Relaunching Iconic Gucci Products Will Boost Future Brand Desirability

Key Takeaways

• Kering's brand elevation and strategy to penetrate higher-value markets could lead to improved revenue mix and net margins.
  
• Modernizing iconic Gucci products and cutting outlets may increase desirability, productivity, and sales growth.
  
• Kering's revenue and profitability are under pressure due to brand strategy issues, challenging markets, and operational challenges, with efforts focused on retail optimization.

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 is focusing on elevating its brands by better penetrating more elevated clienteles to improve its revenue mix, which could enhance sales and potentially improve net margins.
  
• The relaunch and modernization of iconic products at Gucci, such as the Blondie, Jackie, and Bamboo bags, aims to boost their desirability and improve Gucci's revenue and sales growth.
  
• The transformation strategy includes a reduction in wholesale and outlet presence, aiming to increase productivity and sales density in full-priced stores, which should positively impact revenue.
  
• Enhancements in Kering's operational efficiency, such as manufacturing, logistics, and the supply chain, are aimed at supporting gross margins and overall financial performance.
  
• Investments in Kering Beauté and Kering Eyewear are expected to leverage synergies and expand product offerings, contributing to increased earnings and business growth.

Kering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kering's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 9.8% in 3 years time.
• Analysts expect earnings to reach €1.9 billion (and earnings per share of €15.68) by about February 2028, up from €1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.1 billion in earnings, and the most bearish expecting €1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.9x on those 2028 earnings, down from 30.0x today. This future PE is lower than the current PE for the GB Luxury industry at 25.1x.
• 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 8.88%, as per the Simply Wall St company report.

Kering Future Earnings Per Share Growth

Risks

• Kering faced a challenging 2024 with revenue dropping 12%, partly due to adverse market conditions and ineffective execution of certain brand strategies, which could continue to pressure top-line growth in the short term. (Revenue)
  
• Gucci, a vital brand for Kering, experienced significant revenue decline (down 21% comparable), compounded by issues like low consumer traffic, which might impact its contribution to Kering's overall profits if these trends persist. (Earnings)
  
• The group's wholesale rationalization efforts, along with planned store closures, particularly in lower-performing locations, could create additional short-term revenue headwinds as Kering shifts focus to boosting like-for-like sales in its core retail outlets. (Revenue)
  
• Operational challenges and strategic investments are expected to weigh on gross and operating margins, as seen in the past year's performance where gross margin declined about 2% and operating income dropped 46% year-on-year, posing risks to profitability if these issues are not effectively addressed. (Net Margins)
  
• Macro risks such as instability in key markets like China, which faces consumer confidence issues and economic uncertainties, could pose ongoing risks to Kering’s sales recovery in this critical region if not resolved or mitigated. (Revenue)

Valuation

• The analysts have a consensus price target of €254.423 for Kering based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €448.0, and the most bearish reporting a price target of just €195.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €19.6 billion, earnings will come to €1.9 billion, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of €277.0, the analyst price target of €254.42 is 8.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.