Gucci’s China Problem Is Testing Investors’ Patience

The company says a turnaround will take time as the market for luxury goods cools and China muddles through economic doldrums.

Photo of a Gucci store
Photo by Do Nhu via Unsplash

Sign up for smart news, insights, and analysis on the biggest financial stories of the day.

Shares of Gucci parent Kering fell in European trading on Wednesday after the luxury giant said late Tuesday that it expects its operating income for the first half of the year to tank by 40% to 45%, largely due to sluggish demand in China.

The problem is that several of Kering’s luxury peers aren’t having the same issue.

Brand Battle

This isn’t the first time that Kering has warned about sales in China — the company said just last month it expected first-half sales throughout Asia to fall by 10%, due largely to softness in the Chinese market. However, the company essentially rises or falls with Gucci, which supplies over two-thirds of its operating profit. And Gucci is certainly in flux: It named a new creative director last year, and the company has warned that a turnaround for the brand will take time as the market for luxury goods cools and China muddles through economic doldrums. However, that hasn’t been the experience of several top rivals:

  • Fellow French luxury retailer LVMH said last week that first-quarter sales to Chinese customers were up 10%, while sales to the US and Europe were down. Unsurprisingly, LVMH said inflation was “taking its toll” on the “aspirational customer” in the West, while that wasn’t happening in China because “there is no such thing, at least for the time being, as inflation in China,” according to a conference call transcript.
  • Meanwhile, Italy’s Prada reported on Wednesday that sales to the Asia Pacific region grew 16% and that an influx of Chinese citizens traveling overseas was also boosting sales in both Europe and Japan.

Fly China: If you thought you were restless waiting for the pandemic to wane, you have nothing on the citizens of China, who are increasingly busting out after three years of strict prevention measures. Take travel: A recent McKinsey report showed that travel to Hong Kong, Macau, Taiwan, and international destinations has now reached 77% of 2019 levels, rising each successive month. McKinsey noted that while spending on property and personal items like clothing continues to fall, spending on higher-priced items like cars and international travel is on the rise. YOLO, the universal post-pandemic language.