Gucci’s 28 Percent Growth Fails to Clear High Bar Set by LVMH

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A pedestrian walks past a window display at a Guccio Gucci SpA store at Harbour City shopping mall, operated by Wharf Holdings Ltd., in the Tsim Sha Tsui district of Hong Kong, China Photographer: David Paul Morris/Bloomberg

Kering SA’s Gucci label outpaced competitors in the fourth quarter, though the 28 percent sales growth won little applause from investors who had high expectations after rival LVMH trounced estimates last month.

The last of the major luxury-goods makers to report for 2018, Kering wraps up an unusually strong earnings season for the industry. The Gucci owner confirmed a trend seen at LVMH and Richemont, which indicated Chinese shoppers are still buying high-priced items, but more on their own turf rather than on trips abroad.

Facing a trade war with the U.S. and a slowing economy, the government has been trying to promote more consumption in mainland China amid reports of tougher controls on undeclared imports.

“While Gucci did not disappoint, it was only marginally above consensus and this might not be enough to please demanding market expectations,” wrote Thomas Chauvet, an analyst at Citigroup. Kering shares fell 2.3 percent as of 10:08 a.m. in Paris, having gained 25 percent in the past 12 months.

Kering may need acquisitions to diversify from the gradually waning success of the Italian brand, the source of three-quarters of its earnings, Chauvet said. The company can be opportunistic as its net debt dropped by almost half to 1.7 billion euros ($1.9 billion) at the end of December.

Outpacing Rivals

Chief Executive Officer Francois-Henri Pinault said he’s “very confident” Gucci can keep outpacing luxury rivals and that Kering doesn’t need acquisitions to grow, speaking at a meeting with analysts in Paris. The brand plans to fuel growth by expanding more in the perfume and beauty category and launching high jewelry collections, he said. Gucci is also under-represented in travel retail.

Demand from Chinese clients remained “extremely dynamic,” and the “trend remains excellent” on the mainland, Chief Financial Officer Jean-Marc Duplaix said on a call with reporters. He told analysts later that it’d be realistic for Gucci’s sales growth to exceed 10 percent this year.

Sales of iPhones and Volkswagen cars have taken a hit as the Chinese economy slows, but shoppers have yet to cut back on high-end handbags and sneakers.

Still, the growth engine has had some hiccups this year after Gucci’s rapid pace of sales decelerated each quarter in 2018. Kering has said that Italian authorities believe the brand underpaid taxes by 1.4 billion euros, though the company disputes the finding.

Gucci’s $500 pink sunglasses and $1,500 monogrammed canvas totes aren’t the only thing driving Kering’s rapid growth. Yves Saint Laurent grew by double-digits and Balenciaga is approaching 1 billion euros in annual revenue, Duplaix said.

Kering’s profitability jumped 5 percentage points to 28.9 percent in 2018, helped by the spinoff of Puma to investors, which gave them the chance to dump the German sportswear brand while hanging onto their share of Kering’s high-end portfolio.