Black leather, bejeweled shoes from Gucci, during New York Fashion Week on February 11 2020 in New York City, the US. Picture: GETTY IMAGES/EDWARD BERTHELOT
Black leather, bejeweled shoes from Gucci, during New York Fashion Week on February 11 2020 in New York City, the US. Picture: GETTY IMAGES/EDWARD BERTHELOT

Paris — Gucci-owner Kering has closed half its stores in China and shelved new openings and advertising campaigns there as the coronavirus epidemic throws luxury brands into turmoil.

The French group, which also owns Saint Laurent and Balenciaga, remained upbeat about its longer-term prospects as it beat fourth-quarter sales forecasts on Wednesday. But like rivals, it said disruptions are inevitable from an epidemic that has emptied malls and shopping streets in China, which accounts for more than a third of luxury goods sales.

“We are seeing a sharp drop in traffic and sales in mainland China,” chair François-Henri Pinault said, adding that shops in China that remained open, including in Hong Kong, are on reduced hours.

Kering is postponing store renovations and new openings, as well as reviewing product launches in China, Pinault added.

“We are reallocating inventory to other regions of the world to make sure we are not overstocked in China,” he said, without giving an estimate for any impact from the virus on earnings.

Italian puffer jacket maker Moncler said this week that shopper numbers at its Chinese stores had plunged 80% since the virus outbreak, while jeweller Pandora has said business in the country has ground to a halt.

Kering makes 34% of its sales in Asia Pacific, excluding Japan. Spending on its brands by Chinese customers, who have traditionally shopped with it overseas, has shifted overwhelmingly to mainland China, where the virus originated.

Entire cities in the world’s second biggest economy are now shut off, flights have been cancelled and many countries are banning entry to visitors coming from China, exposing Kering and other high-end houses to a major sales hit.

The crisis has compounded a plunge in sales in Hong Kong due to months of anti-government protests. Kering’s fourth-quarter sales in the Chinese territory halved.

Nonetheless, group revenue rose 13.8% to €4.36bn from October-December, helped by demand in China before the virus outbreak. That equated to an 11.4% increase on a like-for-like basis, which strips out currency moves and acquisitions, beating analyst forecasts for about 10% growth.

Kering shares were up 2.4% at 9.45am GMT.

“These are good numbers from Kering and are comforting in the light of the current predicament,” Jefferies analysts said in a note.

Cash cow Gucci?

Kering now relies on Gucci for 83% of its recurring operating income.

The brand’s flamboyant style, an e-commerce push and an expansion of its products in homewares and perfumes have made it one of the fastest-growing luxury labels in recent years. But analysts have questioned whether it can keep up the momentum, and whether Kering is overly-reliant on one brand.

“Whether Gucci can enter in a more steady phase of growth and turn into an attractive ‘cash cow’ will be key to the Kering investment case ... especially in the absence of large-scale, transformational mergers and acquisitions,” Citi analysts said.

Gucci still beat sales expectations in the fourth quarter, with revenue up 10.5% compared to a consensus forecast of about 9.5%, and it returned to growth in the US after an advertising and diversity campaign helped reverse a blip there.

As a whole, Kering posted a 37.4% drop in net income for 2019, hit in part by a record Italian tax settlement of €1.25bn linked to Gucci.

Reuters