GENERAL ANALYSIS
Company description
Kering is a multinational luxury goods conglomerate headquartered in Paris, France. Founded in 1963 by François Pinault the company consisted of timber trading and has evolved significantly over the years. In the 1990s the transition to retail occurred, highlighted by the company's name change: Pinault-Printemps-Redoute, or PPR. In the following decade, the group entered the luxury sector thanks to the acquisition of Gucci and Yves Saint-Laurent. Since 2005 the company has been led by the CEO François-Henri Pinault, son of founder François Pinault, and in 2013 the group was renamed Kering.
Kering headquarters is located in the heart of Paris, in an iconic building that reflects the style and elegance associated with the brand. Kering operates in several business areas, with a main focus on the luxury sector. Among the most famous brands included in Kering's portfolio are Gucci, Yves Saint Laurent, Bottega Veneta, Balenciaga, Alexander McQueen and many others. Each brand has its own distinctive identity and offers a wide range of luxury products, including clothing, accessories, perfumes and cosmetics. Kering's history is characterized by a constant search for innovation and quality in the luxury sector. Over the years, the company has acquired and developed iconic brands, cementing its position as one of the world's leaders in the luxury sector. Its reputation is based on excellent craftsmanship, innovative design and commitment to environmental and social sustainability. The Company is a leading provider of luxury goods to the Fashion Luxury industry.
Industry Overview and Competitive Positioning
In 2023, the global luxury market recorded growth of 10% compared to 2022. The overall turnover of the luxury market is estimated at around 1,500 billion euros, while the personal luxury goods segment also recorded growth in the last year and will reach a total value of €362 billion in 2023. Despite the strong growth of recent years companies working in the sector are generating a growth for the 65-70% of the total brands, while the companies that registered a growth in 2022 where the 95% of the total.
KER is expensive based on its Price-To-Earnings Ratio (17.6x) compared to the European Luxury industry average (16.7x).
Analyzing the company’s financial health we can say that KER’s short term assets (11.9B) exceed its short term liabilities (8.6B) while they do not cover its long term liabilities (16.7B). Moving to the debts we can notice that KER’s net debt to equity ratio (53.1%) is considered high and the gross debt to equity ratio has increased from 38.3% to 77.6% over the past 5 years. Despite that KER’s debt is well covered by operating cash flow (35.9%) and KER’s interest payments on its debt are as well covered by EBIT (18.3x coverage). In conclusion Kering is one of the leading companies in its sector but it has strengths and weaknesses that can change over time.
Kering had the lower P/E for 2023 and the best profit margin compared to his peers.
SWOT Analysis
Strengths:
- Diversified Brand Portfolio: Kering has a well-established portfolio of luxury brands, including Gucci, Saint Laurent, Bottega Veneta and others, contributing to a diverse customer base.
- Positioning in the luxury sector: Kering is recognized as one of the leading fashion and luxury houses globally, benefiting from a strong reputation in the sector.
- Innovation: The company is known for its ability to innovate and stay ahead of emerging trends in the fashion and luxury industry.
- Global Presence: Kering has a strong global presence with well-developed distribution in several key markets around the world.
Weaknesses:
- Dependence on some brands: Even though the brand portfolio is diversified, Kering can be considered dependent on some key brands such as Gucci, the success of which can significantly influence the overall performance of the company.
- Exposure to Market Risk: As a company listed on the stock market, Kering is vulnerable to market fluctuations and changes in consumer trends, especially during uncertain economic times.
Opportunities:
- Emerging market expansion: Kering can capitalize on opportunities in emerging markets such as China, India and Brazil, where there is growing demand for luxury products.
- E-commerce: The rise of online shopping offers Kering the opportunity to expand its digital presence and reach a broader customer base.
- Sustainable development: There is growing consumer demand for sustainable and responsible products. Kering can capitalize on this trend through ethical and sustainable manufacturing practices.
Threats:
- Competition: The fashion and luxury industry is highly competitive, with numerous global competitors. New players may emerge and threaten Kering's position in the market.
- Currency Fluctuations: As a global company, Kering is exposed to the risk of currency fluctuations which may affect production costs and profit margins.
- Regulatory Changes: Regulatory changes regarding international trade, tariffs or tax policies may affect Kering's operations and its costs.
In summary, despite the challenges and threats, Kering has solid strengths and opportunities that can be leveraged to maintain and improve its position in the luxury sector. However, it is important that the company carefully manages its weaknesses and external threats to ensure sustainable growth in the long term.
FINANCIAL ANALYSIS
Introduction
In this section of the analysis, we will conduct a comprehensive assessment of Kering's financial statements and performance metrics. This in-depth examination will enable us to assess the company's historical and recent performance, thereby facilitating the acquisition of valuable insights into its future prospects and investment potential.
Outlook for KERING
In Luxury goods giant Kering has disappointed over the past year, delivering a negative total return around 30% in that time amid both macroeconomic and brand-specific headwinds. Kering derives around 50% of sales and 63% of operating income from the Gucci brand. Gucci, in turn, generates most of its sales (a little over 50%) from leather goods like handbags. The remainder of Kering's business comes from Yves Saint Laurent (~17% of operating income), Bottega Veneta (~6%), Other Houses (~8%), which includes Balenciaga and Alexander McQueen, and Kering Eyewear (~7%). The broader luxury market appears to be entering a slowdown. As a rough rule of thumb, the higher up the pricing chain a brand is, the less sensitive to the economic cycle it is. This has been a hallmark of past luxury downturns and is why a company like Hermès still generated robust year-on-year organic sales growth of 16% in Q3 2023 (the latest quarter we have data for). The issue for Kering is that while its main brand Gucci should ordinarily prove a bit more resilient, it is also facing its own fashion cycle and has been underperforming peers for a while now. Gucci sales fell 7% on a comparable basis in Q3, much worse than the 9% growth posted by LVMH's Fashion & Leather Goods segment, which is dominated by Gucci competitor Louis Vuitton, and the 16% reported by Hermès, which typically displays the most resilient performance in downturns.
Between 2019 and 2022, Gucci only registered around 9% sales growth overall, which is around 10-15ppt lower than the broader luxury goods market depending on what research is used. Net income was €1.79 billion in the first half of last year, although that was down around 10% year-on-year. The last time Kering stock was this cheap was in Q1 2017. The ADSs delivered a total return of ~115% over the following two years. The company sees the luxury market growing at a 5-7% CAGR out to 2030 as per its 2022 annual report.
Financial Metrics
Liquidity
Liquidity refers to the ease with which an asset can be quickly bought or sold in the market without causing a significant change in its price. In simpler terms, it's a measure of how easily an asset can be converted into cash without impacting its value. High liquidity suggests that an asset can be quickly turned into cash, while low liquidity indicates the opposite.
Key Ratios to Measure Liquidity:
1. Current Ratio = Current Assets / Current Liabilities
The current ratio measures the ability of a company to cover its short-term liabilities with its short-term assets. A ratio greater than 1 indicates that a company has more assets than liabilities, which is generally considered a sign of good liquidity. Considering Kering’s current ratio, the company went from 134% in 2020 to 137% in 2022. This means that the potential to meet its immediate financial obligations has been stable since 2020. The current ratio is now 1.38.
2. Quick Ratio = (Current Assets - Inventory) / Current Liabilities
The quick ratio is a more stringent measure of liquidity as it excludes inventory, which may not be as easily convertible to cash. A ratio of 1 or higher is often considered satisfactory. About the quick ratio, which is now 0.86, it also was a stable 0.92 for 2020 and 2021 and then it decreased in 2022 and 2023. That means without inventory the company could have difficulties to meeting the short-term obligations.
3. Cash Ratio = Cash and Cash Equivalents / Current Liabilities
The cash ratio is the most conservative liquidity ratio, focusing only on the most liquid assets. A higher cash ratio suggests a better ability to cover short-term liabilities with cash. The cash ratio was stable for the four years from 0.51 in 2020 to around 0.45 in 2023.
The enterprise could have serious issues to cover the short-term obligations with cash.
Profitability
Profitability is a key metric that measures a company's ability to generate profit relative to its expenses and other relevant costs. It is a crucial aspect of financial analysis and provides insights into a company's overall financial health and performance.
The metrics provide different perspectives on a company's profitability: ROE focuses on equity, ROIC considers overall invested capital, Net Profit Margin analyzes the proportion of profit relative to revenue, and Net Revenue is a measure of total revenue after adjustments. Analyzing these metrics together can give a comprehensive view of a company's financial performance and efficiency.
- ROE = Net Income / Shareholders' Equity
It is a ratio that measures the return on shareholders' equity. ROE indicates how effectively a company is using shareholders' equity to generate profit.
- ROIC = Net Operating Profit After Taxes (NOPAT) / Invested Capital.
It measures the efficiency with which a company utilizes its invested capital to generate profit. It considers both equity and debt.
- Net Profit Margin = Net Income / Net Revenue
It is a percentage that represents the profitability of a company by expressing its net income as a percentage of its revenue. Net Profit Margin shows how much profit a company retains from its revenue after all expenses.
- Net Revenue, also known as Net Sales, represents the total revenue generated by a company after deducting returns, allowances, and discounts.
Kering pays dividends currently which essentially means that some of its profits are not reinvested into the business but given to shareholders.
The ROE decreased from the previous year of 25.8%, the company has now a ROE’s value of 19.6%.
Kering’s annualized return on invested capital for 2023 was 11.1%.
Kering net profit margin in 2023 was 15.2% which is not considered a bad net profit margin.
For 2023 Kering reported revenues of $19.6 billion, a decrease of 3.9% compared to revenues of $20.4 billion in the comparable 2022 period. The revenue decrease was driven largely by the decrease of Gucci’s revenues about 6%.
Financial Leverage
Debt Ratio = Total Debt / Total Assets
This ratio indicates the proportion of a company's assets that are financed by debt. A higher debt ratio suggests a higher level of financial risk, as it means a larger portion of the company's assets is funded by debt. A debt ratio of 43.1% suggests that 43.1% of KER’s total assets are funded through debt. This is indicating that the company relies for less than half of the total assets on debt.
Debt Equity Ratio = Total Debt / Shareholders' Equity
This ratio measures the relative contribution of creditors and shareholders to the company's financing. A higher debt equity ratio suggests higher financial leverage and, therefore, higher risk, as it implies a larger portion of the company's funding comes from debt rather than equity. A debt equity ratio of 117% means that the weight of the debt is excessive compared to the own sources of financing. It denotes a risky financial institution, in fact, the higher the value of the index, the higher the exposure towards third parties.
Total Debt to Capitalization = Total Debt / (Total Debt + Shareholders' Equity)
This ratio shows the proportion of a company's capitalization that is represented by debt. It gives an idea of the extent to which a company relies on debt to finance its operations. A higher ratio indicates a higher dependence on debt for funding. A total debt to capitalization ratio of 54% indicates that 54% of KER's total capitalization is in the form of debt. A higher ratio is typically considered a bad sign, as it implies an higher reliance on debt for capital.
Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense
This ratio assesses a company's ability to meet its interest obligations on outstanding debt. A higher interest coverage ratio indicates a lower risk of default, as the company is generating sufficient earnings to cover its interest expenses. For Kering there is no interest expense for the year 2023.
Cash Flow to Debt Ratio = Operating Cash Flow / Total Debt
This ratio measures a company's ability to generate enough cash flow to cover its total debt obligations. A higher ratio suggests a better ability to service debt from its operating cash flow, indicating financial strength. KER has a ratio of 25%. This is not a positive sign, not indicating robust financial health and capacity to easily manage debt.
Stock Valuation
Multiple Analysis
Multiple analysis refers to the use of financial ratios or multiples to assess and compare the valuation of a company. These ratios express the relationship between one financial metric and another and are useful for comparing companies within the same industry or sector. Some common multiples include the price-to-earnings ratio (P/E), price-to-sales ratio (P/S), and enterprise value-to-EBITDA ratio, the enterprise value is obtained adding the market cup to the total debt and then subtracting the cash. We decided to value these multiples in 2023 to gain insights into how the market values Kering compared to its competitors.
Kering’s EV/EBITDA ratio stands at approximately 9.26, indicating that investors value the company at about 9.26 times its EBITDA. A lower EV/EBITDA ratio may imply that investors are currently paying less for each dollar of EBITDA generated by Kering. This could be attributed to various factors, including expectations about future growth, risk considerations, or other market dynamics.
The P/E ratio for Kering is approximately 17.6, implying that investors are willing to pay 17.6 times the current share price relative to its per-share earnings.
The P/S was 2.4, it shows how much investors are willing to pay per dollar of sales and we obtained it dividing the market cap with the revenue of 2023.
Discounted Cash Flow Analysis
Discounted Cash Flow (DCF) analysis is a valuation method employed to assess an investment's worth by forecasting its forthcoming cash flows. It operates on the principle that the value of money diminishes over time due to influences like inflation and the opportunity cost of capital. In essence, this model computes the current value of anticipated future cash flows by discounting them to the present. It's founded on the notion that the true value of an investment is the present value of its projected future cash flows. Unlevered Free Cash Flow is the focal point of this model as it signifies the cash available for both debt and equity stakeholders. It's derived by deducting taxes from EBIT, adding back Depreciation and Amortization, and subtracting Capital Expenditures and the change in Net Working Capital.
In order to determine the present value of a company using the DCF model, we projected future cash flows for Kering, factoring in variables like revenue growth, operating expenses, capital expenditures, and taxes. These projections were then discounted back to their present value using the WACC; this metric measures the average cost of capital for a company. It's computed by considering the cost of both equity and debt capital, weighted by their relative proportions in the company's capital makeup and provides a holistic view of the cost of financing for the company, accounting for its mix of debt and equity financing.
The value of the WACC for KERING is 6,80%. It is good to specify that this measure is highly influenced by circumstances. The value of beta and market risk premium are assumptions, and by changing them, the WACC value obtained, can change considerably. The value found indicates that the company needs to generate at least a profit of 6,80% on its investments to both cover the cost of capital and satisfy the investors. The WACC of a company can be also used as a benchmark to evaluate a future
investment and show recent financial performance. It is undoubtedly the case that Kering’s weighted cost of capital is low enough to consider the company a safe investment compared to the market.
Future Projections
For the FCF estimations we assumed a slight constant growth of revenue (around 5%) per year for the next few years, this is due to the smaller increases recorded during the last years and, in particular to the decrease that brought the company from 20.35B in 2022 to 19.57B in 2023. We kept EBIT margins on sales with value fluctuating around 24% and a constant tax rate of 25%. We assumed D&A to grow in years and CapEX to remain stable.
Sensitivity analysis is a useful method for understanding how changes in important factors affect the value of a company, project, or investment. It helps decision-makers see how sensitive the value is to different things, which is important for understanding risks. In this case, we're looking at two key metrics: the Weighted Average Cost of Capital (WACC) and the Terminal Growth Rate (TGR). Changes in WACC, influenced by things like interest rates or market conditions, can affect the overall value. Similarly, changes in the TGR, which is a measure of how fast a company is expected to grow in the long term, can also impact the value. Lastly, based on the assumptions described above, we calculated the terminal value which was necessary to determine the implied share price estimated at €531,22.
Piotroski Score
The Piotroski Score, developed by Joseph Piotroski, is a financial scoring system that evaluates the financial strength of a company based on certain accounting and financial metrics. The score is designed to help identify companies with strong fundamentals and avoid those with weaker financial positions. Piotroski originally introduced this scoring system in a research paper titled "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers." The Piotroski Score consists of nine criteria, each assigned a score of 0 or 1, and the total score ranges from 0 to 9. A higher score indicates stronger financial health.
The Piotroski score is broken down into the following categories:
Profitability (1 point if the company has a):
Positive net income
Positive return on assets (ROA) in the current year
Positive operating cash flow in the current year
Cash flow from operations being greater than net Income (quality of earnings)
Leverage, liquidity, and source of funds (1 point if the company has):
Lower amount of long-term debt in the current period, compared to the previous year (decreased leverage)
Higher current ratio this year compared to the previous year (more liquidity)
No new shares issued in the last year (lack of dilution)
Operating efficiency (1 point if the company has):
A higher gross margin compared to the previous year (1 point)
A higher asset turnover ratio compared to the previous year (1 point)
After calculating the scores for each criterion, they are summed to obtain the overall Piotroski Score. A higher score (closer to 9) suggests better financial health, while a lower score may indicate potential financial weaknesses.
Looking at Kering’s financial factors (as 2023), analysing company’s profitability using the Piotroski Score framework:
Positive net income of 2.983.000.000
Positive return on assets (ROA) of 7.2%
Positive operating cash flow of 4.459.000.000
Cash flow from operations greater than net Income (4.459.000.000 >2.983.000.000)
Analyzing company’s leverage, liquidity, and source of funds using the Piotroski Score framework:
Kering has higher amount of long-term debt in the current period, compared to the previous year [10.026.000.000 > 3.685.000.000]
Higher current ratio this year compared to the previous year [1.38>1.37]
Shares issued in the last year
Analyzing company’s operating efficiency using the Piotroski Score framework:
A higher gross margin compared to the previous year [76.29%>74.68%]
A lower asset turnover ratio compared to the previous year [0.07<0.11]
In conclusion, based on the analysis of the Score components for Kering, the company receives a score of 6 out of 9 on the Piotroski score scale. This result suggests Kering does not face financial challenges and weaknesses in its current financial health according to the score.
Risks
Kering faces brand-specific and macroeconomic risks. In terms of the former, Gucci's underperformance could continue, indicating that its headwinds are more structural than cyclical in nature. Similarly, 2023 EPS consensus could prove too optimistic if the current downturn turns out to be more severe than expected. This could also impact growth assumptions in 2024 and beyond. Similarly, the 5% annualized growth rate expected of the broader luxury goods market rests on certain global GDP assumptions, and it is particularly sensitive to economic growth in China. If those turn out to be too optimistic, luxury market growth will be structurally lower than currently expected, which could have a similarly negative impact on Kering's growth.
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