Can Luxury Stock Kering Make a Comeback? Gucci Could Be the Key

The
year
was
particularly
busy
for
the
second
largest
luxury
company
in
the
world,
controlled
by
the
Pinault
family
and
home
to
well-known
fashion
brands
like
Gucci,
Yves
Saint
Laurent,
Bottega
Veneta,
Balenciaga,
Brioni
or
Alexander
McQueen.

Kering
Share
Price
Disappoints

Kering

spent
€1.7
billion
(£1.5
billion)
to
buy
a
30%
stake
in
the
Italian
house
Valentino,
and
signed
a
partnership
with
Qatari
investment
group
Mayhoola.
It
recruited
new
designers
for
Gucci
and
McQueen,

changed
leadership
at
Gucci
and
put
Saint
Laurent
chief
executive

Francesca
Bellettini
in
charge
of
all
its
brands.
It
decided
to
rebuild
a
beauty
business
from
within
and
continued
investing
in
eyewear.
And
it
acquired
fragrance
brand

Creed.

All
of
this
activity
didn’t
help
the
stock
price –
especially
after
the
release
of
disappointing
sales
number
at
Gucci,
its
flagship
house,
and
at
other
brands
including
Balenciaga
or
Bottega
Veneta.

“Gucci
is
the
biggest
piece
of
it,
given
that
it
accounts
for
almost
70%
of
profits,
but
deceleration
elsewhere
is
not
helpful”,
says
Jelena
Sokolova,
equity
analyst
at
Morningstar.

“The
majority
of Kering’s
brands
seem
to
have
higher
exposure
to
more
aspirational
clientele
in
the
developed
markets
(in
contrast
to
peers
like
Hermes,
or
Richemont)
which
are
more
economically
sensitive
and
doing
worse
currently”,
she
adds.

Today,
Kering
is
one
of
the
least
favoured
luxury
names. 

LVMH
Shares
Outpace
Luxury
Rivals

Since
the
end
of
2019,
Kering’s
share
price
has
declined
34%,
while
archrival
LVMH
is
up
88%
and
the
European
market
is
up
17%.
Indeed,
Kering
shares
are
now
back
to
their
2018
level.

As
of
January
29,
they
currently
trade
at
a
price-to-earnings
(P/E)
multiple
of
14.7
times
next
year
earnings
estimate
according
to
consensus
data,
compared
to
21
times
for
the
median
of
its
main
competitors.
Kering
trades
at
a
36%
discount
to
Morningstar
Fair
Value
estimate
of
€600
per
share.

Yet
from
a
fundamentals
perspective,
the
company
has
grown
quite
significantly
over
the
last
five
years.
Revenue
has
jumped
to
€20
billion
in
2022
compared
to
€13.7
billion
in
2018.
Half
of
it
comes
from
Gucci,
which,
based
on
public
figures,
remains
by
far
the
most
profitable
brand
of
the
group.

Earnings
before
interest
and
taxes
is
up
to
€5.6
billion
compared
to
€3.9
billion
(Gucci
brought
67%
of
that
amount
in
2022).

The
only
disappointing
metric
is
free
cashflow,
which
increased
only
by
8%
to
€3.2
billion
over
the
same
time
period.

Kering’s
financial
performances
are
in
stark
contrast
to
LVMH,
a
far
bigger
competitor
with
a
much-diversified
portfolio
of
brands,
but
also
to
other
successful
companies
like
Hermès
and
Moncler.

Looking
at
its
current
valuation
multiples,
it
is
clear
that
investors
are
very
sceptical
about
the
ability
of
Kering,
and
more
specifically
Gucci,
to
stage
a
comeback.

Rebooting
the
Gucci
Brand

“It
is
hard
to
see
a
definite
catalyst
for Kering shares,
but
shares
seem
to
be
pricing
continuous
underperformance
of
Gucci
brand
versus
peers,”
Sokolova
says.

“We
see
this
as
implausible
given
the
brand’s
strong
global
recognition
(number
two
in
luxury
leather
after
Louis
Vuitton), Kering’s
capital
resources
and
access
to
talent
that
should
benefit
Gucci,
and
around
90%
of
control
over
distribution,
which
prevents
excessive
discounting
(which
can
damage
the
brand
permanently)”.

“Gucci
is
still
suffering
from
decisions
taken
during
the
pandemic
period
to
protect
margins
and
cash
flow
generation
instead
of
investing
in
marketing
to
fuel
growth
as
other
key
competitors
did
in
the
luxury
sector”,
a
report
from
HSBC
published
in
November
2023
explained.

While
a
pure
luxury
player
since
2018
(and
since
2012
when
the
company
focused
on
luxury
and
“sport
&
lifestyle”),
the
company
is
credited
with
having
a
“retailer
mentality”,
keen
to
protect
its
margins
when
the
macro
environment
deteriorates
(Kering,
formerly
known
as
PPR,
indeed
controlled
several
retailers
until
2011).

Its
focus
on
luxury
helped
significantly
improve
its
profitability.

Yet
Gucci
has
been
losing
market
share
since
2020.

“During
the
post-Covid-19
time
frame,
LVMH
Fashion
&
Leather
has
emerged
as
the
largest
market
share
winner,
thanks
to
significant
brand
heat
across
its
portfolio
and
outsized
brand
reinvestment,”
Bank
of
America
wrote
in
a
report
published
in
October
last
year.

“Gucci
should
have
spent
more
on
advertising
and
promotion
…
and
should
have
been
stricter
on
wholesale
sell-in,
rather
than
starting
the
rationalization
in
2020
when
the
retail
business
was
starting
to
soften,
further
adding
to
the
cyclicality.”

According
to
HSBC,
a
brand
turnaround
usually
takes
12
to
18
months
to
bear
fruit.
But
turning
around
a
business
while
entering
an
industry
slowdown
in
a
weak
position
makes
it
even
more
challenging
for
Kering.

Problems
at
Balenciaga
and
Bottega
Veneta
Too

Bottega
Veneta,
which
generated
a
profit
margin
in
the
25-30%
range
between
2007
and
2017,
saw
its
margin
fall
back
to
19%
on
average
between
2018
and
2022.

Balenciaga’s
reputation
was
severely
impaired
after
a
poorly-thought-out
ad
campaign
caused
controversy
at
the
end
of
2022.

The
decision
to
rationalise
its
wholesale
business
“contributed
to
all
brands
reporting
organic
sales
decline
in
retail
as
of
Q3
2023
compared
to
mid-single
to
high-single
digit
sales
growth
for
peers”,
UBS
analysts
said
in
a
report
released
in
November
last
year.

“For
Gucci
I
believe
it
is
largely
done,
for
the
other
brands
management
expects
it
to
be
over
mid-2024”,
says
Sokolova.

“Generally,
the
group
already
has
very
high
share
of
retail,
and
we
view
wholesale
rationalisation
as
moat
reinforcing,
given
that
control
over
distribution
gives
control
over
pricing.”

Kering
has
endeavoured
to
boost
its
beauty
and
eyewear
businesses,
but
those
assets
will
probably
take
some
time
before
they
have
a
meaningful
impact
on
sales
and
earnings.

“I
don’t
view
it
as
a
material
contributor
near-term,
although
it
has
potential
to
grow
into
a
more
meaningful
business,
the
way Kering Eyewear
has
done,
which
is
still
though
only
a
little
over
5%
of
revenue
after
launch
in
2014”,
Sokolova
says.

“Creed,
which
Kering acquired,
contributes
only
low
single
digit
to
revenue
but
is
very
profitable
and
helps
to
accelerate
the
launch,
but
still
near-term
it
is
going
to
be
rather
dilutive,
in
an
investment
phase.”

Kering
will
release
its
full-year
results
for
2023
on
February
8.

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