The Luxury Market Spectator: Kering.

Many struggle to find a connection between the austerity of finance and the creativity of fashion. Nevertheless, making a materialistic statement that will give goosebumps to all the creative minds, they have something in common: as all industries, both need money to survive. When feeling the thrill of carrying an Hermès bag, we must –of course- be thankful to the Dumas family (the descendants of Thierry Hermès), but we should never forget to express all our gratitude for the existence of financial markets for making that possible. So, my dear investors, what’s the next fashion company we should put our sacred money in?

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KERING

Let’s start our market analysis with one of the French luxury giants: Kering.

Some of you might have never heard this name before, but I’m pretty sure that everyone perfectly knows Gucci, Yves Saint Laurent, Bottega Veneta, Stella McCartney and Alexander McQueen. Kering is the group that reunites them all: buying a Kering stock would entitle you to ownership of a piece of Gucci, and a share in Saint Laurent’s elegant success. Kering, which is owned by the French business man François-Henri Pinault, is divided into two segments: luxury and lifestyle, the latter of which encompasses sporty brands like Puma.

Should we buy it?

What bulls say:

AN ENVIABLE BRAND EQUITY

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Kering has a wide economic moat (i.e. The ability of a company of maintaining a competitive advantage over its competitors, which is warranty of long-term profits and market share). Kering can boast an amazing brand equity, build on the firm’s intangible assets inherent in its brands.

With Gucci as a cornerstone, the group can rely on a long history and an iconic consumer status, which is really likely to continue to generate excellent long-run returns. The Gucci brand has seen some issues in the previous year, but thanks to the recent turnaround which saw Marco Bizzarri as the new CEO, sales have stabilized. The turnaround also showed that the brand, thanks to its legacy, can virtually be revived at any time. It’s reasonable to believe that the effects of the turnaround will be sizeable only late in the year.

Other than Gucci, Saint Laurent and Bottega Veneta continue to capture high rates of growth, and they are further consolidating their brands.

RELIABLE GROWTH

Under the direction of François-Henri Pinault, Kering is reinforcing its presence in the luxury segment. Already its primary growth driver, expectations of growth in the luxury market in the next decade are positive.

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What bears say:

CHALLENGES IN THE LIFESTYLE SEGMENT

Puma is facing harsh competition from Nike, Adidas and the emerging Under Armour. Returns for Puma have been worse than the rivals. Like Gucci, Puma has undergone a turnaround, which should lead to a refocusing of the brand on sports and less on the swings of fashion.

Pushing too much on sports and lifestyle could also create brand confusion. In the last days, Bloomberg reported some rumors about the possibility of Puma being sold, even if some market specialist think that Puma has great potential for improvement.

It must be underlined, though, that 80% of Kering’s operating income comes from its luxury brands, and that worse performance in the lifestyle division is not likely to impact the whole group significantly.

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EXPOSURE TO CHINA AND EMERGING MARKETS

Demand for Kering’s luxury brand is decelerating in Asia due to structural economic issues in China. If this trend will prove to be even more consistent overtime, luxury revenues could slow down significantly. Demand is nevertheless hard to predict in the long run. Moreover, especially in the last year, the Chinese luxury consumer is shopping elsewhere in the world: this could mitigate the impact of the slowdown.

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CONCLUSION

Kering’s financial statement exhibits a lower than average PE ratio and ROE and a high level of debt. That taken into account, the company has good operating margins and good forecasts about the future. Kering’s stocks are currently trading at 167,40€ but, according to the Financial Times, the 25 analysts offering 12-month price targets for Kering have a median target of 173.00€.

Investing in this company has many implied risks, but positive future perspectives and shares trading below fair value could make it a good investment.

Owning a piece of Gucci has never been that easy.

Francesca Magri

DISCLAIMER: The purpose of this article is merely to illustrate the performance of a luxury company that I care about. I’m not a market guru, manage your money wisely.

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