Gucci, Balenciaga struggle amid designer shakeup and ad controversy

A fall in sales at Gucci and consumer outrage over Balenciaga’s portrayal of children in its ads led to a slowdown in revenue at the brands’ owner. 

French luxury conglomerate Kering SA said its biggest brand, Gucci, booked a 14% drop in comparable sales over a three-month period ending in December in part due to pandemic restrictions that were in place in China during the quarter. Kering reported a 4% sales drop in its "other brands" segment, which includes Balenciaga, over the same period. 

Fourth-quarter revenue at the French luxury-goods group fell 7% on a comparable basis to 5.28 billion euros, equivalent to $5.67 billion, shy of analysts’ expectations. Kering had reported a 23% rise in sales in the previous quarter. 

"I’m not going to pretend that the results we’re presenting today are up to our ambitions or that I am satisfied," said Kering Chairman and CEO François-Henri Pinault. 

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Kering is in the midst of its biggest creative crisis in nearly a decade — the last time Gucci and Balenciaga sales were stalling. Kering enjoyed stellar growth until recently, boosted by the buzzworthy designs of Alessandro Michele at Gucci and Demna at Balenciaga, both of whom generated volumes of new looks and content that resonated with young consumers on social media and fashion buyers on the runways.

Mr. Michele left Gucci in the fall and was replaced recently by little-known Italian designer Sabato De Sarno. Demna — who has dropped his last name Gvasalia — has been under fire for his use of children in an ad campaign in November.

One showed children holding bags in the shape of teddy bears clad in what some people said looked like bondage gear. Another, released a few days later, featured a document related to a Supreme Court ruling against child pornography.

A wave of online posts conflated the two separate campaigns, with critics accusing the brand of promoting child pornography. The fashion house blamed external agencies for the appearance of the Supreme Court document in one of its advertisements. It said the inclusion of children in the teddy-bear-themed campaign should never have happened.

"We made a clear error of judgment with no intention at all to shock, to provoke or to hurt anyone. So I take full responsibility for this episode. And I present our apologies to anyone who was affected," Mr. Pinault said Wednesday. 

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Fallout from the ads led to a "difficult month of December" for the brand, Kering said. Balenciaga’s sales were impacted in the U.S., the U.K. and the Middle East, Mr. Pinault said, adding that there had been no impact in Asia.

Kering said it would create a new position to oversee brand safety across the conglomerate and systematically review large campaigns. Mr. Pinault said the brand had applied control processes in reviewing the ads but that the people involved—both internal and external — hadn’t come to the right conclusions. The brand is gradually starting to advertise in the U.S. again, Mr. Pinault said, after going mute for December and much of January. 

Mr. Pinault said people have asked him why heads didn’t roll following the scandal. "There was no intentionality," he said. "We’re allowed to make mistakes in a group like Kering. We’re not allowed to make the same mistake twice, but we have a right to make mistakes. That’s important to me."

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In an interview with Vogue last week, Demna was reported by the magazine to have said he planned to focus on making clothes rather than spending time on generating buzz through elaborate fashion shows and marketing. Demna said that the teddy bear bags referenced punk culture, not bondage, but he apologized for featuring children, "in images that included objects that were not related and inappropriate to them."

The slowdown at Kering contrasts with rivals that have maintained strong sales growth despite inflation and economic uncertainty. French luxury group LVMH Moët Hennessy Louis Vuitton SE has increased sales at its Louis Vuitton brand, as well as at Dior. French luxury house Hermès, which reports year-end results on Friday, is expected to show strong sales growth.

"Despite these setbacks, I am more than ever convinced that we are implementing the right strategy," said Mr. Pinault.

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Gucci last month appointed Mr. De Sarno as its new creative director, seeking to reinvigorate its largest brand after rapid growth petered out. Mr. De Sarno will lead Gucci’s design studio, with responsibility for its women’s, men’s, leather goods, accessories and lifestyle collections. He will join the brand in the second quarter of this year and present his debut runway collection at Milan Women’s Fashion Week in September.

Sales at other Kering brands, including Saint Laurent and Bottega Veneta, rose during the fourth quarter, Kering said.

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Recurring operating profit climbed 11% to €5.59 billion for the year, despite a lower margin at 27.5%. Gucci’s core profit margin, notably, slipped to 35.6%, amid high investment aimed at nurturing growth, Kering said.

For 2022, Kering will propose a total dividend of €14 a share, up from €12 previously, with the final dividend to be paid in May.

Ticker	Security	Last	Change	Change %
PPRUY	KERING SA	23.32	-0.10	-0.41%