Investors are displaying remarkable faith towards Kering's transformation strategy, even as the luxury conglomerate grapples with a significant 16 percent decline in group sales and persistent challenges at its flagship brand Gucci. The market's measured response — shares edged up 0.5 percent following the earnings announcement — suggests a longer-term confidence in the group's restructuring efforts, despite expectations of continued pressure on operating profit in the fourth quarter.

Demonstrated resilience

The resilience in Kering's share price comes against a backdrop of broader luxury sector volatility, where industry benchmark Hermès continues to demonstrate robust growth and LVMH saw a more muted decline of 5 percent, highlighting the divergent fortunes within the premium segment. However, Kering's year-to-date performance tells a more sobering story, with shares down 40 percent in 2024, largely attributed to Gucci's outsized influence on the group's financial health.

The significance of Gucci to Kering's portfolio cannot be overstated: the brand accounts for 45 percent of group revenues and an even more crucial 63 percent of operating profit in the first half of 2024. This concentration of risk has become increasingly problematic as Gucci struggles to regain its footing in a shifting luxury landscape.

A brand in transition

The brand's challenges predate its current transition. Under former creative director Alessandro Michele, Gucci's maximalist aesthetic — which initially catalyzed a remarkable turnaround and years of double-digit growth — began showing signs of market fatigue in recent seasons. The appointment of Sabato De Sarno as creative director marked a strategic pivot toward a more understated aesthetic.

However, this creative reset comes at a particularly challenging moment for the luxury sector. The Chinese market, historically a key growth driver for luxury brands, has shown persistent weakness amid broader economic uncertainties. Western markets, while more stable, have yet to fully embrace De Sarno's new vision for Gucci, with press reception remaining lukewarm to the brand's revised design direction.

Industry analysts suggest that Kering's relative share price stability, despite these headwinds, reflects several factors. First, the market appears to be pricing in the extended timeline typically required for creative transitions at major luxury houses. Second, Kering's track record of successful brand turnarounds — notably at Saint Laurent and Bottega Veneta — lends credibility to its current strategy.

The group's broader portfolio diversification efforts, including recent acquisitions in the high-end perfume segment and investments in eyewear, may also be tempering investor concerns about Gucci's outsized influence. Nevertheless, the success of De Sarno's vision remains crucial for Kering's medium-term prospects.

Kering's management has emphasized that 2024 will be a transition year, with meaningful recovery not expected until 2025. This timeline aligns with historical precedents for luxury brand repositioning, but the group faces additional pressure from an increasingly competitive landscape where peers like LVMH and Hermès continue to demonstrate greater resilience.

The group's ability to maintain investor confidence during its turnaround strategy appears increasingly precarious, as weakness extends beyond Gucci: Saint Laurent posted a 13 percent decline, while "other houses" including Balenciaga and Alexander McQueen saw sales fall 15 percent, suggesting Kering's challenges are more systemic than initially believed. The group's recovery will hinge not only on De Sarno's upcoming collections at Gucci, but also on signs of revival in the crucial Chinese market and a broader portfolio turnaround across its maisons.

For now, the market's muted reaction to disappointing numbers suggests investors are willing to give Kering's management time to execute its strategy, but the clock is ticking on delivering tangible results from these transformation efforts.