Summary
- Gucci results were flat and Kering sales are lagging behind comps.
- However, Kering Group is now driven by the success of all the houses.
- Kering valuation is too low on a P/E basis and on a reverse DCF. Strong FCF generation was recorded with a higher DPS (up by 17%). We reiterate our buy rating.
Kering Group (PPRUF) (PPRUY) just released its Q4 and 2022 fiscal year results. Just looking at the financial update title called very solid performances and mixed Q4 , we didn't expect something positive; however, looking at the details, the second-largest global luxury group delivered strong and tangible results. Before going deeper into the Q4 analysis, it is worth mentioning our latest update: 1) Kering Is Here To Stay - a follow-up note on the new Gucci creative director and 2) Gucci Is Here To Stay , Not The COVID-19. Our buy rating was supported by 1) a compelling valuation using a reverse multiple analysis, in detail, here at the Lab, we were pricing the company ex-Gucci at 20x EBITDA with a discount to LVMH and Hermes of more than 25%, the implied Gucci multiple on the EBITDA level was just 3 times (definitely too low to ignore); 2) supportive numbers ; and 3) all other houses growth.
Well, we were not very lucky with Kering's first buy, but incrementally increasing our position, we are up by almost 20% since the company's CMD .
Kering PR title
The company is up by more than 3% at the stock price level, and we think that Wall Street was pricing extremely low estimates. In Q4, while Gucci's organic growth (the key supportive number) was down by 14%, our internal team believes that buy-side consensus was closer to minus 16%. Looking at the aggregate level, Kering reported a 7% decline in Q4 top-line sales as COVID-19-related health restrictions in China weighed heavily on its flagship brand. The temporary store closures due to Beijing's " zero-COVID " policy have weighed heavily on Gucci's directly owned stores network. Competitor LVMH, which owns the Givenchy, Dior, and Kenzo brands, among others, reported organic growth of 8.5% in Q4, after +19.5% in the previous quarter.
Beyond Gucci's difficulties encountered in 2022, the Italian brand has recently been delivering a marked slowdown. As already reported, after seven years, Gucci's chief creative officer, Alessandro Michele, left the house in November. Last month, Kering appointed Mr. Sabato De Sarno with the mission to give new impetus to Gucci's brand. The Italian brand, the French group's main profit center, saw its top-line sale increase by only 1% on a yearly basis, while it recorded double-digit increases for other houses such as Bottega Veneta (+11%) and Yves Saint Laurent (+23%). This fully confirmed Mare Evidence Lab's thesis and Kering profits are now driven by the success of all the brands. On the negative side, Balenciaga's account faced some softness in Q4, and this was mainly due to a December post with a controversial advertising campaign. So, regarding the company's operating profit, Gucci was almost flat while Yves Saint Laurent jumped by 43% to exceed €1 billion (for the first time). To sum up, Kering's EBIT profit reached €5.59 billion, up by 11%, but the EBIT margin fell from 28.4% to 27.5%.
Conclusion and Valuation
Our internal team expects a new Gucci strategy, accelerated investments, and a stronger product pipeline that will support the momentum and close the valuation gap within its competitors. Kering brands enjoy the advantages of economies of scale and diversification means more isolated risks from recession. Kering is also diversifying its business and focusing more and more on the digital and ESG industry. Our estimated sales growth for 2024 is 6% with an EBIT margin improvement in the next two years (29% and 30%, respectively). We are broadly in line with the consensus estimates on earnings, but we are pricing a higher valuation ex-Gucci. Furthermore, we report that Kering stock is too cheap when considering the quality of its brands, trading at a multiple P/E of just 16.6x with a 27% discount on LVMH and a 7.5% discount on its 10-year average P/E.
2023 start has been " very encouraging " in China, explained the company's CEO, Jean-Marc Duplaix, during the Q&A call. For the year, Kering foresees a " profitable growth trajectory " despite uncertainties and rising macro risks. These latest results have seen several missed expectations but with positive commentary on the outlook, and we believe that the market is already looking ahead. Speaking of positive numbers, core FCF remains at a high level at over €3.2 billion, debt is sustainable with a 0.3x net debt/EBITDA and was used to share repurchased Kering shares and more important, if approved, DPS will be up by 17% on a yearly basis.
While the company is facing some specific hurdles, here at the Lab, we still believe that is an interesting investment story over the next 12 months. As already mentioned last time, Kering is too cheap to ignore and we reiterate our buy rating on the company at €660 and $70 ADR per share.
For further details see:
Kering: Annual Report - We Are Already Looking Ahead