EUR 850.00 For Business Accounts Only

Morningstar | Increasing FVE for Kering to EUR 387 as Gucci Shows No Sign of Saturation

We are increasing our fair value for Kering shares to EUR 387 from EUR 318 as the company’s annual results came ahead of our expectations. Full-year revenue was 3% stronger while operating income was 6% stronger than we expected.

We have adjusted our 2019 expectations to factor in continued strong performance at Gucci, which we previously expected to roll over through increasing market saturation and fatigue. We now expect Gucci to grow 15% in 2019 and deliver operating margin in excess of 40%. Performance should be helped by the strengthening beauty and fragrance business and the launch of high jewellery ranges as well as ongoing store remodeling to a new format that gives better product visibility and allows displaying more ranges. Longer term, we continue to expect outperformance to reverse with a growth rate of 3% (versus the 4% we forecast for the industry) with some cyclicality. We expect long-term margins for Gucci of 34%-40% versus 39.5% currently and 31% on average since 2009. We believe the Gucci brand is close to the peak of its popularity. Our expectations for other brands in the group are largely unchanged, with an expected rebound in Bottega Veneta performance, supported by new creative leadership, and moderating growth at YSL.

Gucci delivered 28% constant-currency growth in the fourth quarter, which was a sequential deceleration from over 30% growth over the first nine months but came on top of a more challenging comparison base of 43% growth in the fourth quarter of 2017 and 22% growth in the fourth quarter of 2016. Gucci operating profit was a record 39.5% (versus our expectations for 38.7%). Hence, Gucci is on target to achieve its EUR 10 billion in sales and operating margin of 40%. A larger part of Gucci's growth has come from traffic and volume, with limited impact from conversion and customer retention.

Yves Saint Laurent, the group’s second-biggest brand, delivered 18.7% comparable growth for the year (slightly weaker than the 20% we expected), while recurring operating margin was 26.3% versus the 26% we called for. Bottega Veneta remains in a turnaround, and both sales and profits came weaker than we expected, with a 3.2% organic revenue decline (we expected 1% growth) and recurring operating margin falling to 21.8% from 25% in 2017 (we expected 24%). Other house revenue increased 32% on a comparable basis, slightly below the 35% we expected, fueled by strong performance at Balenciaga and Alexander McQueen. Other house operating margin was 10%, slightly above the 9.8% we expected.

In line with peers that have already reported, Kering noted that Chinese demand remained buoyant in the fourth quarter. Spending by European, American, and Chinese customers in the quarter was up by 20%-40% for the main three brands.