|12 February, 2020

Gucci owner Kering halts spending in China on virus fears

50% of China store network shut, rest on reduced hours

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.

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

PARIS - Gucci-owner Kering has closed half of its stores in China and shelved new openings and advertising campaigns there as the coronavirus epidemic throws luxury brands into turmoil.

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 in China that remained open, including in Hong Kong, were on reduced hours.

Kering is postponing store renovations and new openings, as well as reviewing product launches in China, Pinault added.

"We are reallocating inventory to other regions of the world to make sure we are not overstocked in China" he said, without giving an estimate for any impact from the virus on earnings.

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. 

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 2.4% at 0945 GMT.

"These are good numbers from Kering and are comforting in the light of the current predicament," Jefferies analysts said in a note.

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.

Gucci still 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) ((sarah.white1@thomsonreuters.com; + 33 (0) 1 49 49 56 85;))

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