EUR 850.00 For Business Accounts Only

Morningstar | Kering's First-Half 2018 Results Strong, as Expected; Shares Rich. See Updated Analyst Note from 27 Jul 2018

We retain our fair value estimate of EUR 318 per share (which now excludes distribution of Puma shares to shareholders) for narrow-moat Kering, as the firm reported revenue broadly in line with our expectations and a slightly better operating margin. The sell-off in shares after strong results in line with consensus signals investors' high expectations for the stock.

Revenue growth delivered in the second quarter was very strong at 31.5% organically, but still around 5% lower than the stellar first quarter of 2018.

Most of Kering’s brands continued strong performance, with flagship brand Gucci growing 40% in the second quarter after 48% growth in the first quarter. The brand delivered record operating margin of over 38%, helped by strong operating leverage, as growth continued to be driven by same-store sales. We expect Gucci growth to moderate to just over 20% over the coming quarters.

Yves Saint Laurent also delivered strong results, with top-line growth of just south of 20% and operating margin over 24% (we now expect 26% for the year). Other luxury brands, which include Balenciaga and Alexander McQueen, continued their 35%-plus growth rates. Bottega Veneta continued to lag with 2.3% organic decline in the second quarter, with negative impact from lower Asian spending in Europe.

The group has continued to streamline its brand portfolio in recent quarters. Alongside sport brands (where, we argued, brand strength was lower than in core luxury activities), Kering is divesting brands that it doesn’t fully control, such as Stella McCartney and Christopher Kane. This seems reasonable and aligned with the strategy of bold creative direction changes, which have been successfully executed at Gucci and Balenciaga. Such actions would not be possible in situations where Kering doesn’t have full control. Designer-/founder-led brands are also usually younger and smaller, and don't benefit from the same brand recognition as the firm's more prominent historical brands.