By Mimosa Spencer

PARIS (Reuters) -Shares of Kering traded down 5% in European morning trade on Thursday, after the group reported a first-quarter sales drop that was worse than analysts' expectations.

Kering after the market close on Wednesday posted a 14% decline in sales, with a 25% drop at flagship label Gucci, the latest signal the luxury sector faces another tough year.

The sales report confirmed "a weakening backdrop" since February, said analysts at Jefferies, noting "the uncertainties around reigniting Gucci's desirability remain plentiful".

The brand, which accounts for around two-thirds of group profits, is betting on in-house talent Demna to revive sales, but new designs will only arrive gradually at the end of the year.

The French luxury group flagged worsening sales in North America and Western Europe and said it expected sales to continue to fall in double digits, percentage-wise, in the second quarter, before starting to improve.

This leaves the "heavy lifting" for the second half, which will likely depend on a recovery in Chinese demand, noted analysts at Bernstein.

Prospects for the luxury industry, which had pinned hopes on growth from the United States to help pull it out of a slump as the Chinese market remains weak, have been darkened by recession fears prompted by U.S. President Donald Trump's tariff announcements.

As trade tensions have risen, Bellwether LVMH has fallen 23% and Burberry and Kering have both lost 30% since the start of the year. Hermes and Cartier-owner Richemont, viewed by analysts as better insulated from economic downturns because of their wealthier clientele, are up 1% and 3%, respectively.

First-quarter reports from Kering's larger rivals last week also reflected the sector's slowdown and disappointed investors, with sales at LVMH's fashion and leather goods division down 5% while Hermes, which routinely outpaces expectations with double-digit growth, posted a 7% rise.

Analysts at Deutsche Bank on Thursday lowered their 2025 earnings per share estimate for Kering this year by 13% to 8.65 euros ($9.84), citing the company's cautious outlook for the first half, and noting the slowdown in all regions except Asia was slightly worse than peers.

TD Cowen lowered sales forecasts for Gucci this year by 15% to a 20% decline.

The analysts added that Gucci, as well as another Kering label Yves Saint Laurent, were expected to be slower to raise prices to offset tariffs than peers. The Kering labels have a broader base of less-wealthy clients who are more reluctant to splash out in a choppy economic environment.

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LVMH, meanwhile, has raised prices of some Louis Vuitton handbags and leather goods by around 4% according to Bernstein and Barclays, while Hermes said it will pass on the full effect of tariffs to shoppers in the United States on May 1.

U.S. tariffs could include a 20% charge on European fashion and leather goods and 31% for Swiss-produced watches if fully applied, but Trump earlier this month paused most of his tariffs for 90 days, setting a general 10% duty rate instead.

The price hikes from Vuitton are "more than enough" to offset even 20% tariffs, said Bernstein.

($1 = 0.8794 euros)

(Reporting by Makini Brice and Mimosa Spencer; editing by Barbara Lewis)

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