Kering Earnings: Changes Management; Makes Acquisitions As Growth Trails Peers; Margins Contract

We maintain our EUR 650 fair value estimate for narrow-moat Kering KER as the company reported continued weakness in its first-half results and announced the acquisition of a 30% stake in Valentino. Despite a weaker sales trajectory than peers, we believe shares look attractive at current levels, trading in 4-star territory with 25% upside to our fair value estimate. We believe it is highly unlikely that Kering, the second-largest luxury conglomerate, with established strong luxury brands and access to financial resources for marketing and executive and creative talent, would continuously lag competitors. This scenario currently seems to be priced into shares (17 times forward earnings and more than a 20% discount to a peer median of 22 times).

In the second quarter Kering’s group revenue grew by 3% on a comparable basis, the weakest so far among luxury peers. Gucci was sluggish ahead of its new designer collection (up 1% at constant exchange rates and in line with the first quarter), but other brands were also materially weaker than the competition. Saint Laurent was up 7%, Bottega Veneta was up 3%, and other luxury brands were down 1%. This compares with double-digit growth for most of the luxury competitors we cover. Unsurprisingly, the North American market was the main drag (down 23% for the group), but sales in Europe and Asia were also weaker than peers. Margins came under pressure for Gucci and other luxury brand divisions due to weak growth and brand investments. Our models already incorporated roughly 100-basis-point margin shrinkage for Gucci in 2023.

The company is getting increasingly acquisitive, buying a 30% stake in Valentino, after it recently acquired Creed. The deal values Valentino at EUR 5.7 billion (4 times sales and 16 times EBITDA—on the high side of our luxury coverage range). Kering has the option to make a full purchase no later than 2028.