Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

When One Direction frontman Harry Styles rocked a red floral suit from Gucci at the X-Factor final in London in December, it was clear the Italian brand was back in fashion.

Kering Shares
Gucci turnaround helped lift shares as much as 5 percent on Friday
Source: Bloomberg

Now Kering, the label's parent, has confirmed that Gucci isn't just grabbing column inches on the celebrity and fashion pages -- it is winning sales too.

Gucci's underlying sales rose 4.8 percent in the fourth quarter, widely beating analysts' forecasts of a 1.5 percent expansion. It was the brand's best performance in three years.

Gucci accounts for almost two-thirds of Kering's profit, so getting it right will have a big impact on the group, which also includes Yves Saint Laurent and luxury leather goods brand Bottega Veneta.

Gucci has struggled to find its groove since the departure in 2004 of creative director Tom Ford, the man who made Gucci sexy again in the 1990s. CEO Patrizio di Marco and creative director Frida Giannini failed to maintain the brand's momentum, and they both left their posts at the end of 2014 as sales shrank. 

Kering's pinned its hopes for a Gucci revival on CEO Marco Bizzarri and creative director Alessandro Michele, a once little-known accessories designer. So far it looks like these bets are paying off.

The appointment of a new creative director might usually be expected to generate a halo effect around Gucci's products, and Michele's designs featuring vintage styling and Gucci's classic double-G logo seems to have won new fans. What's particularly encouraging is that clothing, loafers and bags -- the real drivers of sales and profit -- are being snapped up by new, younger customers who aren't tourists.

Asian Focus
As Japan attracts Chinese shoppers, Kering's one of the luxury brands better-placed to benefit
Source: Bloomberg Intelligence

That bodes well if Gucci is to prosper in a new luxury environment. Demand from Asian shoppers, particularly Chinese, is shrinking, so it's crucial to attract customers other than the travelling Chinese luxury consumer. In addition, Kering has a strong position in Japan relative to some other brands such as Burberry and Louis Vuitton. The country is fast becoming an area of focus for luxury companies as growth in China stalls in 2016. 

Even after the shares jumped as much as 5 percent on Friday, Kering is broadly in line with the Bloomberg Intelligence luxury peer group. The stock is trading on about 16 times the next 12 months earnings. This looks mean, given the potential for Gucci's turnaround, a strong performance from Yves Saint Laurent, and a recovery at Puma.

Cheap Luxury
Good prospects at Gucci mean Kering's shares are looking undervalued
Source: Bloomberg

Still, Kering isn't immune to the pressures faced by other luxury goods groups. Its Bottega Veneta brand has a much bigger exposure to Asia, and so has been hit particularly hard by the slowdown in China. 

At YSL, there is the risk that Hedi Slimane, its creative director, departs, as has been recently speculated in the fashion press. The brand has enjoyed a stellar performance, with operating profit up 60 percent last year. Any disruption to the winning combination of edgy brand image and wearable styles is worrying.

And the full verdict isn't in yet on Michele. His designs accounted for just over 30 percent of sales in the final quarter. This is expected to increase to just over half in the first quarter, and almost all by the end of the year. That's when the real test will come.

But if Kering can keep Gucci moving in the right direction, his investment case will be this: Michele's fur-lined Gucci loafers -- the it-shoe of the season -- might be pricey, but the shares are not.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net