2023-05-08 21:33:19 ET
Summary
- Better than feared results, Kering delivered a resilient performance in Q1.
- The new Gucci Creative Director confirmed the brand's long-term target.
- Kering trades at a higher discount compared to peers. Gucci's recovery is underway. Our buy is then confirmed.
In 2022, here at the Lab, we decided to increase our overweight on luxury brands and Kering was one of Mare Evidence Lab's first investments ( OTCPK:PPRUF , OTCPK:PPRUY ). Our buy was supported by a positive price mix development, a Chinese rebound, an inflation natural protection given Kering's clientele who is not sensitive to price increases, a solid balance sheet, and a positive view on brand performance i.e. ' Gucci Is Here To Stay, Not The COVID-19 '. So far, we recorded a 20% performanc e (including the company dividend yield) on average. Read our previous coverage on Kering here.
Indeed, the 2022 performance demonstrated that the European luxury goods industry enjoyed solid fundamentals and was largely immune to macro and geopolitical uncertainties. We enter 2023 with the confidence that luxury players can record growth above the historical average at +10% without the exchange rate effect. To support our thesis, we positively view LVMH's record market cap , it is now the first European company to exceed $500 billion. We also expect a recovery in Chinese demand, thanks to the end of the restrictions related to COVID-19 and the borders reopening which should stimulate local spending and encourage travel recovery.
Kering Q1 update
Wall Street analysts' expectations were not great; however, we believe that the Q1 reporting season largely satisfied the current shareholders, and Mare Evidence Lab's forecast was also relatively lower than the markets. Wall Street sentiment continues to imply a recovery story for Gucci and lower growth in the US. In numbers, the company delivered top-line sales of €5.07 billion with a plus 1% on a quarterly basis and its previous consensus. Looking at the brand performance, Gucci's growth was at plus 1%, Bottega Veneta was flat, Saint Laurent delivered a plus 8% and the other brands were down by 9% and was mainly due to Balenciaga’s controversial marketing campaign which continues to lower its growth estimate. Despite that, we believe that expectations were modest, and with no other hiccups were just enough to comfort the bearish investors.
Kering sales evolution (Source: Kering Q1 results presentation)
As usual, there was no reporting on profitability metrics. Therefore, we decided to leave our assumptions largely unchanged. However, it is important to report the following takeaways:
- China/APAC recorded a plus 10% on a quarterly basis and was driven by Macao, China, and Hong Kong. Also, the rest of Asia remained strong. In detail, the Chinese cluster was up double-digit with Gucci back to record positive growth (even if the exact level was not quantified). During the management call, we understood that in March and April, there was also an acceleration,
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The US area remains more challenging and was down by 18%. E-commerce turnover has slowed and there was a reduction in US department stores orders from US department stores. Credit card spending for luxury brands in the leather goods, RTW, jewelry, and watches sub-categories worsened in February with a minus 15%. However, US customers in the EU are still spending strongly. As a reminder, if we are looking at the pre-COVID-19 level, Kering in the US is above 60% in Q1 2023.
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Despite the gas crisis, Europe delivered a plus 15% on year-to-year performance. This was supported by local demand and also by a rebound of tourist inflows. As a reminder, local demand is more than 50% of the total company's sales;
- On pricing, there were no major price increases. On Gucci's profitability, margins should be slightly up over the year. In Saint Laurent, we are estimating a margin improvement. Margin growth will be achieved thanks to higher average price, especially for handbags;
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Management is also targeting wholesale rationalization. Kering would like to achieve an 85% retail by year-end. According to our estimates, this implies a wholesale decrease of 25%;
- As already reported in a publication called ' Kering Is Here To Stay ', the company confirmed Sabato de Sarno's promises. The medium-term prospect is €15 billion and 41% in revenue a margin respectively;
Conclusion and Valuation
Mare Evidence Lab's view on the French luxury powerhouse remains unchanged. In our team, we are confident in Gucci's turnaround story and given the company's valuation (16x as a forward twelve-month P/E), the risk/reward is attractive. Kering is also trading at a 26% discount to luxury peers compared to a historical average set at minus 17%. Therefore, we reiterated our target price of €660 per share . Catalysts that might affect our target price are FX, half-year results performance, Chinese recovery, Gucci execution risk, an EU economic downturn, and acquisition risk.
For further details see:
Kering Is A Clear Buy