Kering Shares Fall After Goldman Sachs Downgrades to ‘Sell’

Shares of Kering experienced a decline on Tuesday following a downgrade by Goldman Sachs, which revised the luxury conglomerate’s rating to “sell.” As of 3:51 AM (0750 GMT), Kering’s stock was down 2.9%, trading at €249.50.

The downgrade is rooted in concerns regarding Kering’s flagship brand, Gucci, which has struggled to maintain its appeal in recent years. After remarkable growth from 2016 to 2019, Gucci has faced challenges since 2020, and despite attempts to regain market share, stabilization has yet to be achieved.

One major factor influencing the downgrade is the weaker-than-expected growth in China, a crucial market for luxury goods. China’s economy has been slowing down, and although recent stimulus measures aimed at enhancing consumer confidence have been implemented, Goldman Sachs remains doubtful about their effectiveness in encouraging high-end discretionary spending soon.

According to Goldman Sachs, the luxury sector often lags behind in recovery cycles, suggesting any improvement in overall consumer spending will take time to translate into luxury purchases. This has made the situation in China a significant point of discussion when evaluating the outlook for luxury brands like Kering.

The brokerage also points to ongoing challenges in China’s luxury consumption trends, despite government policy interventions. Preliminary data for the third quarter of 2024 indicates continued weakness in consumer activity, even when compared to more favorable previous periods.

Additionally, the economic slowdown in Japan, another vital market for Chinese luxury shoppers, complicates the landscape further. Luxury goods prices in Mainland China are around 25% to 30% higher than in Europe, which may limit the effect of reductions in overseas spending on domestic luxury sales.

Concerns over the ongoing turnaround efforts at Gucci, which represents 64% of Kering’s EBIT forecast for FY24, also contributed to the downgrade. Despite changes in management, including the appointment of a new creative director, the brand has struggled to regain its former market dominance, with little indication of successfully stabilizing its market share.

Gucci faces substantial investment needs in order to revitalize the brand. Key initiatives such as new product development, fresh content creation, and customer engagement are essential for driving growth, but these efforts might also increase operational inefficiencies.

In a market where store traffic is sluggish and consumer confidence—especially in China—is low, executing Gucci’s ambitious plans could be challenging. Goldman Sachs anticipates that Gucci’s EBIT margins will hit their lowest point in the first half of 2025, adding further strain to Kering’s overall profitability.

Regarding valuation, Kering’s shares have already underperformed relative to its luxury sector peers, with a year-to-date drop of 28%. Goldman Sachs has identified additional downside risks; the stock is currently trading at a forward P/E of 20x for 2025, which is an 18% premium over the 10-year average P/E of 17x, excluding the COVID-19 period.

The firm considers this valuation demanding given the uncertainty surrounding Kering’s earnings outlook, particularly with Gucci undergoing its turnaround. They project Kering’s EBIT for FY25 to be 11% below consensus estimates, indicating potential for further earnings disappointments.

Additionally, concerns are raised about Kering’s broader portfolio. While Gucci is a major focus, other brands under the Kering umbrella, such as Saint Laurent, are also undergoing significant investment phases, which could result in greater earnings volatility compared to competitors.

Goldman Sachs expects Kering’s adjusted EBIT margin to fall to 15.8% in FY25, a decrease from 30.1% in FY19, prior to the pandemic.

China remains a key market for luxury products, accounting for approximately 25% of global luxury consumption. However, the contribution of Chinese consumers has declined from about 32% before the pandemic, with spending increasingly shifting from overseas shopping to domestic purchases.

Goldman Sachs maintains a cautious view on the Chinese consumer’s interest in luxury goods in the short term, especially considering regional price disparities. With luxury items priced significantly higher in China than in Europe, the firm sees limited potential for elevated domestic spending to compensate for reduced luxury shopping abroad.

Consequently, while China’s significance to the luxury industry is undisputed, the risks tied to its economic slowdown are becoming central to Goldman’s analysis of the sector’s future.

Goldman Sachs’ revised outlook emphasizes increased downside risks from China. In a more adverse growth scenario, where demand for luxury goods in China could decrease by 10% in FY25, the luxury sector could experience considerable pressure. The firm estimates an average downside of 34% for luxury stocks, including Kering, while its base case predicts a modest 4% upside. However, the potential risks in this weakened growth environment considerably outweigh the possible gains.