Time of Reckoning for Kering
Kering will publish its annual results on Thursday that will reveal the extent to which the group is underperforming compared to peers Richemont, LVMH and Zegna Group. The miracle investors had hoped for with Gucci under designer Sabato de Sarno has not happened yet.
Since the former Valentino ready-to-wear designer took over Gucci’s creative leadership in May, there’s not been a huge buzz around the brand. It may take two to three years before it really takes off again – if it ever does, industry experts predict.
The group’s poor performance adds pressure on CEO François-Henri Pinault, 61, to pass on full executive powers to deputy CEO Francesca Bellettini, 53, the former Saint Laurent boss who runs all of the group’s fashion and jewelry brands. Pinault gave her the operational reins as part of a major group reorganization following the abrupt departure of Gucci CEO Marco Bizzarri last summer.
Some investors argue Pinault needs to become non-executive chairman to clarify the lines of command and the group’s corporate governance. Several industry sources say Pinault is planning to leave his post as CEO in the near to medium term to focus on the family investment company Artemis. François-Henri Pinault co-heads Artemis with his 88-year-old father François who founded the company and built Kering, previously a retail group called Pinault Printemps La Redoute (PPR).
Artemis owns the auction house Christie’s, cruise line Ponant, fashion brands Courrèges and Giambattista Valli as well as several French winemakers and magazines including weekly Le Point. In September, Artemis bought a majority stake in Los Angeles-based CAA (Creative Artists Agency) which represents hundreds of famous actors and athletes.
Over the years, Pinault has become less and less involved with the day-to-day management of Kering’s brands. Currently he looks after the group’s eyewear and beauty operations. He’s also in charge of sustainability policies, human resources, communication and audits. You do not see him often visiting boutiques or hear of him breathing down the neck of his CEOs like does his archrival Bernard Arnault, CEO and controlling shareholder of LVMH, industry sources say.
Pinault is known for letting his CEOs get on with their jobs. While he takes pride in the freedom he gives them, this is not without consequences. One of them is that Pinault does not fully control what is going on at his brands. That’s one of the main issues plaguing Kering, sources close to the group say. Somebody needs to be in charge and hold everyone accountable for their performance.
Such lack of control is starting to show in the numbers. Broker HSBC sees Kering’s luxury brands reporting a 5 percent drop in revenue in the three months to Dec. 31. The comparison between Kering and its rivals this week risks being brutal. In the fourth quarter, sales from LVMH’s fashion and leather were up 9 percent, Richemont’s turnover rose 8 percent and Zegna Group saw a 19.6 percent increase.
Kering shares are down 38 percent in the past year and the stock is trading at a discount to its rivals. Kering’s “low PE (price-earnings ratio) of 13.4 times 2024 expected earnings is a 35% discount to soft luxury peers,” HSBC explained. “We believe visibility on an improvement at Gucci and other brands is still limited and we do not see any short-term catalysts.”
Kering’s poor share price performance is making some senior managers think about pursuing other opportunities elsewhere, several industry sources told Miss Tweed. “Frankly, Kering’s two-year option plan is not looking particularly attractive,” one of the sources said. If Kering starts losing executives, that’s not a good sign.
So why is Kering is doing so badly compared to its competitors? One explanation is that Pinault is having a hard time imposing his will on the group’s brands, several industry analysts and sources close to the group say. “Kering’s main problem is the lack of control the shareholder has over all of the group’s brands and particularly Gucci,” another senior source close to the group said. “Management knows and understands what needs to be done but does not do much about it.”
Another important issue is that Pinault does not appear to be au fait of everything that’s going on at his group. He relies on his first circle of lieutenants and it’s likely they don’t tell him everything. This first circle is made up Jean-François Palus, who was managing director of the group and now runs Gucci. There is also Bellettini and Cédric Charbit, CEO of Balenciaga. One joke Pinault may not be aware of is that some staff call Kering by its old name PPR, which stands for “Pinault, Palus and the Rest,” highlighting the extent to which Pinault, Palus and a few other executives are seen as disconnected from the reality of how some of the group’s brands are faring.
Sources close to the group have been saying for years that Pinault’s lack of control over his CEOs and brands was a problem. Several of them believe he would benefit from appointing external controllers to ensure the consistency of the figures presented by his group’s various brands.
Kering’s managers are remunerated depending on a brand’s sales growth. This creates incentives to inflate that number – at the expense of the brand’s image. Rival groups such as Richemont also use other performance indicators such as return on net assets to calculate executives’ bonuses. Kering’s remuneration policy encourages CEOs to artificially boost growth with outlets – stores that sell items at a discount. That has been an issue plaguing the group’s brands for years. While the market was strong, it could get away with it. In the current downturn, it’s a real problem.
Outlets are great for lifting sales, but they are deadly for brand desirability and the perception of exclusivity. The good news is that under Palus, Gucci has started downsizing its network of outlets, sources close to the brand have said. Investors may want to grill Pinault and Palus on that point.
PALUS TO STAY AT GUCCI
Another question investors may want to ask Kering is about the search for a new CEO for Gucci. Palus is in no hurry to hire a replacement, as Miss Tweed reported. He was named interim CEO following Bizzarri’s exit last summer. He intends to remain in charge for at least two years and retire afterwards. “Palus is part of the old guard,” one source close to Kering said. “You can’t build something new with someone like him who’s been part of the group for more than 30 years. Gucci needs a new drive, a new vision and it’s not going to happen with Palus.”
Kering declined to comment on the matter.
When Palus, 62, moved to Milan in September, he benefited from the flat tax Italy has introduced to encourage high earners to move to the country. That’s another reason why Palus is not in a rush to leave, industry sources say.
Since he’s arrived, he has been working hard on improving the company’s processes. He’s hired a new brand image director and a new head of production. Palus is a great manager and a fantastic troubleshooter, but he has no track record in brand building and storytelling: what Gucci needs to reconquer the hearts and minds of customers.
Its Christmas ad campaigns were sparkling and elegant but lacked originality and audacity, experts say. Sabato has been asked to turn Gucci into a timeless, chic brand, but after the maximalism and zany creativity of his predecessor Alessandro Michele, it looks plain and institutional. It will take time for consumers to adopt the brand’s more subdued aesthetic and for sales to pick up again – if they do, fashion experts predict.
MISSED OPPORTUNITY
Another frustration investors have about Gucci concerns the brand’s missed opportunities in watches, jewelry and beauty. Pinault has publicly complained about the inability of license partner Coty to bring Gucci’s beauty revenues beyond the €1 billion mark. They are currently estimated at around €700 million and Kering gets a small percentage of that amount in royalties. It’s hoping to take Gucci’s beauty business in-house once it has built a strong presence in that field. But that will take a few years.
Rivals Chanel, Louis Vuitton, Dior and Hermès have built much bigger businesses in beauty, watches and jewelry, as Miss Tweed reported in 2021. In watchmaking, these four brands have become respected players with sharp designs and innovative movements. At Hermès, watches represent one its fastest-growing product categories. The brand makes around €800 million in annual sales and looks set to join the watchmakers’ €1 billion club soon, like rival Breitling, industry experts predict.
Gucci could have capitalized on its fashion edge to produce original collections. But that side of the business appears to lack momentum. Gucci’s watch sales are estimated to be around €200 million.
Gucci has launched a new collection of watches for women that features steel bracelets and pastel tinted dials similar to some Rolex models. They are sold on the brand’s website next to models that were launched more than two years ago featuring Michele’s trademark bees.
Then there’s jewelry. Gucci has a tiny jewelry shop at Place Vendôme. Its collection is limited to a few chains and ultra-thin necklaces, matching bracelets and few earrings. Nothing to brag about. Like watches, Gucci has not been actively promoting that business.
Everyone knows that hard luxury is not Kering’s forte. Best not remind the group of its misadventures with watchmakers Ulysse Nardin and Girard-Perregaux, which it sold to management in 2022 after financing losses for many years.
BALENCIAGA
Another mystery at Kering: why is Cédric Charbit still CEO of Balenciaga? Sources close to the group say he has Pinault’s support, but they wonder for how long. Bellettini and Charbit are said to be at loggerheads. Pinault’s father François Pinault has long been in favor of sacking Charbit for what happened, as Miss Tweed first reported last year. In October, Laura du Rusquec, a former Morgan Stanley analyst and Kering veteran, was appointed deputy CEO of Balenciaga. At the time, the group said we should not read anything into this nomination.
Balenciaga’s annual sales are estimated to be around €1.8 billion or 15-20 percent below their peak from two years ago. It has not recovered from the PR fiasco of December 2022. There seems to be fatigue around the provocative creations of Demna Gvasalia. The talented Georgian designer tried to reburnish the brand’s aura with an Haute Couture collection in July and a ready-to-wear one in October featuring some of his best-selling outfits. But the story remains the same, one that has been tarnished by the absence of moral filter that the brand displayed when it put out an advertising campaign a little over a year ago involving toddlers dressed in what looked like BDSM attire. And it handled the debacle disastrously. Balenciaga blamed the photographers and threatened to sue them, a threat it later retracted.
For investors, it was yet another sign that there was a lack of control at Kering, a point already raised by Miss Tweed a year ago. Since that communications mishap, luxury leaders such as Richemont Chairman Johann Rupert and LVMH’s Bernard Arnault have commented publicly on how such a thing would never happen at their group since every ad and move was vetted by several people. Kering said at the time it would hire someone in charge of “brand safety” but it never gave his or her name afterwards.
Kering has been building internally what it calls a “Brand Book,” a sort of creativity map to set in stone its brands’ DNA and heritage. That may sound like a good initiative, but the group needs to be careful that it does not kill good ideas or alienate designers like Sarah Burton, who left Alexander McQueen in September after more than 20 years. Kering has denied there was any falling out between the group and the designer. It will be interesting to see what the new creative director Seán n McGirr, coming from JW Anderson and previously Dries Van Noten, produces for McQueen at Paris Fashion Week on March 2.
Gucci, McQueen and Balenciaga – that’s a lot of brands on which investors have little visibility. It’s a time of reckoning for Kering.