“ “For years, we’ve had the processes in place to avoid such situations, and despite the activation, we made a clear error of judgment with no intention at all to shock, to provoke, or to hurt anyone.””
That was the chief executive of one of the world’s biggest fashion houses, Gucci-owner Kering
apologizing on Wednesday for a child-marketing scandal that helped drag down the company’s fourth-quarter results.
Kering’s Balenciaga brand came under fire in December after an ad showed a child holding what appeared to be bondage-themed teddy bears. A second controversial ad displayed a $3,000 Balenciaga handbag sitting among papers including one text related to U.S. ruling against child pornography.
The ads were dropped amid an uproar from parents that included branding partner and enthusiast of the Spanish label Kim Kardashian. Balenciaga artistic director Demna Gvasalia apologized for what he called a “stupid” mistake, and to further make amends, the brand announced a three-year partnership with the National Children’s Alliance to educate and help children heal with trauma.
“We have now completed a comprehensive review of our procedures together with outside consultants, and we are building additional oversight at group level with authority across all our houses to prevent, of course, this from happening again,” Pinault said on Wednesday’s conference call as Kering presented fourth-quarter results.
But the fallout is lingering, as Kering said Balenciaga had an “excellent” year, but a “difficult December” that stretched into the start of the year. The French company as a whole suffered a 7% decline in comparable fourth-quarter revenue that fell to €5.28 billion euros ($5.67 billion,) below the €5.48 billion that analysts had forecast, according to a poll compiled by FactSet.
A further headache for Kering came as its core brand Gucci reported a 14% sales drop amid China’s pandemic struggles in the fourth quarter and tough comparables elsewhere. Kering gave an upbeat outlook for 2023, though it didn’t give any specific guidance.
Executives said on the conference call that they expect the Balenciaga scandal will fade by the second quarter, disclosing moves being made in wake of that fallout.
Balenciaga’s organization will see a change, following a reorganization and reshuffling of the image department, with an image board set up to give broad overview of all content. At a group level, additional guidelines will be implemented, and a brand safety officer may be appointed to supervise this work further, the company said.
Kering executives also said they had conducted both internal and external surveys, coming to the conclusion that “just errors of judgement” were made as procedures were properly foollowed.
The luxury company’s shares were up 2.3% to €572.10 on Wednesday, but have dropped 8% for 2023 thus far, underperforming bigger rivals such as LVMH Moet Hennessey Louis Vuitton
LVMH shares climbed 18% after the company last month posted record results, though analysts say much hinges on China’s reopening.
Putting the results into context, Citi analysts Thomas Chauvet and Lorenzo Bracco noted that Kering’s second-half earnings before interest and taxes came in 5% below consensus, driven by Gucci and Balenciaga labels, and they see shifts ahead.
“At Balenciaga, we expect potential changes to style/design, communication strategy and internal control following recent controversy which may impair sales and brand equity,” said the Citi analysts, who have a buy rating and €652 target on the company.
As for how the more-than-100-year old Balenciaga label moves forward from here, Kering might take comfort from the fact that Gucci manage to recover from its own early 2019 scandal involving an $890 wool bacalava sweater with red lips, that gave the appearance to many of blackface.
“For a brand, reputation is at risk whenever there is a backlash on social media. The consequences can potentially be significant, and it can take years to recover,” Chris Gee, managing director of digital strategy at PR firm Finsbury, told Yahoo at the time. “It appears that Gucci has built a tremendous amount of brand affinity with its customers, which has so far allowed it to navigate these firestorms with minimal apparent reputational damage.”
According to Luxe Digital, Gucci was the most popular global luxury brand as of January 2023, though it has lost some traction on search engines.