Kering: History Suggests A Big Turnaround Is Around The Corner

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Kering's stock is undervalued, with potential for significant gains due to its historically low valuation multiples and expected recovery in free cash flow. The stock chart shows recovery potential as...

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The stock chart shows recovery potential as...</p>\n\n<a href=\"https://seekingalpha.com/article/4726842-kering-history-suggests-big-turnaround-around-the-corner\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Kering: History Suggests A Big Turnaround Is Around The Corner</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nKering: History Suggests A Big Turnaround Is Around The Corner\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-10-15 21:34 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4726842-kering-history-suggests-big-turnaround-around-the-corner><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Kering's stock is undervalued, with potential for significant gains due to its historically low valuation multiples and expected recovery in free cash flow. The stock chart shows recovery potential as...</p>\n\n<a href=\"https://seekingalpha.com/article/4726842-kering-history-suggests-big-turnaround-around-the-corner\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"PPRUF","symbol_name":"Kering SA","start_time":0,"source_url":"https://seekingalpha.com/article/4726842-kering-history-suggests-big-turnaround-around-the-corner","article_id":"2475968556","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1301505789/image_1301505789.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2475968556","pubTimestamp":1728999278,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Kering's stock is undervalued, with potential for significant gains due to its historically low valuation multiples and expected recovery in free cash flow. The stock chart shows recovery potential as well.Gucci, Kering's largest segment, has faced cyclical downturns before but has historically rebounded; current efforts include product innovation and leadership changes.Stimulus measures in China and global interest rate cuts may boost Kering's revenue.Despite short-term challenges, Kering has historically had great profitability metrics and still has a high gross profit margin that has trended higher over the years.My reverse DCF valuation suggests that Kering hardly needs to grow its FCF/share in order to justify its valuation.   Robert Way Kering SA  , the owner of brands such as Gucci, Yves Saint Laurent, Bottega Veneta, Balenciaga, and more, has been struggling recently. On the French exchange, the stock is down about 71% from its high . On the OTC exchange, it's down about 73%, b","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"PPRUF":"Kering SA","PPRUY":"Kering SA","BK4202":"服装、服饰与奢侈品"},"translate_title":"开云集团：历史表明大转机即将到来","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"PPRUF":0.9,"PPRUY":0.9},"content_text":"Kering's stock is undervalued, with potential for significant gains due to its historically low valuation multiples and expected recovery in free cash flow. The stock chart shows recovery potential as well.Gucci, Kering's largest segment, has faced cyclical downturns before but has historically rebounded; current efforts include product innovation and leadership changes.Stimulus measures in China and global interest rate cuts may boost Kering's revenue.Despite short-term challenges, Kering has historically had great profitability metrics and still has a high gross profit margin that has trended higher over the years.My reverse DCF valuation suggests that Kering hardly needs to grow its FCF/share in order to justify its valuation.   Robert Way Kering SA (OTCPK:PPRUY) (OTCPK:PPRUF), the owner of brands such as Gucci, Yves Saint Laurent, Bottega Veneta, Balenciaga, and more, has been struggling recently. On the French exchange, the stock is down about 71% from its high (69% when adjusted for dividends). On the OTC exchange, it's down about 73%, but the company hardly has to recover for the share price to soar. PPRUY Stock Chart (TradingView) Why is it down? Part of the reason is due to a fall in sales and profits, especially regarding Gucci, which made up 45.3% of Kering's H1-2024 sales and 53.5% of H1-2024 EBITDA. As a heads-up, I'll mostly be focusing on Gucci in this article because it's the largest segment of the company, so that's what mostly drives the share price. Anyway, this slowdown can be attributed to changing consumer tastes and a weakening economy. However, this isn't the first time that Gucci has gone out of favor or faced a slowdown. Throughout its history, it has faced many several periods of ups and downs, but it has always emerged stronger. Gucci has and will continue to make some changes in order to revive itself, and I believe that the brand can make a recovery eventually, as it always has. Further, stimulus measures from China and the global lowering of interest rates can help the company. Additionally, Kering has been very profitable in the past few years and has maintained a high gross margin, showcasing its strength. I also like the stock chart for the medium-to-long term since it looks like it's near the end of a stage-4 decline, even though the short term may be bearish. These factors, augmented with a low current and forward valuation, position the stock for outsized gains in the next few years. As a result, I rate it as a Strong Buy. An Overview Of Kering's Worsening Financials In H1 2024, Kering's revenue fell by 11%. Specifically, Gucci saw a 20% drop (or a -18% comparable change, meaning \"at constant scope and exchange rates\"), and Saint Laurent saw a -7% comparable change. Bottega Veneta grew by 3% on a comparable basis, but it made up a smaller percentage of H1-2024 revenue (9.3%).   Kering's H1-2024 Revenue (September 2024 Investor Presentation) Regarding profits, its recurring operating income fell from €2.739 billion in H1 2023 to €1.582 billion in H1 2024. Additionally, free cash flow from operations, excluding real estate acquisitions and disposals, fell from €2.138 billion to €1.887 billion for the first half of the year. Such falls happen from time to time in the fashion industry, but that doesn't mean a rebound won't happen. Looking in the longer term, the firm's profits have been volatile but have still trended higher. And keep in mind that the percent changes listed below are for the USD amount, but in Euros (the currency the company reports in), the increases are larger since EUR/USD has taken a large tumble since 2010. Data by YCharts This Isn't The First Time Gucci Has Been In Trouble The fashion industry always changes, and brands need to innovate and find ways to stay relevant. If not, they can fall out of favor, which has happened to Gucci several times since its founding in 1921. I'll give a quick timeline of past events where it has fallen in and out of favor. 1980s Overexpansion And Brand Dilution In 1992, there was an article from The New York Times titled, THE MEDIA BUSINESS: ADVERTISING; Gucci's Current Campaign: Recovering Its Elite Image. The title already suggests that Gucci was in a rough period. This article stated:  It has not been easy. In the early 1980's, Gucci went mass market, distributing its products not only in its 36 United States stores but through 600 retail outlets as well. That strategy ultimately tarnished Gucci's image and sales of its costlier items. Then in 1989 Maurizio Gucci decided to close the 600 outlets, which cut the company's sales in half, to about $200 million, industry experts estimate. His goal: to focus on a line of costlier products developed by Ms. Mello at a time when consumers were being hurt by a recession and spending in general had slowed.  So, that was a problem caused by overexpansion, which hurt the brand's exclusive image. There was also economic trouble. But soon after, Gucci recovered. Revival In The 90s Tom Ford became the creative director of Gucci in 1994, and within a year, Gucci's profits soared by 90%. The reason the brand was revived was Ford introduced a more sensual, modern aesthetic. It was a big shift, and Gucci was seen as sexy. Gucci Struggles After Tom Ford Leaves Then, Tom Ford left in 2004, and the brand struggled to maintain its momentum. In 2015, Mr. Amed, from The Business of Fashion stated, “It was no longer a brand that would create ripples of influence in the industry as it once had under Tom Ford. When you lose creative influence, the numbers and money eventually catch up.” In 2014, Gucci's sales fell by 1.75%, and they had been sluggish since 2012. Gucci Revival In Mid-2010s In 2015, Alessandro Michele became the creative director, and Marco Bizzari became the CEO, which helped put Gucci back on its feet. I don't want to get into too many details about how the brand revived itself, but one of the things it did was focus on maximalist designs, which were a hit. It also focused more on younger consumers. Now, Gucci Is In Trouble Again It seems as though every decade, Gucci is in and out of trouble. Now, it's struggling, but changes are being made, which I'll talk about. And based on historical trends, Gucci should end up just fine eventually, as it's still a strong brand. It was ranked #2 out of 10 in \"The Vogue Business Index: Winter 2023/24.\" It actually climbed up a spot. What Are Gucci's Recovery Plans? One of the problems Gucci has right now is that there is relatively weak demand for its carryover (timeless products) line. To help bounce back, Francesca Bellettini, Kering's Deputy CEO stated in the Q2 earnings call that the company will work on an \"animation of the key carryover line.\" In other words, it can tweak some of these iconic products to give them new life. The company will also reduce the SKU count and make the collections more focused. Regarding that, here's a quote from Francesca Bellettini: We have already gone through this year into a process of streamlining the distribution, reducing the SKUs that are present in the stores, working also on VM [Visual Merchandising] to rationalize the SKUs that are present in the store to make it more focused, both for the clients, but also for the sales associates. Further, Gucci will introduce four handbag lines in H2 2024. These will be a mix of purely new designs and additions to existing lines at various price points. The new handbags, along with animations of the carryover line, can draw in customers who were growing tired of the same old products. Another thing the company (as a whole, not just Gucci) is working on is efficiency. Quote from Kering's CFO in the Q2 earnings call:  We are also better assessing the efficiency of our outreach efforts to maximize return. And we are making a big push on enhancing distribution improving time to market and the management of sell-through. We are also becoming even more demanding when it comes to OpEx and CapEx control. We have activated new processes to assess store projects and consent or postpone all openings that were not immediately essential. And because we are fully aware of the operational deleveraging that comes with our top line contraction, we have enhanced cost control across the board. All this will not become visible in our bottom line in the short-term. This is why considering the current uncertainty regarding consumer confidence and demand for luxury in particular, we have issued new guidance.  Lastly, and this can be crucial, is that on October 8, Kering appointed Stefano Cantino as its upcoming CEO, effective January 1, 2025. Cantino worked at Louis Vuitton for five years, overseeing Communications and Image. He also \"spent 20 years in the Prada Group, where he held positions of increasing responsibility in Marketing and Commercial, culminating in his role as Director of Communications and Marketing,\" according to the press release. Considering his expertise in marketing, he can potentially help Gucci see a revival, even if it takes a few years. After all, the revivals Gucci saw in the past (at least the ones I mentioned) happened when there was a leadership change. Gucci Is Already Showing Some Promising Signs While there's still a lot of work to do, there was a promising sign that was highlighted in the earnings call. The company's CFO said: On average, the new offer represented about 25% of revenue as we executed in line with plan, the ramp-up in stores during the quarter. In terms of category, ready-to-wear outperformed, thanks to the higher penetration of the new styles with a men’s offer gradually becoming available in stores at the end of the quarter. This is encouraging but not enough to offset the performance of carryovers, especially in handbags that continued to suffer. Essentially, this shows that while the carryover lines are suffering, the new collections are outperforming, particularly in ready-to-wear. Stimulus Measures, Lower Interest Rates Should Help Kering See Growth China recently announced stimulus measures to aid its economy, and since Asia Pacific represented 35% of Kering's 2023 revenue, this can give consumers a boost. Not all the stimulus measures are 100% relevant to Kering, as some are aimed at boosting the stock market, and some are for lower-income citizens who wouldn't buy luxury goods regardless. However, there are some things that can help. For example, last month, it was announced that the reserve requirement for banks would be cut by 50 basis points and that more cuts were on the way. Also, the People's Bank of China reduced the seven-day reverse repo interest rate from 1.7% to 1.5%. Further, it was announced that existing mortgage rates will be lowered by 0.5% and that those who are buying their second homes (more likely to be affluent people) will have a minimum down payment of 15%, down from 25%. But even the stimulus measures for the stock market can help. Bloomberg noted that China will \"allow institutional investors to tap central bank financing for stock purchases and is weighing plans for a market stabilization fund.\" There are other stock-market-related measures as well. Why this can benefit Kering is because, generally, more affluent people (Kering's target demographic) own stocks, or at least not lower-income citizens. If Chinese stocks soar, owners of shares may feel richer and spend more money or even sell their shares and buy luxury goods -- perhaps at Gucci. But Kering is a global company, with 23% of 2023 revenues coming from North America, 28% from Western Europe, 7% from Japan, and 7% from the rest of the world. Considering that interest rates are being lowered in key markets like Europe, the United States, and Canada, (which can even cause stocks to keep rallying), this should eventually help Kering generate more revenue. Kering Isn't Amazing, But It's Still A Good Company I won't say that Kering is as great as Hermès or LVMH Moët Hennessy (OTCPK:LVMHF) because the numbers suggest otherwise. However, this doesn't mean that Kering is a bad company. It's still solid. For instance, its gross profit margin has trended higher over the years, showing that competitors haven't been able to erode its gross profits. It also means the company has more profitability potential overall. Data by YCharts Further, its return on equity for the past 12 months is a respectable 14.1% and the stock is rated an \"A\" for its profitability. As you can see in the chart below, its ROE went from 0% in 2014 to a high of 26.4% in December 2022 as the brand went through its revival phase. Now, the ROE is coming back down, but it goes to show the profitability potential the company has if it recovers again.   Kering's Historical ROE (Finbox) Meanwhile, the company's free cash flow has increased in the past 10 years, more or less stabilizing since 2017. It's a cash cow. Kering's Historical Cash Flow (Seeking Alpha) The Valuation Is Too Cheap To Ignore Let's get to the fun part. Kering stock has gotten cheap. It's a profitable luxury goods conglomerate that's well off its all-time high. In 2023, it generated €3.3 billion in free cash flow from operations (not including real estate acquisitions and dispositions. It bought a prestigious building in NYC). In H1 2024, its FCF from operations fell by 251 million year-over-year. Therefore, if you do the math, the TTM FCF from operations should be about €3.05 billion ($3.33 billion USD). Compared to its market cap of €28.2 billion (about $30.8 billion USD), that gives you a TTM free cash flow multiple of 9.25x -- a free cash flow yield of 10.8%. Its regular or unadjusted free cash flow (which includes real estate transactions) is €2.2 billion for the trailing 12 months. This still gives it a very reasonable 12.8x multiple, or 7.8% free cash flow yield. However, since real estate acquisitions are sporadic in nature for Kering, it may be better to rely on the adjusted FCF figures mentioned above. Nonetheless, analysts (per tikr.com) expect a surge in unadjusted free cash flow. For 2024, five analysts predict €2.81 billion in FCF, and they then expect €3.053 billion in 2025 and €3.392 billion in 2026. I think these estimates can more or less be met or at least the trajectory will look like that as Gucci tries to turn things around, lower interest rates take effect, and, potentially, if real estate transactions normalize. If the 2026 estimate is met, Kering will then have a free cash flow yield of around 12%, or an 8.31x FCF multiple. That's cheap for a leader in the luxury space. Historically Cheap Multiples Kering is also cheap compared to its historical valuation multiples. For instance, its price/sales ratio is 1.54x. The last time it was this low was in 2016, just before the stock went on a multi-year rally (refer to the chart posted in the intro). At the same time, its gross profit margin has gone up since 2016, meaning that its valuation is even lower on a price/gross profit basis. Data by YCharts Its NTM price/FCF is also at a low based on the image below. The multiple seemed to stabilize at around 14-15x from 2022 to mid-2024 but has now come down further. I think that it can return to the 14-15x level in the future, especially as interest rates come down, providing another avenue for high upside potential.   Kering's NTM FCF Multiple (tikr.com) How Much Growth Is Priced In At Current Levels? To see how much growth is priced in at current levels, I've performed a reverse DCF valuation on Kering stock. Here's some context for my inputs. I calculated its FCF per share by taking the €2.197 billion in unadjusted FCF and dividing it by a share count of 122.6 million. I set the terminal growth rate to 2%, as it's generally in line with long-term inflation expectations. I calculated the discount rate using the CAPM model. For the CAPM model, I used the French market risk premium of 5.75%, a beta of 1.02, and a risk-free rate of 3.04% (the French 10-year yield). This gave me a discount rate of 8.9%. What the image below tells us is that for Kering's fair value to be €230 (its current share price), it will have to see annual FCF per share growth of 0.23% over the next 10 years and then grow perpetually by 2% annually. That's what the market is pricing in at the current valuation. This is quite pessimistic, especially based on analysts' forecasts for the next few years. Even if Kering saw just 3% annual growth for the next 10 years (peep the right side of the image), then its fair value would jump to €282.40, a 22.8% increase from the current price. This gives investors a large margin of safety. Kering Stock Reverse DCF Valuation (Author) Not to mention, with the stock coming down so much recently, Kering may start repurchasing more shares, which will boost FCF per share. The company mentioned a \"flexible share buyback approach\" in its September 2024 investor presentation. In the meantime, Kering's shareholders will be rewarded with dividends, which come out to an average of 50% of \"recurring net income, group share and available cash flow.\"   Kering Capital Allocation (September 2024 Investor Presentation) The Chart Looks Poised For Upside In The Next Few Years Kering stock is in stage 4 right now, which means it's in a decline after topping/distribution. Check the notes on the chart to see what I mean. I've pulled up the stock on the French exchange because it has more price history. You'll even see that this same pattern played out from the 90s to 2000s. Is it time for a part 2? I think most of the downside has already happened.   KER Stock Chart (TradingView) What Are The Risks? There are risks involved with investing in Kering. The first risk is that much of the investment thesis involves expecting a recovery in China, Gucci, and a stimulation of the global economy. These expectations may not play out or may take longer than expected to play out. Who knows? Maybe this could be a lost decade for Gucci. And just because Gucci has recovered in the past doesn't mean it can recover again. As the saying goes, past performance does not guarantee future results. Regarding China, I've seen several articles saying that the stimulus measures won't be enough to boost growth. They could be right. Next, Kering has high amounts of debt, which some people may not like and may cause the stock to trade at a relatively low valuation. As of the most recent quarter, it had €3.934 billion of cash and equivalents but €13.856 billion in debt. Additionally, its debt/equity ratio has been increasing and is now at 88%. Just three years ago, it was at 42.3%. Still, its interest coverage ratio is strong at 7x, and as interest rates trend lower, perhaps Kering will be able to benefit. Therefore, I'm not too worried about its debt right now, although things can get bad really quickly if the business was to suddenly produce negative cash flow for a few years. Moreover, there's the risk that analysts' estimates won't be met. This is a real risk because there have been many downward revisions in the past. Check out the historical revenue revisions. Thus, if you're betting on Kering, you're betting that this trend can reverse eventually, unless you believe that the low valuation supports more downward revisions without hurting the share price (it's a possibility).   Kering's Historical Revenue Revisions (Seeking Alpha) Lastly, although I like the chart for the long term, the shorter-term trend is still down, meaning more pain could be on the way. The closest major support level is around €200/share, which is where it broke out to the upside in 2016. The Bottom Line On Kering Stock Here's the bottom line on Kering. The stock has gotten too cheap to ignore, especially for a luxury goods conglomerate of good quality. It may have a 12% FCF yield by 2026 if analysts' estimates are met. Plus, the market is essentially pricing in almost no FCF per share growth over the next 10 years, even though analysts expect a surge in FCF. If the company sees just 3% annual growth in FCF for the next 10 years (and 2% perpetually), there will be 22.8% upside potential. If it instead recovers at a faster rate, say, 6% annually, then the fair value will be 53.6% higher. Additionally, the valuation is historically cheap on a price/sales and forward price/FCF basis, presenting an opportunity for valuation multiple expansion -- potentially 40-50% worth when looking at the forward price/FCF multiple. With the stock being so cheap right now, management may even start buying back shares in a notable way. Gucci has seen problems in the past, and going based on history, I think the brand will recover, especially with the upcoming CEO having impressive experience. After all, it's still a strong brand, but brands go in and out of fashion sometimes. It's just the nature of the fashion industry. But it's better to buy a strong brand when it's out of favor than when it's firing on all cylinders -- similar to a cyclical company. The same goes for Saint Laurent, which is currently struggling. Plus, stimulus measures and lower rates may help with the recovery, although those aren't guarantees. With the chart now near what is likely the near-end of a stage-4 decline, similar to what it saw two decades ago, you now have a chance to buy a good-quality stock at a cheap, de-risked valuation. Therefore, I rate it as a Strong Buy. Editor's Note: This article was submitted as part of Seeking Alpha's Best Value Idea investment competition, which runs through October 14. With cash prizes, this competition -- open to all analysts -- is one you don't want to miss. If you are interested in becoming an analyst and taking part in the competition, click here to find out more and submit your article today!  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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