EUR 850.00 For Business Accounts Only

Morningstar | Gucci Continues to Deliver Strong Results and Chinese Demand Remains Solid at Kering; FVE Retained

We maintain our fair value estimate of EUR 318 for Kering as the company delivered another set of strong quarterly sales numbers. The recent share price rout left shares trading at a midteens to 20% premium to our fair value estimate.

Gucci growth surprised on the upside with 35% organic growth and a smaller-than-expected slowdown from 44% in the first half of the year, despite an increasingly challenging comparison base (43% organic growth in third-quarter 2017 and 17% growth in third-quarter 2016). We expected a deceleration to the low 20s in the second half of the year and hence plan to increase our expectations for Gucci annual growth, which would be offset by worse performance at Saint Laurent and Bottega Veneta.

Bottega Veneta and Saint Laurent came below our expectations, with Bottega sales falling 8.4% in the quarter (versus our expectations of flat sales) with positive performance for its new collection failing to offset weakness in carryovers. Saint Laurent sales grew by 16% versus 20% we expected. Other luxury activities, with strong performance from Balenciaga and Alexander McQueen, were in line with our expectations, growing at 32% organically.

Management downplayed the risks associated with the cooling of Chinese spending, noting that the Chinese cluster for the three main brands was up 30%-plus worldwide, similar to the second quarter (LVMH scored midteens growth with Chinese consumers in the third quarter in its fashion and leather division). Management also downplayed the significance of the daigou impact on the market (as we said previously, we don’t see a significant negative impact from the daigou crackdown if end-consumer demand remains healthy). Price gaps have been reduced compared with the past (for Gucci, there is a 26% price difference between China and Europe, versus 29% a year ago and a 15% difference between mainland China and Hong Kong). Forty-five percent of Chinese Gucci clients are domestic buyers, according to management.

Although the market-anticipated Chinese slowdown has so far proven elusive for the group, we see higher risk with the possible brand fatigue for Gucci after a period of very strong growth, and hence continue to model below-industry growth over the five years post-2018.