TheChek News Flow

Kering shareholders need to be patient. On Thursday, the owner of Gucci and Saint Laurent presented the worst annual results of the big luxury groups. Yet it told investors it believed it had the right strategy and management in place. It also confirmed that group veteran Jean-François Palus was to remain the CEO of Gucci, after having initially been appointed as interim boss of the Italian luxury brand last year. Miss Tweed was first to report that fact.

Palus is neither a brand-builder nor a storyteller, but an operational manager, a trouble-shooter. The 62-year-old is happy to be in Milan as he benefits from an attractive tax deal for newcomers. At the same time Palus has long been the strongman of its CEO François-Henri Pinault. One year younger, the top boss owes his fellow Frenchman a lot. But gratitude should not come in the way of strategy.

It’s a shame Kering confirmed Palus as CEO of Gucci. There are so many talented executives out there who are more daring, know how to create buzz and surprise customers, managers who are not just financiers but have both the sensibility and drive needed to help Gucci reconquer the world. For Palus, it’s his last job before he leaves Kering.

John Galantic, the former chief operating officer and head of Chanel’s e-commerce operations based in the United States, would have been a strong candidate. Kering’s deputy CEO and head of Saint Laurent, Francesca Bellettini, could have recruited him easily. They both sit on the board of the luxury carmaker Ferrari, alongside Delphine Arnault, the CEO of LVMH’s Dior. Galantic did not reply to requests for comment.

It's no surprise that François Pinault, father of François-Henri, is concerned about the future of Kering, and particularly Gucci. Several industry sources said the 87-year-old was so worried he asked his old friend Serge Weinberg, (on Kering’s board since April 2022,) for advice on how to better manage things. Weinberg is a senior member of the French establishment who worked in politics before and helped François Pinault build the group, previously called PPR.

Kering and Weinberg vehemently denied this was the case and said François Pinault never meddled in Kering’s affairs. A spokeswoman for Pinault said: “François Pinault never asked Serge Weinberg to help or make suggestions on how to best improve the group’s performance.” However, one thing is certain: it’s pretty normal that François Pinault is worried about Kering and asking friends to help.

LOWER PROFITS

How long will Kering shareholders be willing to wait? Kering said it expected modest sales growth for Gucci this year, picking up in earnest only in the second half. Collections by the brand’s new designer Sabato De Sarno just started hitting the stores in recent weeks. The group warned that Gucci’s operating profits would drop again this year in mid-single digits after suffering a 13 percent drop in 2023 due to the brand’s investments in its repositioning.

That said, Kering also published some good news on Thursday. One of them is that Palus had started closing down some outlets for Gucci, a point Miss Tweed reported last week. Outlets allow brands to offload stock from previous seasons at a discount, but they harm a brand’s image and perception of exclusivity. Kering wants Gucci to be as desirable as Dior, Louis Vuitton, Chanel and Hermès but refuses to stop working with outlets altogether. Burberry has the same problem. Burberry and Gucci are both pursuing a “brand elevation” strategy but they are not willing to sacrifice outlets, which artificially boost sales. Dior, Louis Vuitton, Chanel and Hermès never do discounts aside from discreet “friends and family sales.”

The performance of Kering’s brands came in stark contrast to those of LVMH’s Dior, Louis Vuitton, Hermès and other brands. In the fourth quarter, Gucci’s revenues dropped 4 percent while sales at LVMH’s fashion and leather division rose 9 percent. Hermes was up 17.5 percent. In the 13 weeks to Dec. 31, Burberry’s revenues fell 7 percent. In tough economic environments, strong brands tend to become stronger and weaker brands lose market share.

Kering could be a self-help story for investors, but no real change appears on the cards. The group said Palus had hired a new head of production and was going to continue strengthening Gucci’s management team. But what the brand needs is a fresh pair of eyes and vision. A new CEO could have provided that. Referring to Gucci, Kering CEO François-Henri Pinault said the “reassessment stage is nearly complete.” That’s astonishing considering that the brand fired previous Gucci designer Alessandro Michele more than a year ago and sacked its CEO in July. They should have had ample time to decide what needs to be done.

Pinault said Gucci was a “cultural institution” and belonged in the Premier League. But what’s important is brand heat. As of now, De Sarno has not yet produced much buzz around Gucci. His designs are very elegant but his creativity to date has not been strong enough to get fashionistas super excited.

Gucci has put out classic-looking ad campaigns focusing on one of its new trademark colors - burgundy red - with celebrities holding a handbag like the Jacky. Today that’s not enough to get consumers rushing to Gucci shops. Pinault said the brand should “live and breathe luxury.” That’s great. But what’s the story? That’s what consumers want to know. It’s not yet been clearly expressed. Or at least, it’s not been strong enough to get people overwhelmed by the new Gucci.

Industry sources say wholesalers have been showing support for Gucci. But since the brand makes more than 90 percent of its sales in its own boutiques, what investors want to know is what the brand is doing to get customers to visit its own shops? There is not much visibility on that yet.

Gucci’s operating margin in 2023 reached 33.1 percent. When you compare that with 40 percent at LVMH’s Fashion and Leather goods division and Hermes’ record of 42.1 percent, up from 40.5 percent in 2022, you see there is room for improvement.

IMPROVEMENT

Kering’s shares have been depressed in the past few months, but they rose nearly 10 percent in the past week. Its annual results were as bad as investors expected. Many bought the stock betting things could only improve from here.

Gucci, which generates the bulk of Kering’s profits and sales, is not the only problem. Truth is: all of the group’s major fashion brands are in decline. Even Saint Laurent, which enjoyed stellar growth in recent years, suffered a 5 percent drop in sales in the fourth quarter. Again, Kering does not think there is a management problem here.

Bellettini, who runs all of Kering’s fashion and jewelry brands, does not want to give up her CEO role at Saint Laurent and Pinault has not forced her to find a replacement. “There is a lack of clarity on what Bellettini does,” one internal source at Kering told Miss Tweed. “She is involved in Gucci, in all the brands and also runs Saint Laurent, but many people think when you have so many jobs you cannot do any one properly.”

Saint Laurent has invested in the promotion of more expensive handbags, such as the Icare costing €4,000, while its traditional price range is around €2,000. Burberry made the same mistake. It recently launched much more expensive handbags in an environment when consumers were seeking value for money. These two brands depend on so-called “aspirational customers,” middle class people that do not have particularly deep pockets. These buyers have been tightening their purse strings in recent months and it shows in the numbers. The customer base of brands such as Chanel and Hermès are much more affluent. Hence, they are less affected by the current downturn.

Luxury executives believe wrongly that if you launch more expensive handbags, consumers will surely follow. It’s not always true. Some shoppers have been complaining on social media about the outrageous increase of Chanel handbags in recent years. The brand’s popular 2.55 handbag cost 1,850 euros in 2008 in Paris boutiques. The price is now €10,000. The same bag, the same design, the same leather. Not everyone is stupid enough to follow. Chanel sales advisers tell clients that the successive price increases of several thousands of euros in the past few years were introduced to make the bag more “exclusive” and make it more difficult for people to acquire them.

Chanel has invaded Hermès’ territory in terms of price point. Hermès’ Kelly and Birkin handbags used to start at around €7,500 15 years ago, they are now around €9,000. Hermes never sharply increased prices. Its price hikes were always in the mid-single digits. At the annual results presentation on Friday, Hermes CEO Axel Dumas joked about how people thought he was a fool not to have increased prices more. Now, he’s the one looking smart, he said, since demand for Hermès handbags has never been so strong. Hermès’ revenues in 2023 rose 21 percent, the highest growth rate of the industry.

Dumas said the economic environment remained uncertain, but business stayed brisk. “You don’t do 20 percent growth in a difficult environment,” Dumas pointed out with a smile. In his view, the years 2008 and 2009 were much more difficult in terms of market conditions. Dumas said Hermès increased prices by 7 percent in 2023 and planned to raise them by 8-9 percent in 2024 — the brand’s biggest increase ever. He said that reflected the inflationary environment and higher costs of production.

BALENCIAGA

Kering said it was focused on making its brands desirable. However, it did not address Balenciaga, its biggest problem brand and the fourth-biggest label after Gucci, Saint Laurent and Bottega Veneta in terms of revenue. After the PR fiasco of December 2022, investors expected Pinault to sack its CEO and ultimately part ways with Georgian designer Demna Gvasalia.

Investors will remember that, at the annual results last year, Palus predicted Balenciaga’s sales would recover in the second half of 2023. They never did, particularly in Europe, the Middle East and North America. Balenciaga is the biggest brand in Kering’s “Other Houses” division. The unit saw an 8 percent drop in revenue in 2023. It would appear that Kering is keeping its head firmly in the sand about Balenciaga. As Miss Tweed reported last week, Pinault continues to support Cedric Charbit, Balenciaga’s CEO, but it’s not clear how long that will last.

Looking forward, Pinault said the group was not planning to make acquisitions in either fashion or beauty but focus on existing brands. Kering overpaid for Creed last year, splurging €3.5 billion on the high-end fragrance brand. It also bought a 30 percent stake in Valentino, a brand that is not enjoying strong momentum either. And it plans to buy the rest in five years.

Over the course of the past few years, Kering took back from Coty the licenses for Bottega Veneta (BV), Balenciaga and Alexander McQueen after their license contract ended. It plans to launch Bottega Veneta’s first fragrances by the end of the year. We will have to see how that goes considering how little experience Kering has in beauty. The decision to launch a new line of perfumes for BV first is evidence that it’s currently the hottest in the group’s portfolio of available brands. Coty has the license to exploit Gucci until the end of 2028. Kering’s plan is to bring that business in-house. It thinks it can do a better job than the U.S. cosmetics group. Burberry thought the same when it bought back its beauty license from Interparfums in 2012. It threw in the towel a few years later and sold the license to Coty.