Gucci's Sales Drop Slows, Offering Hope for Kering's Revival Push

A Smaller Drop Than Anyone Expected

Gucci has been struggling. For a while now, its products just were not clicking with wealthy shoppers the way they used to. That hurt Kering, the French company that owns Gucci along with Yves Saint Laurent and Balenciaga, because Gucci alone accounts for about half of the group's profit.

But the second quarter brought a surprise.

Investors reacted fast.

The smaller decline suggests that Kering's efforts to turn the brand around might finally be working. CEO Luca de Meo, who took the top job in September, said in a statement the quarter showed '"early signs of progress in brand desirability, commercial momentum and operating performance".' He also noted that things sped up as the quarter went on, including at Gucci.

What Kering Did to Get Here

Kering did not just sit around hoping Gucci would fix itself. The company sold its beauty division, including the Creed perfume brand, to L'Oreal as part of a debt-reduction plan. Kering shut underperforming retail outlets and reduced staffing at Alexander McQueen, a smaller brand in its portfolio. Those moves helped slash debt and sharpen the focus.

Get the market news that matters in a five-minute read with Market Briefs, our free daily newsletter

Then there is the creative side. Last year, Kering hired Demna Gvasalia as Gucci's creative director, following his ten-year stint at Balenciaga. In February, Demna presented his debut runway show in Milan, featuring sensual designs that echoed Tom Ford's era at Gucci. Additionally, the brand staged a cruise collection event in New York this past May.

Whether that works is still an open question. Edouard Aubin and his team at Morgan Stanley said there is debate about Gucci's "aesthetic positioning, with some experts arguing that Demna's approach is helping the brand stand out, while others felt it risks narrowing Gucci's appeal versus the broader audience the house traditionally served."

Meanwhile, the broader luxury market is not making things easy. Luxury consumers are being increasingly choosy, particularly when it comes to clothing and accessories categories. Rivals like LVMH also felt pressure from the Middle East conflict, which knocked about 1 percentage point off Kering's second-quarter revenue growth. The Middle East accounts for roughly 5% of Kering's retail revenue, so the impact was noticeable but not devastating.

What This Means for Your Portfolio

The luxury world is splitting into two camps right now. On one side, you have brands that are holding up well, like Richemont's jewelry names Cartier and Van Cleef & Arpels, which posted much stronger-than-expected sales. On the other side, you have fashion houses like Burberry and Moncler, which reported tepid results.

Gucci has been stuck in the second group. But this quarter suggests it might be creeping toward the first. The leather-goods category, a core part of Gucci's business, returned to growth. That is a concrete sign that customers are starting to come back.

For investors, the story here is not about a full-blown comeback - not yet. It is about whether the pieces are in place for one. Kering has a new CEO who is slashing debt and cleaning house.

It has a buzzy creative director trying to give Gucci a fresh identity. And the numbers are starting to bend in the right direction.

The question is how much patience investors have. Kering shares were still down 17% for the year through Tuesday's close in Paris, even after the post-earnings jump. That tells you the market wants to see more than one good quarter before it fully trusts the turnaround.

The bottom line: Luxury spending is picky right now, and brands that adapt fast enough - with the right products, the right leadership, and the right financial discipline - are the ones that will keep their place in investors' portfolios. Gucci just showed it is at least moving in that direction.

Join Market Briefs, our free daily newsletter, for a quick daily rundown of the markets