Kering’s Performance Hit by China Lockdowns, Gucci Weakness

We maintain our EUR 620 fair value estimate for narrow-moat Kering KER after the company delivered a rather weak set of fourth-quarter results hindered by lockdowns in China and weak Gucci performance. We view shares as fairly valued at the moment.

Kering’s flagship Gucci brand (over 70% of the group’s operating profit) revenue dropped by 14% on a comparable basis in the fourth quarter (10% growth for LVMH’s fashion and leather division, comprising Louis Vuitton, a bigger peer) and was up 1% for the year on a comparable basis and up 8% at actual currencies (9.6% in our forecasts). Profitability of the brand lagged our forecasts, coming in at 35.6%, down 260 basis points from last year and weaker than our 37% estimate. Gucci has been lagging its top fashion and leather peers (Hermes and LVMH’s fashion and leather division) as well as smaller groups’ brands since the start of the coronavirus pandemic, in our view signaling a turn in brand appeal that has been very favorable for Gucci from 2015 to 2019. A recent change in the creative leadership of the brand is management’s way of acknowledging the dwindling appeal of Alessandro Michele’s collections, in our view, and could bring new energy to the brand. No big product shifts and discounting is expected, given a high share of carry-over styles (60%-65%) and recent moves to a more subdued aesthetic, according to management.

Saint Laurent continued its strong performance in 2022, up 23% in comparable revenue and reaching a 30.9% operating margin. Bottega Veneta’s revenue was up 11%, comparable with the margin improving to 21%, up 190 basis points. Other luxury houses were up 16% in terms of revenue, but operating leverage was hindered by investments (margin up 30 basis points), and the Balenciaga scandal weighed on results in the fourth quarter. The eyewear division was up 25% organically.