Kering’s flagship brand Gucci is starting to bounce back.

The brand saw 25 percent growth year-on-year in the first quarter, with consumers in Asia-Pacific and North America leading the recovery. Europe, where the brand is heavily dependent on tourists, continued to suffer.

Kering said it was “very happy” with the execution of a push to get the brand back on track, including investments in communications, clienteling and events as well as fewer (but bigger) runway collections and buzzy collaborations, such as crossovers with the North Face and Kering stablemate Balenciaga. Gucci helped support a “sharp revenue rebound” in Kering’s first quarter sales Tuesday, with overall organic growth of 26 percent over the prior year.

Compared to early 2019, the group’s last first quarter before the coronavirus crisis, sales were up 5.5 percent excluding currency shifts, despite the fact that many of its stores continued to experience shutdowns as the pandemic entered its second year.

While getting back above pre-pandemic levels is undoubtedly good news for the conglomerate, the group’s recovery is still lagging far behind some of its biggest rivals: last week, LVMH reported fashion and leather goods sales had jumped 37 percent over 2019, while UBS analysts expect Hermès to report a 19 percent jump.

Kering has other bright spots besides Gucci, as fashion fans have marvelled at its commercially (and creatively) successful revamps of Saint Laurent, Balenciaga and Bottega Veneta in recent years. But from a financial perspective, Kering still depends on the Florentine leather goods brand for the majority of revenue and over 80 percent of profit. The fact that the label has a history of boom-and-bust fashion cycles (such as before and after Tom Ford’s turnaround) means that it’s likely to dominate discussion about the group for the foreseeable future.

Unless, that is, Kering can finally pull the trigger on a major acquisition that would transform its profile.

There have been signs the company is eyeing a deal for years, which have intensified since the pandemic. Previously, the group tried to buy Versace (it was outbid by Michael Kors), as well as reportedly exploring deals with Moncler and Prada. While Kering has not commented on whether any specific approaches took place, in an investor presentation in February, chairman François-Henri Pinault confirmed the chatter. “We are looking closely at any opportunities that would make sense,” he said.

We are looking closely at any opportunities that would make sense.

Last month, Astrid Wendlandt’s Miss Tweed website reported that Kering had made an approach to rival group Richemont, the owner of Cartier, Van Cleef & Arpels, and Chloé, and been rebuffed over the proposed terms. While unconfirmed, the news sent Richemont shares up by 4 percent.

The deal is one that analysts have speculated would make sense for years, as it would combine Kering’s expertise in fashion with Richemont’s in the fast-growing luxury jewellery sector, as well as e-commerce capabilities through its Yoox Net-a-Porter (YNAP) division.

While Kering wouldn’t comment on that specific report, chief financial officer Jean-Marc Duplaix dismissed recent M&A rumors as “pure speculation” on a call Tuesday — before reminding listeners in the same breath that Kering was well-positioned to make such a move. “Our deleveraged position gives us flexibility,” he said.

Whether or not Richemont turns out to be in play for Kering, the logic of a transformational move remains intact, especially as rival LVMH has further beefed up its scale in recent months, acquiring American jewellery giant Tiffany & Co. and investing in collections and communications to fuel fast-growing Dior.

But there are few deals that would appeal to the group. A brand needs to have sufficient scale to be worth Kering’s time and energy (sales of $1 billion seems to be the threshold). It also needs a clear brand platform, but not one that competes with any of the brands it already owns. Ideally, there would be no founders or hands-on family shareholders who would stay on to interfere with the group’s authority to appoint designers and chief executive officers following an acquisition.

And they want all of that at a price that doesn’t exceed their standards for “financial discipline” — a favourite Kering phrase.

Those tough constraints show why some of Kering’s previous M&A attempts have failed to come to fruition.

Still, a few brands could fit the bill. Burberry, with no controlling shareholder, is always for sale. Under designer Riccardo Tisci and CEO Marco Gobbetti, the British brand has refocused on luxury retail, cutting out mid-market department stores and revamping its offer to appeal to the streetwear set.

But Burberry’s more affordable department store lines were only discontinued in 2017, and that recent history could provoke flashbacks at Kering to a distracting detour into premium and lifestyle apparel. It took years for the group to disentangle from brands like Puma and declare itself purely a player in luxury again. Burberry may need to establish itself further as a true luxury brand before attracting one of the French groups.

Plenty of Italian brands remain independent and could be more open to a partner or buyer after the pandemic. Salvatore Ferragamo was exploring a stake sale, according to market reports, and Giorgio Armani has said he would consider taking on a partner in the business. But those brands have both been resistant to previous turnaround efforts, making them uncertain picks. And such deals could also involve leaving room in the business for the kind of strong-willed shareholder-managers that Kering has, until now, managed to avoid.

If Kering wants to do more deals, they might need to become more flexible.

A famous founder might keep Prada from being a fit, too, should the family ever decide to sell. Even as the brand pursues a turnaround on its own with new co-creative director Raf Simons, it’s been placing its owner and designer Miuccia Prada at the centre more than ever, live streaming Q&A sessions with her on social media following each show. She’s one of the brand’s biggest assets—but making the brand fit Kering’s model could be a challenge so long as she and her husband, CEO Patrizio Bertelli, continue to animate the business.

Instead of chasing a big fashion deal, beauty and skincare is another space where Kering might expand, understanding that building up specific expertise in research and development, production and distribution for the category would be a steep climb on its own. Pinault has previously expressed frustration with license-holder Coty’s sluggish performance developing beauty for its Gucci, Balenciaga and Bottega Veneta brands. The right acquisition could put the group in a position to take back control of those licenses down the line.

Or the company might go in another direction entirely — getting into hotels, as LVMH did with its investments in the Cheval Blanc and Belmond groups, Christophe Cauvy, a partner at Intersection M&A suggests. Or leaning into e-commerce and technology. After all, the Pinaults’ group used to be a lumber company.

Whatever direction Kering chooses, there’s likely to be competition. After luxury sales fell an average of 23 percent during the pandemic, M&A in the sector is expected to heat up, as “the pandemic made some companies realise that scale matters more than before,” UBS analyst Zuzanna Pusz said.

But even after most independent brands took a hard hit last year, “it’s still a sellers’ market,” Cauvy said. “If Kering wants to do more deals they might need to become more flexible.”

Kering, for its part, denies the rush, saying there’s still plenty of ways to invest in scaling up its existing brands. “We are confident in our houses’ ability to grow in 2021 and beyond,” Duplaix said.

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