Heavy Gucci Reliance Will Hurt Long-Term Luxury Margins

Key Takeaways

• Over-dependence on Gucci and lack of innovation in other brands threaten revenue stability and future earnings growth.
  
• Increased digital access and sustainability concerns are eroding exclusivity, compressing margins, and amplifying operational risks.
  
• Kering's innovation, permanent cost reductions, and focus on brand equity and financial flexibility position it for resilient growth despite market volatility and evolving consumer expectations.

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 reliance on the Gucci brand exposes the group to significant earnings risk, and recent performance shows persistent double-digit sales declines that are not offset by other brands, threatening future group revenue and margin stability if Gucci underperforms further.
  
• The ongoing rise of digital channels and e-commerce is making luxury goods more widely accessible, undermining exclusivity and eroding premium pricing power, which could compress net margins and structurally weaken Kering's earnings profile over time.
  
• Shifting global wealth patterns, particularly the rise of the middle class in emerging markets, are redirecting luxury demand away from Kering's traditional strongholds, which may result in slower growth and increased vulnerability to regional economic shocks, placing long-term top-line growth at risk.
  
• Intense consumer scrutiny around sustainability and ethical sourcing is raising compliance costs and operational complexity; should Kering fail to decisively meet these evolving standards, the company risks damaging brand equity and losing pricing power, directly impacting gross margin and earnings quality.
  
• Recent underperformance and perceived creative stagnation in formerly robust brands such as Balenciaga and Saint Laurent highlight a lack of standout innovation and leadership, pointing to diminished portfolio diversification and a weakened outlook for consistent earnings growth across the group.

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 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.6% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach €1.0 billion (and earnings per share of €8.46) by about August 2028, up from €729.0 million 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 21.1x on those 2028 earnings, down from 35.6x today. This future PE is lower than the current PE for the GB Luxury industry at 21.5x.
• 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 10.01%, as per the Simply Wall St company report.

Kering Future Earnings Per Share Growth

Risks

• Kering's demonstrated ability to grow newness and innovation within its product pipeline, with successful launches such as Gucci's Giglio and Emblem bags and Bottega Veneta's ongoing creative development, suggests that revitalized desirability could restore retail traffic and drive both revenue and gross margin higher over the long term.
  
• Strategic, structural reductions in operating expenses-including rightsizing the store network, procurement efficiencies, and reorganization-are designed to be permanent, meaning that even if sales pressure persists, improvements in operating income and free cash flow could be substantial and sustainable.
  
• Kering's focus on investing in sustainability, talent development, and digital capabilities aligns with rising consumer expectations for ethics, exclusivity, and omni-channel experiences, positioning the group to enhance brand equity and pricing power and potentially support stable or growing profit margins.
  
• The APAC region and North American markets, despite current volatility, continue to recover or show resilience in certain brands, indicating that global demand for luxury goods remains both diversified and potentially supportive of future top-line growth and net income as macro conditions stabilize.
  
• The group's disciplined approach to capital allocation, active deleveraging (including asset disposals and improved working capital), and a robust liquidity position allow for financial flexibility to navigate downturns and reinvest in growth initiatives, thereby mitigating risks to earnings and supporting long-term shareholder value.

Valuation

• The assumed bearish price target for Kering is €135.0, 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 €135.0.
• 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 €1.0 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 10.0%.
• Given the current share price of €211.65, the bearish analyst price target of €135.0 is 56.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.