Flowers & Cats

Gucci's Gamble on Granny Chic

A big bet on Alessandro Michele's flowery vision.

Gucci's granny chic is going gangbusters, and even millenials are lapping it up. The question is whether its floral-encrusted turnaround can last.

The message from Kering's fourth-quarter sales report on Friday is that, with the performance of its other main brands more or less in line, Gucci was the main driver of its stellar performance.

The brand's underlying sales rose 21.4 percent in the period, almost double estimates of 12.1 percent, as more of creative director Alessandro Michele's collection went into stores. Kering, meanwhile, reported a 14.5 percent gain in group underlying operating profit in 2016, while free cashflow almost doubled.

Wearing It Well

Gucci has driven Kering's forward p/e raio to its biggest premium to the sector for 10 years

Source: Bloomberg Intelligence

The reinvigorated Gucci, with its new-look Double G logos, patterned cardigans and pleated skirts, is not mere embellishment. The division accounts for half of Kering's luxury sales, and about 60 percent of group profits.

Gucci's collections had got tired and dated, and the brand had lost its edge. The design changes, together with investors generally regaining their appetites for luxury, have helped Kering shares rise over 55 percent in the past year.

They trade on a forward price to earnings ratio of about 20 times, the biggest premium to the Bloomberg Intelligence luxury peer group for at least a decade.

It's not clear that this impressive performance can be sustained. True, the final quarter shows that shoppers, so far, can't get enough -- indeed, half of Gucci's sales came from millennials, so it seems that Michele has struck luxury gold. He's also influencing the wider fashion industry. That, together with efforts to enhance sales now that the full collection is in stores, reinforces the brand's desirability, at least in the short-term. However, 2016's stellar performance means that Kering also faces tough growth comparisons this year. 

Gucci Glow

Gucci's fourth quarter sales growth was almost double analysts' expectations

Source: Bloomberg Intelligence

The new Gucci is also a very distinctive look, whose maximalism is a far cry from the lean lines currently dominating fashion. Kering wants to continue in the current direction to enhance the consistency of its design shift. Even so, Michele must keep subtly innovating to stop shoppers getting bored.

Kering has also wedded the look and feel of Gucci's stores to his vision. That's fine until that vision changes. Then it can make for expensive refurbishments. 

Saint Laurent continues to be another power brand, with underlying sales up 20.5 percent in the fourth quarter. But the group is transitioning to Anthony Vaccarello, who replaced Hedi Slimane as creative director in April. There's no sign of a sales slip, but a new designer is a risk.

Bottega Veneta, meanwhile, remains challenging. The nascent recovery in China may help the brand, which is dependent on Asian consumers, but it's early days and an improved performance will take time.

Lagging The Field

There is opportunity for Puma to lift its margins closer to thos of rivals

Source: Bloomberg

Adidas is a forecast

One wild card is Puma. Operating profit rose by a third last year and the sportswear company expects it to expand significantly in 2017.

The operating margin, which lags those of rivals, edged up to 3.5 percent in 2016. If the company can lift this towards its goal of 8-10 percent, that could generate significant upside. The improving performance, together with the trend for sportswear, could encourage Kering to finally divest its 86 percent stake.

Until it gets there, the Kering investment case is all about Gucci.

The rating assumes its incredible rehabilitation will continue. But fashion is notoriously fickle, and Gucci's granny chic might not be in vogue forever.

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

    To contact the editor responsible for this story:
    Jennifer Ryan at

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