2023-04-11 01:18:52 ET
Summary
- Luxury company Kering has seen a recent come-off in price, but signs of a slowdown were visible in its full-year results itself.
- It reported declining revenues in its North American and APAC markets in Q4 2022. In its upcoming update, I would look out for developments in both.
- The balance of how its North American market's slowdown plays out against a recovery in APAC will be critical to its prospects in 2023.
The French luxury company Kering ( OTCPK:PPRUF ) is due for a financial update later this month. One that can prove critical to what its price does next. It has made gains of 15% year-to-date [YTD] and is up by an even more impressive 30% since I last wrote about it almost six months ago. Here I take a quick look at what has driven its price rise since and dive deeper into its numbers to assess what could be next for it.
Buoyed by optimism and results
The price increase was undoubtedly initially helped by its third quarter of 2022 (Q3 2022) numbers, released later in October. The company reported 23% year-on-year (YoY) revenue growth, in line with what it had seen for the first half of the year. After that, a relaxation of COVID-19 regulations in its big China market and the general improvement in market mood served to lift Kering’s price.
It continued to perform well, even after its full-year results were released in mid-February, but it has not seen a steady rise since. In fact, at its last close at the time of writing, it was 5% lower than the price it saw right after the results. The fundamental reasons for this are visible in the full-year results, which also give an indication of what is coming next.
Slowdown impact
The company’s revenue growth slowed down to 15% on a reported basis and to 9% on a comparable basis YoY. In itself, it does not sound too bad at all, and neither does its full set of results (see table below), but the revenues have seen a significant come-off from the 35% rise seen in the year before. It can be argued that 2021 had the benefit of a COVID-19-related low base effect from 2020, a year when its revenues shrank.
Source: Kering
But the fact remains that the real drag in the past year is because of subdued Q4 2022 performance. The group’s revenue declined by 2% on a reported basis and 7% on a comparable basis during the quarter. This makes a sharp contrast to 20%+ reported and 10%+ constant currency growth in the first three quarters of the year. If this were just due to the China effect, which was impacted by COVID-19 restrictions in 2022, I would be more at ease. But that is not the case.
While retail sales in its Asia Pacific [APAC] market are indeed down by 19% in Q4 2022 on a comparable basis, the sharp 15% decline in North America is glaring too. The company has reported weakness in the American market across key brands like Saint Laurent and Bottega Veneta, whose growth slowed down to 10% and 8% in the quarter at market exchange rates, while Gucci actually shrank by 11% during the quarter.
Trends in North American Market (Source: Kering)
Given that North America is its biggest market after APAC, with a 27% share in revenues, this is a red flag right there. The US economy is expected to see a recession this year , and as I pointed out in my last article, the company’s revenues tend to be vulnerable at such times, even if it is a small dent.
Gucci’s operating margin effect
The drop in revenues from Gucci, which accounts for over half its revenues, is particularly glaring. It is the only Kering brand besides ‘Other Houses’ that includes the likes of Alexander McQueen and Balenciaga, to show a decline. But Gucci is also critical to Kering in sustaining its very healthy operating margins, which are second only to the near unbeatable Birkin maker Hermès ( OTCPK:HESAY ), at 41.5% as of 2022, among luxury companies.
Gucci has the highest operating margin among all of Kering’s business segments, at 35.6% for 2022, so if its share in revenues continues to drop, the company’s overall margins will be affected too. In any case, its margin dropped by almost a percentage point from 36.5% in H12022 for the full year already. Commensurately, Kering’s margin is down from 28.4% in H12022 to 27.5% for the full year. This was one of my concerns when I wrote about the company the last time, and it has played out.
The company attributes lower margins to business investments but also adds that Q4 2022 has dragged it down. We do not know how much, but going by how much its revenues have been impacted, I would watch for trends in margins in updates over this year.
China’s the winning ticket
However, there are balancing factors too. The company could, for instance, also benefit from China’s opening up. Shopping trends during the recent Lunar New Year, indicate robust consumer buying. According to a recent Vogue Business and Barclays Research survey of 532 respondents in the country, Kering’s brands like Saint Laurent and Gucci have been popular with luxury buyers in the past quarter and are expected to remain so in the next three months too.
In fact, China is expected to see significant growth acceleration in 2023, which can hold companies focused on the market in good stead, even as Western markets weaken, which further backs the probability of rising luxury demand in the market.
This is significant, considering that APAC is the company’s biggest market (see chart below), despite the fact that revenues from the region shrank by 8% in 2022. In this context, the company says that Gucci’s performance was “significantly affected by the situation in China”.
Source: Kering
Attractive market multiples
The company’s trailing twelve months reported price-to-earnings (P/E) ratio is also relatively attractive at 19.3x, compared to other luxury companies. Even the British Burberry ( OTCPK:BURBY ), best known for its trench coats, is trading at a higher 24.8x. Others like Richemont ( OTCPK:CFRUY ), LVMH ( OTCPK:LVMUY ) and Hermès are all trading at over 30x multiples. Swatch ( OTCPK:SWGAY ), of brands like Longines and Rado, is the only other luxury company trading at the same multiple as Kering.
What next?
The P/E makes a case for buying into the luxury sector at a relatively reasonable price. Kering’s price upturn over the recent months, also makes returns on it look far more favourable compared to when I last checked on it. The relaxation of restrictions in China and the company’s strong footing there also bodes well. Demand from APAC can steady the ship at a time when economies like the US, UK and Germany are recession prone. But that remains to be seen. Especially considering its unpredictable price performance in the last couple of months. I would wait until at least the release of its latest results before taking a call.
For further details see:
Kering: Still Strong, Still Vulnerable