Luxury group Kering tumbles to its lowest level in seven years

Investors throw in the towel after a blast of an earnings alarm. The wandering luxury group is now ten times smaller in market value than arch-rival LVMH.

On an otherwise fairly quiet European trading day, that one red spot stands out: Kering

in Paris tumbles up to 10 percent lower to 315 euros, the lowest level since 2017.

The luxury group managed to surprise investors for the second time in a month with a big alarm. At the end of March there was already a message that flagship Gucci is quickly making water: a buyers’ strike resulted in a 20 percent lower turnover last quarter.

After that message, investors had braced themselves for a very weak quarterly report, but the reality turned out to be even more dramatic than feared: Kering warns that operating profit will decline by 40 to 45 percent this half year.

The problem at Kering is that not only the share is in the trash, but also the products of flagship Gucci. The Bloomberg news agency, which is very influential among major investors, launched a devastating portrait of Kering and CEO and major shareholder François-Henri Pinault this week from an anonymous Parisian suburb, where unsold Gucci items are being roasted in an outlet store. The contrast with rivals like Louis Vuitton (LVMH) and Hermès, who maintain their cachet by never lowering prices and avoiding outlets like the plague, was crystal clear to every reader.

Giving Gucci cachet again – while cash flow is under pressure due to shrinking turnover – will cost a lot of money in marketing and to retain and attract talent. After the conference call with analysts, trading house Jefferies sees only one bright spot: “It is encouraging that Kering is looking for external partners for its real estate,” writes analyst James Grzinic. Kering, which paid 1.3 billion euros this month for a prime location in Milan, could free up cash by ‘marketing’ its real estate.

“It is quite possible that Kering has gradually reached its lowest point,” Grzinic acknowledges. ‘But it is very difficult to chart a recovery. And this is especially true given the high debt ratio for the sector.’ The Jefferies analyst expects that Kering, including leasing, will have 16 billion debts at the end of this year, while he estimates the operating cash flow at only 2.2 billion.

The end result: investors now value Kering at 40 billion euros. That is ten times less than the 400 billion for arch-rival LVMH with the ultra-profitable flagship Louis Vuitton. Put another way: at the beginning of 2020, investors considered Kering and Hermès to be of equal value. Now the almost unprofitable Hermès is considered worth more than six times more at 250 billion, while its annual turnover at 13 billion is about three times smaller than that of Kering.