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“In difficult times, fashion is always outrageous,” the eccentric Italian designer Elsa Schiaparelli once said. So it is proving at one of luxury’s most storied brands. Gucci, part of the Kering corporate empire, parted ways with its creative director Sabato De Sarno this week after slumping sales and multiple profit warnings.
Luxury houses are used to highs and lows. The issue here is that Kering lacks many of the soft layers that pad its peers. Gucci — which accounts for two-thirds of operating profit — caters to the affluent more than the astronomically wealthy, which leaves it exposed to the economic cycle. Its over-the-top brand heritage, too, can be in or out of favour. It doesn’t sit well with the current “quiet luxury” movement.
In less status-focused industries, managers try to cut costs when sales dip. That’s harder for companies like Gucci, which have an image to maintain. Fully three-quarters of Gucci’s first-half revenue decline passed straight through to its operating profit.
Alongside a more cyclical and concentrated business mix, Kering has also amassed more debt. Its peers may entice customers to splurge, but they keep a close eye on their own finances. Richemont and Hermes hold cash. LVMH’s net debt is roughly equivalent to its forecast ebitda. On S&P Capital IQ numbers, the Gucci owner’s indebtedness including capitalised leases at the end of June 2024 was three times that.
It’s not like François-Henri Pinault has nothing to show for this. Kering has acquired 30 per cent of Valentino, perfumer Creed and an eye-popping €1.3bn building in Milan’s Via Montenapoleone. But there may be further calls on its resources. The 70 per cent of Valentino Kering does not already own is governed by put and call options exercisable from May 2026 to August 2028 and is in the books at €4bn.
Investors will no doubt be scouring Kering’s annual results next week for guidance on what happens next. The group may hope that a rising tide will help it float above such matters. After all, the luxury cycle seems to be turning. Yet with no designer at the helm, Kering risks missing out on this particular wave. The upshot is that Pinault may well come under pressure to offload real estate stakes — as it did with some Parisian properties in January — and embark on some serious cost cutting.
The House of Gucci is no stranger to drama — it has endured M&A battles, departures of iconic designers and bitter feuds. It would be wrong to bet against the brand reinventing itself again. But unless sales growth materialises, its next new look will need a slimmer fit.
camilla.palladino@ft.com
