Gucci Fears Spark Kering Sell-Off

(Bloomberg) -- Kering SA shares plunged as much as 9.9%, the most since mid-October, after a second-quarter sales miss at its red-hot Italian brand Gucci sparked fears the label may be falling out of favor with U.S. and Chinese customers.

The stock was down 8.1% as of 9:07 a.m. in Paris, Friday’s top loser on Europe’s Stoxx 600 Index as well as on France’s CAC 40. Kering shares, initially suspended in morning trading because of excessive volatility, are lagging those of peer LVMH this year. Analysts flagged in recent weeks that Gucci, a crucial growth engine, appeared to be losing momentum on social-media platforms such as Instagram.

Here is what analysts are saying about Gucci’s prospects:

Bernstein, Luca Solca (market perform)

• Expect Kering to be under pressure with 2Q Gucci revenue growth of 12.7%, against sell-side expectations close to 15%
• Brand’s slowdown in the U.S. “exacerbated” from 5% growth in 1Q to -2% in 2Q
  • All this is in contrast to F&LG growth of +20% in 2Q at LVMH earlier this week
• Questions remain about a soft landing for Gucci, despite a “very healthy” 1H margin improvement
• After a strong share price recovery in recent weeks, investors likely to “top slice” their Kering exposure

Jefferies, Flavio Cereda (buy)

• Sales were in line and Ebit was a slight beat

• That said, Gucci top line was a small miss, and this is set to cause concern over allocation of resources and speed of medium-term normalization

• Most of the metrics were good but probably more is needed to close the valuation gap

Morgan Stanley, Edouard Aubin (Equal-weight)

• Gucci’s top line, key sentiment driver for Kering shares, disappointed, meaning investors may take 1H results negatively even if group sales and earnings were essentially in line with expectations
• Gucci is losing momentum, “clearly” with U.S. nationals but also with Chinese consumers, following robust performance since 2015
• Still “too early to say if Italian baroque is going out of favor,” i.e. whether it’s the fashion cycle turning against Gucci or if the more pronounced-than-expected slowdown in 2Q is a function of the Italian brand prioritizing margin expansion over top line growth/desirability in past few quarters

RBC, Rogerio Fujimori (outperform)

• Margin beat was “nice” but short-term focus will be on Gucci’s easing sales-growth trend, in particular in the U.S.

• Kering attributed U.S. weakness to several factors, including an extremely demanding comparison base, tougher market backdrop, more Americans buying Gucci in Europe, lower inbound tourism purchases and competition

  • Still, this didn’t prevent Saint Laurent from delivering +22% comparable growth in 2Q in North America, similar to +21% in 1Q

• Co. plans to boost U.S. marketing and retail investment in 2H to reverse negative Gucci trend

  • U.S. market has been characterized by strong brand polarization with the likes of LVMH’s Louis Vuitton and Dior, Hermes, Saint Laurent (YSL) and Balenciaga “materially” outperforming

• Bottega Veneta’s organic growth better than feared but brand’s margin remains under “severe” pressure

• Balenciaga continued to fuel Other Houses’ 19% organic growth in 2Q, “bang in-line” with consensus

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