February 12, 2020 / 6:56 AM / 13 days ago

Gucci owner Kering halts spending in China on virus fears

PARIS (Reuters) - Gucci-owner Kering has temporarily shut half of its stores in China, and shelved new openings and advertising campaigns there, as the coronavirus outbreak throws luxury brands into turmoil.

FILE PHOTO: A woman walks past a Gucci advertising poster as shoppers and anti-government protesters gather at New Town Plaza in Sha Tin, Hong Kong, China November 3, 2019. REUTERS/Shannon Stapleton

The French group, which also owns Saint Laurent and Balenciaga, remained upbeat about its longer-term prospects as it beat fourth-quarter sales forecasts on Wednesday.

But like rivals, it said disruptions were inevitable from an epidemic that has emptied malls and shopping streets in China, which accounts for more than a third of luxury goods sales.

“We are seeing a sharp drop in traffic and sales in mainland China,” Chairman Francois-Henri Pinault said, adding shops that remained open, including in Hong Kong, were on reduced hours.

Kering is postponing store renovations and new openings as well as spending on social media and product launches in China, Pinault added.

It is also shifting inventory to other regions to make sure stocks don’t pile up in China, he said, without giving an estimate for any impact from the virus on earnings.

Pinault expects the Chinese market to rebound strongly once the health emergency is over, and said Kering was ready to increase marketing spending in the second half of the year to make sure it doesn’t miss out when sales start picking up again.

But for now he said online shopping was not really making up for the decline in store footfall. “The warehouses are shut. People can place orders but there are no deliveries,” he said.

TOURISTS

Italian puffer jacket maker Moncler said this week shopper numbers at its Chinese stores had plunged 80% since the virus outbreak, while jeweller Pandora has said business in the country had ground to a halt.

Kering makes 34% of its sales in Asia Pacific, excluding Japan. Spending on its brands by Chinese customers, who have traditionally shopped with it overseas, has shifted overwhelmingly to mainland China, where the virus originated.

Entire cities in the world’s second biggest economy are now shut off, flights have been cancelled and many countries are banning entry to visitors coming from China, exposing Kering and other high-end houses to a major sales hit.

Pinault said that since last week Kering had begun to see the impact of fewer Chinese tourists in Europe and the United States. In China, Kering is taking steps to protect its staff, such as paying for taxis so they can avoid public transport.

The crisis has compounded a plunge in sales in Hong Kong due to months of anti-government protests. Kering’s fourth-quarter sales in the Chinese territory halved.

Nonetheless, group revenue rose 13.8% to 4.36 billion euros ($4.76 billion) in October-December, helped by demand in China prior to the virus outbreak. That equated to an 11.4% increase on a like-for-like basis, which strips out currency moves and acquisitions, beating analyst forecasts for around 10% growth.

Kering shares were up 3.5% at 1416 GMT.

CASH COW GUCCI?

Kering now relies on Gucci for 83% of its recurring operating income.

The brand’s flamboyant style, an e-commerce push and an expansion of its products in homewares and perfumes have made it one of the fastest-growing luxury labels in recent years. But analysts have questioned whether it can keep up the momentum, and whether Kering is overly-reliant on one brand.

“Whether Gucci can enter in a more steady phase of growth and turn into an attractive ‘cash cow’ will be key to the Kering investment case ... especially in the absence of large-scale, transformational mergers and acquisitions,” Citi analysts said.

Pinault said Kering was looking at potential opportunities but was selective and did not want to buy brands that could directly rival those it already owns. Commenting on recent reports that Kering was interested in Moncler, he said there were “no active talks” with the Italian group.

Gucci beat sales expectations in the fourth quarter, with revenue up 10.5% versus a consensus forecast of around 9.5%, and it returned to growth in the United States after an advertising and diversity campaign helped reverse a blip there.

As a whole, Kering posted a 37.4% drop in net income for 2019, hit in part by a record Italian tax settlement of 1.25 billion euros linked to Gucci.

Reporting by Sarah White and Silvia Aloisi; editing by Mark Potter

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