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Saturday 18 August 2018

The renewed Gucci sparkle makes parent Kering shine

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'No examination of Kering is complete without looking at its star brand, the revenue and profit engine Gucci.' (stock photo)
'No examination of Kering is complete without looking at its star brand, the revenue and profit engine Gucci.' (stock photo)

John Lynch

An 18th century English poet reckoned that fashion was 'Folly's child' and a 'guide to fools,' but he also believed that no one would pay the slightest attention to his wise words.

Of course, he's 100pc. People cannot seem to have enough luxury in their lives and will always somehow find the money for goods that their friends and neighbours privately characterise as ruinously conspicuous consumption.

I wouldn't be the most devoted 'brands' man myself, but as an investor, I'm lost in admiration at the way money can be made in the luxury goods market, particularly by our target company today, the French giant, Kering,

Kering may be an unfamiliar name (they thought it up four years ago) but the brands behind it are anything but unfamiliar.

It has a portfolio of products like jewellery, watches, leather goods, shoes and ready-to-wear clothing with brand names like Gucci, Yves St Laurent, Balenciaga, Brioni and Boucheron. The company has revenues of €15.5bn, employs over 40,000 people and is valued by the market at €58bn.

The group had an odd start in life. Founded in Brittany, it was the brainchild of Francois Pinault, who was in the timber trading business.

It went through a number of phases including a spell in charge of the famous Parisian department stores, Printemps and mail-order retail outfit La Redoute.

Even today the Pinault family company, Artemis, owns the auction house Christie's, the winery Chateau Latour and the publisher Le Point.

Kering followed the road to luxury at the start of the millennium by buying Gucci in an acrimonious tussle with LVMH (a rivalry that still prevails). It began to accumulate all the 'names' that would bring a beaming smile to even the least-demanding wife/girlfriend/ mother or grandmother.

Along with the above named fashion brands, it also owns the Italian leather goods-maker Bottega Venta, the Italian jeweller Pomellato and Swiss watchmaker Ulysse Nardin. It has been doing a little asset disposal too. It sold off the Stella McCartney fashion brand and sportswear assets Puma and Volcom.

No examination of Kering is complete without looking at its star brand, the revenue and profit engine Gucci. The brand has seen a remarkable turnaround of fortunes in recent years. Up to two years ago it was regarded as possibly a little tired. To arrest the problems the group appointed Marco Bizarri, previously a management consultant, as CEO.

Since his appointment Bizarri has rewritten the strategy for the 97-year old brand. He has concentrated on creativity and digital media, relegating marketing and merchandising to minor roles. For creativity he surprised the industry by appointing a member of the Gucci design team, Alessandro Michele. The pair has reinvigorated the brand, with revenues last year at €6.2bn, up from €3.9bn three years ago. The brand also accounts for 60pc of Kering's profits, not surprising with the sling-back shoes selling for €750 a pair and a denim jacket at €3,000 a pop.

Kering's strategy of being a pure luxury group is paying dividends. Last year's results were sparkling.

Revenue of €15.5bn were its best for the last five years and first-quarter results this year show revenues up by more than one third.

Operating profits of almost €3bn was double its 2010 results helped by the removal of lower margin business.

Over the past two years the company's net debt has been reduced by €1bn. The group reported double digit growth in all geographic areas, with North America and Asia the standout regions. It continues to benefit from strong demand from China. The shares are not cheap, trading at €453 per share, but it was the second best performer on the French Stock Exchange.

Its price earnings multiple is 26. The majority of Kering brands are performing well helped by the Gucci brand in the Chinese market.

The group's improving balance sheet gives it firepower for further acquisitions but with trade tensions rising between US and China any signs of a slowdown could darken the outlook for luxury goods and have negative consequences.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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