Gucci Owner Kering Halts Spending in China on Coronavirus Fears

February 12, 2020 Updated: February 12, 2020
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PARIS—Gucci-owner Kering has closed half of its stores in China and shelved new openings and advertising campaigns there as the coronavirus outbreak 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 Feb. 12.

But like rivals, it said disruptions were inevitable from an outbreak 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,” Chairman Francois-Henri Pinault said, adding shops in China that remained open, including in Hong Kong, were 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 shopper numbers at its Chinese stores had plunged 80 percent since the virus outbreak, while jeweler Pandora has said business in the country had ground to a halt.

Kering makes 34 percent 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 new coronavirus, COVID-19, 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 pro-democracy protests. Kering’s fourth-quarter sales in the Chinese territory halved.

Nonetheless, group revenue rose 13.8 percent to 4.36 billion euros ($4.76 billion) in October-December, helped by demand in China prior to the virus outbreak. That equated to an 11.4 percent increase on a like-for-like basis, which strips out currency moves and acquisitions, beating analyst forecasts for around 10 percent growth.

Kering shares were up 2.4 percent at 0945 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 percent 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 percent versus a consensus forecast of around 9.5 percent, and it returned to growth in the United States after an advertising and diversity campaign helped reverse a blip there.

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

By Sarah White and Silvia Aloisi