Is Gucci Too Trendy?

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Europe’s luxury brands have shrugged off the pandemic and inflation but fickle tastes in fashion still have the power to trip them up.

Shares in Gucci’s owner, Kering, KER -4.32% fell around 5% Friday in reaction to quarterly results released the night before. Sales grew 21% in the three months through March compared with a year earlier, but the Gucci brand, Kering’s most important for both sales and profits, appeared to weaken among Chinese shoppers, based on the label’s 6% drop in sales in the Asia Pacific region.

Management blamed fresh Covid-19 lockdowns in mainland China, although just one-tenth of Gucci’s stores in the country were closed for one month of the quarter. Its second-largest label Saint Laurent, which is admittedly slightly less reliant on Chinese customers, still managed to grow sales by 15% in Asia.

Worries about whether Gucci can maintain its trendiness have long made Kering’s stock more volatile than its key peer LVMH, to which it currently trades at a 30% discount as a multiple of projected earnings. LVMH’s business is more diverse and sales at brands such as Christian Dior and Louis Vuitton seem to be less impacted by sudden trend shifts.

Shareholders in Europe’s top luxury brands may be fretting about the wrong things. The region’s five largest luxury stocks have lost 15% of their value on average since the beginning of the year amid worries about inflation, rising interest rates and how the war between Russia and Ukraine might impact the global economy and demand for luxury goods.

So far, there is no sign of a slowdown. Among the biggest luxury brands that have already reported first-quarter results— Hermès, LVMH and Kering—all grew sales by at least 20%. In Europe, Kering said demand is back to prepandemic levels. The region used to generate half its sales from tourists and the company has by now replaced that lost business with local buyers.

Inflation isn’t slowing spending even as luxury brands raise prices more than most businesses. LVMH saw no change in buying patterns after it marked some of its Louis Vuitton handbags up by 20% earlier this year. Privately owned Chanel has been the most aggressive throughout the pandemic. A small classic flap bag that cost $5,200 in November 2019 will set shoppers back $8,200 today, according to a Jefferies analysis.

Pandemic restrictions in China mean that the second quarter will likely be tougher for luxury brands that make a significant chunk of sales in this important market. But it should be a temporary blip for the stronger labels. The whims of fashion are still the biggest threat to brands like Gucci.

Write to Carol Ryan at [email protected]