Is Gucci too trendy? – WSJ

Europe’s luxury brands have shrugged off the pandemic and inflation, but the vagaries of fashion still have the power to break them.

Shares in Gucci’s owner, Kering,

KER -4.32%

fell about 5% on Friday in response to quarterly results published the night before. Sales grew 21% in the three months to March compared to a year earlier, but the Gucci brand, Kering’s most important for both sales and earnings, appeared to weaken among Chinese customers, based on the brand’s 6% drop in sales in Asia and Pacific area.

Management blamed new Covid-19 lockdowns on mainland China, even though only one-tenth of Gucci’s stores in the country were closed for a month of the quarter. Its second-largest label Saint Laurent, which admittedly is slightly less dependent on Chinese customers, still managed to increase sales by 15% in Asia.

Concerns over whether Gucci can maintain its trendiness have long made Kering’s stock more volatile than its key partner LVMH,

to which it is currently trading at a 30% discount as a multiple of expected earnings. LVMH’s business is more diverse, and sales at brands such as Christian Dior and Louis Vuitton appear to be less affected by sudden trend changes.

Shareholders in Europe’s leading luxury brands may worry about the wrong things. The region’s five largest luxury stocks have lost 15% of their value on average since the beginning of the year due to concerns about inflation, rising interest rates and how the war between Russia and Ukraine could affect the global economy and demand for luxury goods.

So far, there are no signs of a slowdown. Among the largest luxury brands that have already reported results for the first quarter – Hermès,

LVMH and Kering – all increased sales by at least 20%. In Europe, Kering said demand is back at pre-pandemic levels. The region used to generate half of its sales from tourists and the company has now replaced the lost business with local buyers.

Inflation does not curb spending, although luxury brands are raising prices more than most companies. LVMH saw no change in buying patterns after some of its Louis Vuitton handbags rose 20% earlier this year. Privately owned Chanel has been the most aggressive throughout the pandemic. A small classic clamshell bag that cost $ 5,200 in November 2019 will set customers back $ 8,200 today, according to a Jefferies analysis.

Pandemic restrictions in China mean that the second quarter is likely to be tougher for luxury brands, which make up a significant portion of sales in this important market. But it should be a temporary blip for the stronger labels. The whims of fashion are still the biggest threat to brands like Gucci.

Write to Carol Ryan at carol.ryan@wsj.com

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