Morningstar | Kering's Strong Luxury Brand Portfolio Should Deliver Long-Term Sustainable Growth and Profits
Kering’s portfolio of luxury brands provides it with a narrow moat and a good platform for future growth. While its flagship Gucci brand still accounts for over half of operating profit, Kering has several smaller promising brands that have crossed or are aiming to cross the EUR 1 billion revenue mark.Kering’s main luxury brands have strong control over distribution channels and a significant presence in leather goods, where product cycles tend to be longer and brands’ aspirational value higher than in apparel. Kering’s brands hold over 10% of the global luxury leather goods market.We anticipate higher growth for Kering luxury relative to the industry (4.7% organically over the next 10 years versus 4% industry growth), as its portfolio of smaller brands can deliver superior sustainable growth over a longer period. Smaller brands can expand geographically, can benefit from Kering’s infrastructure, and have more resources to grow than similar independent brands. Because we see luxury brands as somewhat limited in growth through economic cycles and the perception of exclusivity, we believe a portfolio of brands helps mitigate the brand-specific risks. We expect store expansion for the group to moderate to the low single digits over the next few years, down from double-digit expansion before 2013. We expect operating margins of 25%-30% over the next 10 years versus 28.9% in 2017 with some cyclicality.Although the company previously overpaid for some acquisitions, with subsequent goodwill write-downs, we believe execution at the brand level is strong. Nonetheless, we think it is reasonable to expect a fall in performance at some point for Gucci and other portfolio brands. Our expectations are consistent with the historically uneven performance of soft-luxury brands in Kering’s portfolio and the industry. We think management is capable of addressing any brand issues in a timely manner without brand dilution.Kering is engaged in the retail industry, particularly luxury fashion brands. Co.'s operations can be divided into two segments: Luxury and Sport & Lifestyle divisions. The Luxury division includes brands such as Gucci, Bottega Veneta, Yves Saint Laurent, Balenciaga, Boucheron, Sergio Rossi, Alexander McQueen, Girard-Perregaux & JeanRichard, & Stella McCartney. In addition, Co. offers Leather Goods, Shoes, Ready-to-wear, Watches, and Jewelry & Other products. The Sport & Lifestyle division designs & develops footwear, apparel & accessories and includes brands like Puma, Volcom and Electric among others.
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