The search for the next Gucci is on, but may yield more innovative designs than profitable investments.
Gucci’s youth-led resurgence has laid to rest fears, widely whispered in luxury circles just two years ago, that millennials are more interested in accumulating experiences than handbags. Investors are driving up the valuations of flagging labels like Burberry and Prada in the belief they can pull off the same trick. Alas, neither quite has the Gucci factor.
Gucci’s growth under Creative Director Alessandro Michele, who was appointed in 2015, has defied all expectations. In 2017, sales reached €6.2 billion ($7.3 billion)—up 45% from 2016 excluding currency movements—and the label has kept the pace this year.
Younger consumers have been central to the rebound. Buyers aged 35 and under contributed 57% of Gucci sales last year, baby boomers just 8%. This is unusual: Most fashion brands derive less than 40% of sales from millennials.
One explanation is the way the new Gucci aesthetic, both edgy and retro, chimes with millennial values like creativity and inclusivity. Another is careful planning under Chief Executive Marco Bizzarri, who joined alongside Mr. Michele. The new boss relaunched Gucci’s online stores and made aggressive use of social media. He also invested in more affordable products: Although millennials dominate Gucci’s client list, they spend less than the average buyer.
Some elements of Mr. Bizzarri’s playbook are now mainstream. Brands spent 30% of their ad budgets online last year, up from 24% in 2015, according to agency Zenith Media. The industry has also been investing heavily in new ways of reaching consumers through social media, such as events for trendy Instagrammers.
Other elements can be seen in today’s turnaround candidates. A bit like Gucci, Milanese fashion house Prada “priced itself out of the market” with an ever tighter focus on high-end leather goods, says John Guy at brokerage Mainfirst. Now, its new leather bags are on average 24% cheaper than the previous range, he calculates, making them more competitive with similar products from Gucci, Fendi and Valentino. After years of decline, first-half sales were up 9% year over year.
Meanwhile, ailing U.K. trench coat maker Burberry has hired a new chief executive and designer in an effort to reboot growth. A hint of their aesthetic came in an early August Instagram post that revealed a simpler, bolder new logo that eliminates the knight on horseback. If this is anything to go by, the new Burberry could look very different.
But investors should be wary of seeing either company as the next Gucci.
One problem is valuation. The Florentine brand’s revival coincided with an upswing in the entire luxury industry as spending by Chinese consumers recovered from a clampdown on corrupt gift-giving and the 2015 devaluation. Without that upswing, Prada and Burberry are unlikely to see a Gucci-style surge in profits and stock-market value even if they win over consumers. Investors are already very bullish, valuing them at 29 and 28 times prospective earnings, respectively.
The other problem is that neither company can reset itself as radically as Gucci did. Prada is a family-controlled company whose two brands, Prada and Miu Miu, are both inextricably linked to its lead designer, Miuccia Prada, granddaughter of the founder. Her husband is the company’s chief executive officer. As Erwan Rambourg at HSBC points out, a strategic and design relaunch of the kind Gucci undertook is out of the question.
Burberry faces another barrier: It wants to move upscale. This will be tough as the wider industry subtly shifts in the other direction in search of younger consumers.
Investors may be better off sticking with the industry’s stalwarts. Kering , the French holding company that owns Gucci as well as Yves Saint Laurent and a host of other brands, trades at just 21 times earnings. In time, Gucci’s star will doubtless fade, but there’s little sign of that happening yet, and other Kering brands, such as Bottega Veneta, could burn brighter. LVMH Moët Hennessy Louis Vuitton, the industry’s other big portfolio company, changes hands for 23 times.
Both look expensive relative to their history, but these are sunny times for the luxury industry. When confidence fades, the established success stories will hold up better than speculative turnaround hopes at companies like Burberry and Prada.
Chasing the next big thing is understandable in a fashion-driven industry. But it may pay better to buy the classics.
Write to Stephen Wilmot at [email protected]