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Gucci Is Pulling Further Back from Wholesale, and 6 Other Key Takeaways From Kering's Q1 Results

Kering Chief Financial Officer Jean-Marc Duplaix was hesitant to draw any conclusions about how a global recovery might look like from the few weeks of partially reopened stores in China.
A Gucci store in Wuhan prepares to reopen in March | Source: Getty Images
By
  • Chantal Fernandez
BoF PROFESSIONAL

PARIS, France — The coronavirus pandemic has not been kind to Gucci.

Kering's flagship brand saw revenue plunge 22 percent worldwide in the first quarter, as Covid-19 forced stores to close and consumers to cut back on luxury spending, the luxury conglomerate said Tuesday. Saint Laurent's sales fell 13 percent, while Bottega Veneta saw a 10 percent increase compared to a year ago when few of Daniel Lee's designs had hit stores.

The declines mostly reflect how much each brand depends on China for sales. Kering's brands closed their stores in the country for much of January and February, and the company cut back on advertising in its most important market as well. Most of those locations began to reopen toward the end of the quarter, just as much of Europe and North America shut down. As of the end of March, 53 percent of Kering brands' stores were closed globally.

With a group-wide decline of 15.4 percent, Kering fared similarly to rival LVMH, which said sales in the first three months of the year also declined by 15 percent. While executives with the Louis Vuitton owner said they were optimistic that sales would quickly rebound, Kering Chief Financial Officer Jean-Marc Duplaix was hesitant to draw any conclusions about what a global recovery might look like from the few weeks of partially reopened stores in China.

Duplaix said on a conference call with analysts that the pandemic has caused Kering to rethink aspects of its retail strategy, from where to open stores to its relationship with third-party retailers.

Read on for more takeaway from Kering’s performance update.

1. Gucci's dependence on Asia contributed to steeper declines earlier in the global pandemic. Gucci's torrid growth in the last few years was in part driven by booming demand in Asia. That dynamic was turned on its head when much of the region shut down earlier this year.

In the first quarter, 37 percent of Gucci’s sales came from the Asia Pacific region, where retail revenue decreased 32 percent. The store closures led to a boost in e-commerce, which now presents 9.5 percent of Gucci’s retail sales. Duplaix said Gucci is “leading the pack in mainland China” in terms of the return to sales growth.

Some good news came out of North America in January and February, however, where Gucci’s sales grew by double digits after a challenging 2019 (after the balaclava incident, the brand pulled back on marketing and sales declined in the low single percentage points there).

2. The pandemic will give Gucci even more of a reason to cut back on wholesale. Department stores are among the hardest-hit retailers this year, with Neiman Marcus reportedly considering a bankruptcy filing. Gucci had already reduced its reliance on wholesale, generating 85 percent of sales from its own channels.

But Duplaix said that ratio will increase this year to better control markdowns and other inventory issues in the future.

“Exclusivity will be ever more paramount than before,” he said.

Exclusivity will be ever more paramount than before.

3. The worst may be over for Gucci, but Saint Laurent's troubles are just beginning. Unlike Gucci, the brand generates most of its sales from Western Europe. So while Saint Laurent's retail sales decreased 34 percent year-over-year in the quarter in Asia, sales in North America managed to be flat and the brand itself only saw sales decrease 12.6 percent.

The brand will likely see declines in the second quarter with stores in the US and Europe still closed, when it will be less able to offset that loss of revenue with a rebound in Asia. Saint Laurent does not yet offer e-commerce in China, which is growing for Gucci, but the brand's site is expected to launch later this year.

4. The Bottega Veneta boom continues. Just a year into its artistic overhaul, Bottega Veneta grew 10.3 percent year-over-year in the quarter despite relying on Asia for most of its sales like Gucci does. It benefited chiefly from wholesale, which grew 55 percent year-over-year. While every region and channel (except e-commerce) declined for Gucci and Saint Laurent in the first quarter, Bottega Veneta only saw declines in Japan and Asia Pacific. While the comparison point in the first quarter of 2019 was likely extremely low, the results bode well for the brand, which is poised to appeal to consumers who may prefer more understated luxury items coming out of the pandemic.

5. More markdowns than usual are coming. Even Kering isn't immune to the excess inventory problem plaguing the entire industry as collections sit in closed stores and crowded warehouses. While Kering will delay autumn deliveries to give spring and summer collections more time to sell, Duplaix said to expect more discounts than usual in the coming months across all the brands, offered on selected seasonal merchandise.

6. Shifting travel patterns could mean rethinking the store network. Duplaix said the company is thinking about how a long-term reduction in tourism, which accounts for a significant share of Chinese spending in the West, could change its business specifically in regards to where it has flagship stores, though he said it was too early to elaborate further.

Like LVMH, Kering is seeing an acceleration of the “repatriation” movement, whereby Chinese luxury shoppers are buying more domestically than usual. A permanent shift in this behaviour could call into question the value of European flagship stores.

7. M&A is on the back burner, for now. Instability could be a good time for luxury's conglomerates to tighten their control over the market with opportunistic deals. Duplaix said acquisitions are "not a priority" in the short term, but the company remains open to them in the long run. First, the company needs to resume normal operations and focus on the health and safety of clients and vendors, he said.

We’re tracking the latest on the coronavirus outbreak and its impact on the global fashion business. Visit our live blog for everything you need to know.

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