Shares of the owner of Gucci soared on rumors of a change of head. Is this optimism justified?

Shares in French group Kering, which owns the Gucci, Saint Laurent and Balenciaga brands, jumped 8% after reports that the company will be headed by Renault's Luca de Meo. Under his leadership, the auto company's shares rose about 90%. However, Wall Street warned that Kering investors' optimism about the new top manager may not be justified yet;

Kering shares jumped 8.2% on the morning of June 16 on news of a possible executive change. Earlier, Le Monde reported that Luca de Meo, who spent the last five years at the helm of Renault, could become the new CEO of the Gucci owner. Under his leadership, the automaker's shares have risen about 90 percent and overtook Nissan in market value in 2024, though it was previously considered the weak link in the alliance, noted Bloomberg. De Meo will leave Renault in July "to take on new challenges outside the automotive sector," the group announced on June 15. 

Kering declined to comment. De Meo will be succeeded as CEO by Francois-Henri Pinault, whose family controls the luxury goods maker and who has been at the helm for 20 years. Pinault will retain his position as chairman of the board of directors, Reuters noted.

During Pinault's 20 years at the helm, Kering became a pure luxury player and for years grew thanks to Gucci, which generates nearly two-thirds of the group's profits, reports Reuters. Since the pandemic, Kering has struggled to revitalize its flagship brand.

Pinault tried to remedy the situation by diversifying the business through acquisitions, including a stake in Valentino, luxury perfume maker Creed, luxury real estate and a Hollywood talent agency. This strategy has caused Kering's net debt to rise from near zero to 10.5 billion euros from 2021 to the end of 2024, reports show. That raises the risk of the company's third credit rating downgrade in three years, wrote Reuters.  

The credit burden also prevents Kering from competing with other luxury companies such as Hermes, Chanel and LVMH, which have virtually no debt and are actively investing in their brands. Investors see this as well: Kering's stock has lost about 66% of its market value over the past two years;

"We believe it is premature to take a more positive stance given the lack of information on Gucci's recovery. There is still a lot of work ahead," said Citi analyst Toma Chauvet.

"De Meo faces a Herculean task. It is critical for investors to hear exactly what he plans to do and to understand how soon his plans can be realized," noted Bernstein analysts.

Only two of the 24 analysts tracking Kering now advise investors to buy the stock (Buy and Overweight ratings), cites MarketScreener data. Five recommend selling them; consensus recommends holding them in a portfolio. The average target price over a 12-month horizon is already at current market levels.