Geopolitical Instability And Digital Rivals Will Undermine Luxury Retail

Key Takeaways

• Reliance on vulnerable markets and Gucci heightens risk amid shifting consumer sentiment, geopolitical instability, and declining relevance among digitally savvy, price-conscious buyers.
  
• Strategic store closures and exclusivity measures increase fixed-cost pressures and jeopardize future revenue growth due to uncertain retail productivity gains.
  
• Strategic brand elevation, diversification into eyewear and beauty, operational efficiency, and ESG focus position Kering for resilient earnings and sustainable, long-term growth.

Catalysts

Manages the development of a collection of renowned houses in fashion, leather goods, and jewelry in the Asia Pacific, Western Europe, North America, Japan, and internationally.

• Kering's heavy dependency on the global middle class, particularly in Asia-Pacific, exposes it to ongoing geopolitical instability and weakening consumer confidence in key markets like China and the US, which threatens future revenue growth as international discretionary spending on luxury goods remains fragile and potentially faces long-term stagnation.
  
• The acceleration of digital commerce and proliferation of lower-cost, agile direct-to-consumer competitors threatens to undermine Kering's traditional luxury retail model and erode its pricing power; this is compounded by a 20% year-on-year decline in e-commerce sales, signaling deteriorating relevance among younger and price-conscious digital natives, which is likely to compress future net margins.
  
• Intensifying social backlash against conspicuous consumption and widening wealth inequality may significantly shrink Kering's addressable customer pool over time, especially as younger ESG-conscious consumers eschew traditional luxury, constraining mid
• and long-term group revenue and risking stranded assets in retail and inventory.
  
• Over-reliance on Gucci as the primary earnings driver amplifies the risk from any prolonged underperformance or missteps in creative direction; the failure to offset shrinking permanent lines with new product launches has already driven a 21% comparable revenue decline for Gucci, making group earnings more volatile and jeopardizing the stability of operating margins.
  
• Kering's ongoing program of wholesale rationalisation, store closures, and market exits to elevate brands-while aiming for exclusivity-creates headwinds for top-line growth, heightens fixed-cost absorption risk, and puts further pressure on cash flow, especially as operational leverage will only improve if full-price store productivity can be sharply increased, for which current evidence is lacking.

Kering Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kering compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kering's revenue will decrease by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.6% today to 6.2% in 3 years time.
• The bearish analysts expect earnings to reach €949.8 million (and earnings per share of €7.81) by about July 2028, down from €1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, up from 23.0x today. This future PE is greater than the current PE for the GB Luxury industry at 21.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.02%, as per the Simply Wall St company report.

Kering Future Earnings Per Share Growth

Risks

• Kering's investments in brand elevation and creative leadership changes across core brands like Gucci, Saint Laurent, and Bottega Veneta have established strong foundations for renewed fashion authority and desirability, increasing the likelihood of revenue growth and net margin expansion if consumer response is positive.
  
• The robust growth in Kering Eyewear and Kering Beauté, both highly profitable and with expanding global footprints, offers the group enhanced diversification of revenue streams, which increases earnings resilience even if traditional luxury demand weakens.
  
• Strong execution on cost controls, logistics, and manufacturing efficiency has already reduced fixed costs and inventories, positioning Kering for improved operating leverage and margin recovery as sales stabilize or rebound.
  
• Kering's focus on elevating brand positioning, increasing direct-to-consumer sales, and selective distribution channels strengthens pricing power and creates higher-quality revenues that support gross margin improvement and long-term EBIT growth.
  
• Secular growth drivers such as a rising global middle class and growing sustainability awareness align with Kering's ongoing ESG initiatives and continued international expansion, fostering long-term potential revenue gains and increased brand loyalty.

Valuation

• The assumed bearish price target for Kering is €145.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kering's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €360.0, and the most bearish reporting a price target of just €145.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €15.3 billion, earnings will come to €949.8 million, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 10.0%.
• Given the current share price of €212.6, the bearish analyst price target of €145.0 is 46.6% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.