis, even if it managed to cut 30 per cent of its target’s cost base.

That contrasts with Deutsche’s standalone prospects, with earnings per share expected to grow by more than 10 per cent a year between 2024 and 2026 on S&P Capital IQ estimates.

True, a UniCredit-owned Commerzbank might make its domestic life harder, at least at the margin. But that is not enough to think that it could or should muscle in.

Regulator cited significant uncertainties about the drug’s benefits and high costs to treat its severe side effects

England’s drug-cost regulator rejected Eli Lilly’s Alzheimer’s drug for use in the country’s public health system, marking the second time a treatment for the disease has been deemed too costly.

The U.K.’s Medicines and Healthcare products Regulatory Agency approved the drug, donanemab, on Wednesday. Simultaneously however, the National Institute for Health and Care Excellence said the treatment wasn’t good value for money to the taxpayer and rejected it for use in the National Health Service. The independent committee, known as NICE, decides on reimbursement for the public health system in England.

It attributed its decision to what it called significant uncertainties about the drug’s benefits to patients, in addition to high costs to treat its severe side effects.

Clinical trials showed that the U.S. pharma giant’s monthly injection—also known as Kisunla—slowed early-stage Alzheimer’s by four to seven months through the reduction of amyloid proteins. Patients experienced side effects of brain swelling and bleeding that would require extensive monitoring in hospital, NICE said. It is estimated that around 70,000 people would have been eligible for Eli Lilly’s treatment in England, it added.

The health watchdog said it asked the company to provide further information on the drug as it will make a final decision on Nov. 20.

Eli Lilly said it would continue to work closely with NICE during the consultation period ahead of the final decision.

“Lilly remains confident in the clinical and cost-effectiveness of donanemab and the value that it can bring to patients and to the NHS,” a spokesman for Eli Lilly said.

NICE’s decision follows a prior rejection of Japanese Eisai and U.S. Biogen’s Alzheimer’s treatment lecanemab, despite being approved for use in the U.K.

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