Call it the Beyonce bounce. The singer's love of all things Gucci has rubbed off on legions of shoppers. That helped the fashion label's owner, Kering, to post its strongest quarterly organic sales growth in three years.
The stock has gained almost 50 percent in four months. But Gucci's turnaround gets harder from here.
First, the good news. Since Alessandro Michele took over early last year, Gucci looks like it's appealing to the three groups of buyers all luxury brands want: local customers, tourists and millennials. The label's 17 percent increase in third-quarter sales was all the more remarkable given the personal luxury goods market is expected to be flat this year.
There's certainly more to go for at the brand: margins are set to rise by 1.5 percentage points in the second half, and the company's still rolling out Michele's popular collection to stores. By the end of the year, Gucci expects more than 80 percent of products in stores will be his designs.
Kering's other brands did well too: organic sales at Yves Saint Laurent increased 34 percent, while revenue at Puma climbed 11 percent.
So far, its improved prospects haven't been reflected in its valuation. At 19 times estimated earnings, the shares trade at a discount to peers like Hermes and LVMH, according to Bloomberg data. There are sound reasons for that caution.
Kering acknowledges it will have to keep spending on Gucci over the long term. Fashion is notoriously fickle, and Michele's look is distinctive. The novelty might wear off unless Gucci keeps it fresh. That could drag on profit. Gucci started to turn the corner in the final quarter of 2015, so sales comparisons will get tougher from here.
And there are nagging doubts at some of the other businesses. At Yves Saint Laurent, successful designer Hedi Slimane has been succeeded by Anthony Vaccarello. Kering says his first collection was well received by the fashion press. We don't know yet whether shoppers will like it. Sales at Bottega Veneta fell 11 percent, hurt by fewer Chinese visitors to Europe and Japan, where it generates almost a fifth of retail sales.
That means even more pressure on Kering to keep delivering on its famous double G brand. It needs more gains from Gucci.
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