Kering: Valuation Is Not Demanding

Overview

With strong labels like Gucci and Yves Saint Laurent, Kering (OTCPK:PPRUF) is among the elite of luxury conglomerates. In my opinion, PPRUF is currently in a period of recovery in an effort to make up for lost ground in terms of growth. To this end, the company is introducing novel and refreshing features to its offering and maintaining its investment in activities directed toward Western consumers. Even though other brands, such as Bottega and Saint Laurent, are continuing to show strong execution and momentum, I believe Gucci will continue to receive the bulk of attention until it re-accelerates more consistently than it did in FY21 and FY22. Overall, I have faith in the company's prospects for success and rate the stock as a buy. The price is also not outrageous. With a PE multiple of 17, it assumes 4% terminal growth at a cost of equity of 10%, which is well within reach.

Gucci

The lackluster results of 4Q22 don't really shock me, and I don't think we'll see a repeat anytime soon given management's dedication to and interest in the brand have not wavered. While the AUR metric has increased, there are still obvious categories where aspirational customers aren't spending as much. Therefore, in my opinion, the necessity of pursuing brand elevation is more apparent than ever before.

Management has stated that merchandising will continue to be strengthened before Sabato de Sarno's debut collection is shown in September and distributed to retailers in 1Q24. In addition to the emphasis on luggage and FW23 men's collection, I expect to see release of new products and stronger marketing campaigns leading up to the September fashion show. Management has also stated that they anticipate a seamless change of Creative Directors and there is low likelihood of write-offs due to the small percentage of current inventory that is comprised of collections. From a business perspective, I admire PPRUF's dedication to expanding Gucci's product offerings, which has resulted in double-digit growth in AUR thanks to the brand's innovative product mix.

PPRUF remains committed to investing in initiatives that aim to enhance the appeal and value of its brands, which is in line with its previous statements. The company had attributed its lower EBIT margin in FY22 to its decision to maintain brand investments in spite of a difficult sales environment in 4Q22, which I found encouraging. Although PPRUF will continue to invest in its brands, particularly in Gucci, throughout 2023, I expect that most of these expenses have already been accounted for in the profit and loss statement. Therefore, I anticipate that the Gucci brand will experience a slight improvement in its profit margin in 2023.

Saint Laurent

Retail, especially in Western Europe and Japan, drove Q4 growth for Saint Laurent, while wholesale showed a negative trend. Operating leverage from the right combination of channels and prices allowed for a 31.9% 2H22 margin. As wholesale rationalization proceeds, I foresee that retail will be the main growth driver. Concerning earnings, I expect margin erosion as they recommence store openings in 2023. Despite increasing investments, management affirmed that the margin of Saint Laurent is expected to continue growing in the coming year, albeit at a slower rate

Balenciaga

Balenciaga's management has acknowledged that the ongoing controversy is having a negative effect on current trading, albeit one that is less severe than before, and that they anticipate it will be resolved by 2Q23 (source: FY22 earnings transcript). The incident has led to a reorganization within the Group's image department, and additional internal controls have been implemented. Profitability wise, Balenciaga experienced operating deleverage in 2H22 as management maintained reinvestments in the brand despite slower sales growth. When I consider the planned investments that will be required and the ongoing wholesale rationalization, I do not see a bright future for this brand in the coming year.

Management/China

Given PPRUF's underlying difficulties, I think it says a lot that Pinault played such an active role in the call discussing the company's 4Q22 results. Despite FY22's setbacks, I'm optimistic about FY23 because management has already sent a clear signal that they intend to refocus on heritage and a better strategy. Not much information was provided about China beyond the fact that CNY23 was more successful than CNY22.

Conclusion

The company is on the mend and is increasing its focus on Western consumers and the development of new features for its products. Even though competing brands like Bottega and Saint Laurent are maintaining impressive rates of growth and execution, I anticipate that Gucci will continue to receive the lion's share of the spotlight until it re-accelerates more consistently. I'm glad to see PPRUF keep its focus on investing in initiatives that boost brand equity and appeal.

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