Gucci owner Kering drops 12% as luxury braces for tough winter

By Helen Reid

LONDON, Oct 23 (Reuters) - Shares in Gucci owner Kering tumbled 12% on Friday after the group reported further sales declines, but said it would stick with CEO Luca de Meo's turnaround plan and accelerate store closures, aiming for 125 by year-end.

The recovery long promised by luxury brands seems nowhere in sight, as the expansion of war in the Middle East, along with China's tax crackdown on the wealthy, piled further pressure on the world's biggest luxury conglomerates in the third quarter, and executives buckled in for a tough winter.

Riots in Paris, leaving Louis Vuitton shop windows smashed and electric-bike bonfires near luxury shopping mecca Place Vendome, threw into sharp relief the political risk faced by luxury brands not just abroad but also at home.

Shares in LVMH and Hermes were also down 1% to 1.5% on Friday, as crude prices hit their highest level since early May, worsening the squeeze on households that has curbed consumers' ability to splurge on handbags and clothes.

Harsharan Mann, global equity portfolio manager at Aviva Investors in London, said that luxury labels may need to bring down entry-level product prices further to lure shoppers back.

"If the pricing is still a bit out of touch or the consumer still thinks prices are too high to digest, then you can have the best creativity, but is the consumer going to engage with the product?” she said.

GUCCI STRUGGLING TO RECOVER

Gucci's decline has continued despite de Meo's plan to make the brand's prices more enticing to middle-class consumers and creative director Demna's Primavera collection - including a $5,900 crystal-encrusted bodycon dress - hitting stores in mid-July. Gucci sales improved in wholesale, but were down 6% overall.

"The progress made on improving brand desirability remains in its very early stages," JPMorgan analyst Chiara Battistini said in a note. Kering's finance chief said the brand's recovery would be "gradual" and that weak footfall was the main challenge, especially in China.

While Kering struggles to execute a turnaround against a weak economic backdrop, even high-end Hermes is showing signs of slowing, with its ready-to-wear division falling 2% in the third quarter due to weak Chinese demand. Overall, Hermes reported its weakest quarterly sales growth since 2020.

Across the sector, valuations have taken a beating as investors reassess future growth prospects. After a 40% slide in share price since January 1, Hermes' valuation is its lowest since 2014, while LVMH's is at a 10-year low.

(Reporting by Helen Reid, Additional reporting by Alessandro Parodi, Editing by Louise Heavens)