Deeper Gucci woes test new CEO’s luxury touch

Bling it back. Leading a turnaround under the scrutiny of investors is not for the faint-hearted. On Tuesday, French luxury group Kering said quarterly sales at its top Gucci brand were likely to fall nearly 20% from a year ago, triggering a 14% slide in the $49 billion conglomerate’s share price. The unexpected announcement, a month before the company’s scheduled results, suggests the revamp of the century-old fashion house could be longer and more complicated than expected. That raises the stakes for new Gucci boss Jean-François Palus.

Gucci is fighting its turnaround battle on many fronts. Firstly, consumer sentiment in China, traditionally Gucci’s most coveted market which used to command an estimated 30%-plus of annual sales, is still negative. A recent Bank of America survey suggests Chinese consumers are more inclined to splash out on experiences like lavish meals and holidays than pricey handbags and shoes. That’s a big problem for Gucci, which has previously relied heavily on volatile young Asian shoppers.

Secondly, the more classic style reset engineered by new designer Sabato De Sarno, appointed last year to replace flamboyant creative director Alessandro Michele, is still unproven. Kering said De Sarno’s collection, which is only on offer in selected stores, is experiencing a “highly favorable reception”. But it’s too early to make a call on whether pivoting away from the exuberant clothes and shoes that allowed Gucci to become a $10 billion brand will pay off. For the time being, Palus is stuck with De Sarno.

Lastly, Kering’s somewhat stretched balance sheet limits its options further. A bold M&A spree, which included the 3.5 billion euro purchase of Creed and a stake in fashion house Valentino, makes it difficult to woo investors with buybacks. That means there is little hope of propping up the shares that have fallen more than 30% in a year.

That puts the focus squarely on Palus. The former Kering group managing director, who has worked for the controlling Pinault family for more than three decades, was initially meant to be an interim replacement to former Gucci CEO Marco Bizzarri. Investors had put high hopes on Francesca Bellettini, who masterminded a big expansion at Yves Saint Laurent, another Kering brand. But she ended up as Palus’ second in command, although she oversees Gucci’s brand development.

Kering’s fortunes are tied to those of Gucci. But the around 35% discount on its price to 2024 earnings multiple versus bigger rival LVMH may represent a buying opportunity for new investors, provided Palus can convince them Gucci can be fixed. As the brand’s woes deepen, it’s up to the new CEO to prove he has the right luxury touch.