We started coverage of Kering with a 'buy' recommendation and a 'price target' of €540.
The luxury retail industry reported strong results for 2018 and did not suffer from the trade-war between the US and China.
We like Kering because it offers a high margin business to shareholders (Gucci which represents 63% of sales reported an operating margin of 39.5%). We expect growth in the near future to be driven by opening up of new stores and increasing the group’s presence online. The aim is to focus on expanding sales across the globe with particular reference to Asia.
Our model is forecasting margins to remain constant in the near future as the group focuses on its other brands to reduce too much reliance on Gucci.
Although there is no doubt that Gucci is the star performer, any disappointment from this brand will have a negative impact on the financials of the group. We are factoring in stable margins because the contribution to the margin of the group by other brands is lower than that of Gucci (Saint Laurent 26%, Bottega Veneta 21.8%).
Nonetheless, by factoring in similar growth forecasts as LVMH in our model and a modest growth in margins for 2019, we still see further upside in the shares from the current level. We also applied the same discount rate and forward multiple in our model.
Our 12-month price target of €540.00 is based on a forward P/E ratio of 25x and a discount rate of 10%.
We like Kering because:
• It has a portfolio of well renowned brands in the fashion industry
• It has a strong presence in Asia where it is seeing strong growth (+37% in 2018)
• Investing heavily in e-commerce. In 2018, the group saw e-commerce increase 70% for the Gucci brand. The group continues to invest in its IT system to increase sales online. This remains a growth area with online sales only accounting for 6% of the total sales of the group
• Although the group has a strong reliance on the Gucci brand which accounts for 63% of sales (2018), management are seeing considerable growth in its other brands with the aim of reducing its reliance on Gucci
o Gucci – this is the highest contributor to margins of the group with operating margin at 39.5%. Management are looking at further deployment of new store concept
o Saint Laurent – Operating margin above 26%. Management is targeting solid and more gradual margin progression through opening of new stores and renovation plans
o Bottega Veneta - Operating margin at 21.8%. Management planning iconic projects, including new high-visibility flagships (Madison Avenue, Ginza, Dubai Mall) and store renovations
o Other houses (including Balenciaga and Alexander McQueen) – Operating margin above 10% - strong momentum seen building across all brands
• A high margin business – we expect margins to continue to increase as a result of improved pricing as well as reduced costs
• Accelerated modernization of IT systems, expansion of Group logistics capabilities
About Kering
Kering SA is an international luxury group based in Paris, France. It owns luxury goods brands, including Gucci, Yves Saint Laurent, Balenciaga, Alexander McQueen, Bottega Veneta, Boucheron and Brioni, Pomellato.
The company was founded in 1963. It was known as Pinault SA until 1994, as Pinault-Printemps-Redoute from 1994 to 2005, as PPR from 2005 to 2013, and became Kering in 2013. It has been quoted on Euronext Paris since 1988 and has been a constituent of the CAC 40 index since 1995. The company has been headed by François-Henri Pinault since 2005.
Disclaimer:
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.