Gucci has problems. The biggest may be a safe new look

Kering, the French luxury group that is Gucci’s owner, issued its third profit warning of the year on Wednesday evening as it unveiled quarterly results and now expects 2024 operating income to be barely half last year’s levels. Its star brand is weak. Sales at Gucci fell 25% in the third quarter compared with the same period of 2023. The label has been shrinking for more than a year and its performance has fallen behind rival fashion brands at luxury giant LVMH.

Kering is giving Gucci a makeover and replaced its creative team a year-and-a-half ago. The flashy designs that Gucci had become known for are out in favor of a more subtle look. If the brand can successfully pull off this new classic image, it should be less vulnerable to the fickle fashion cycles that have made Gucci’s sales volatile in the past.

New designer Sabato de Sarno’s collections still only make up around a third of what is available in Gucci’s stores. But when asked how new handbag models are selling, Kering’s finance chief sounded muted. Gucci’s wholesale business had a very weak quarter. This could be a sign that the brand is being disciplined about who it sells inventory to, as luxury brands battle a surging parallel market for designer goods in China. Or it might instead be a sign that Gucci’s new collections haven’t been a hit with industry buyers who select the stock for luxury department stores.

Some challenges are out of Kering’s control. Gucci’s sales to Chinese consumers fell 35% in the quarter. Many of the factors that led China’s shoppers to spend heavily on luxury goods over the past decade, such as booming property prices and strong economic growth, have evaporated, with implications for the entire luxury goods industry.

But Americans and Europeans also reacted tepidly to Gucci’s new look, with third-quarter sales down a fifth in both regions. Luxury shoppers have become more selective as they have less money to splurge. The trend is benefiting the highest-quality brands like Hermès, whose sales rose 14% in the third quarter, while hampering weaker labels like Gucci and Burberry.

Kering relies heavily on Gucci as its main cash cow. In better years, the Italian brand generated two-thirds of the group’s total operating profit. The Paris-listed company has spent billions of euros over the past year on luxury real estate in New York and Milan and a 30% stake in luxury brand Valentino. Net debt is expected to hit 11 billion euros this year, equivalent to around 2.5 times the company’s estimated earnings before interest, taxes, depreciation and amortization for the year. That isn’t at uncomfortable levels yet, and Kering still expects to maintain its dividend, but the cash needs to start flowing again at Gucci soon.

Luxury makeovers take time to build momentum, and it is still early days at Gucci. That could leave profit margins under pressure for a while. There is only so much cost cutting a top luxury brand can do without damaging its image. Kering will close some Gucci stores next year to reduce its rent bills, probably in China. But absolute spending on advertising will stay the same as last year as the company tries to grab attention for its new collections.

After a 40% fall so far this year, Kering’s stock is back at levels last seen in early 2017. The shares will surge at the first signs of recovery at Gucci, but there aren’t any yet.

Write to Carol Ryan at carol.ryan@wsj.com