By Kering (KER) share price has imploded this year as concerns about its strategy and business growth continued. It has dropped in the last two consecutive months, moving to its lowest point since August 2017. It has also fallen by over 64% from its highest point in August 2021, bringing its market cap to over €31 billion.
Growth concerns remain
Kering’s performance mirrors that of Burberry, the biggest luxury brand in the UK whose shares have dropped to 669p, its lowest point since 2010. Burberry’s stock has dropped in the last 13 consecutive months.
Kering has continued to underperform other French luxury goods companies. For example, the LVMH share price has dropped by less than 1% this year while Hermes has risen by over 20% this year.
Kering, the parent company of Gucci, Balenciaga, Saint Laurent, Bottega Veneta, Brioni, and Alexander McQueen, is going under intense pressure this year.
The company is facing two main concerns. First, it relies heavily on its Gucci brand, which is showing signs of slowing down. This is in contrast to LVMH, a company made up of over 70 businesses, which often compliments each other.
To be clear: it is possible to succeed with just one brand. Hermes, for example, has become a giant company in the fashion industry by focusing on just one brand. Kering’s challenge is that the Gucci brand is not doing well as it did in the past.
Second, Kering’s growth in its key markets, especially in China is slowing even as the company continued adding stores.
Kering’s financial results
Kering’s shares dropped sharply after the company published weak first half financial results. These numbers revealed that its revenue dropped by 11% in the first half of the year to €9.01 billion.
Its first and second-quarter revenues dropped to €4.5 billion and €4.51 billion, respectively. In contrast, Hermes continued firing on all cylinders as its revenue jumped by 12% to over €7.5 billion. Its profit rose to over €2.3 billion.
LVMH’s revenue dropped by just 1% to over €41.6 billion while its net profit fell by 14% to €7,2 billion.
A closer look at its key segments shows that most segments in Kering’s business continued to underperform. Gucci revenue dropped by 20% to €4.08 billion while Saint Laurent’s fell by 9% to €1.4 billion.
Also, Bottega Veneta’s growth stalled while its Eyewear and Corporate revenue jumped by 23% to over €1.067 billion. These smaller brands’s stumble has been better than Gucci.
Kering’s top-line performance has also spilled over to its profitability numbers. Gucci’s operating margins dropped from 35.3% in H1’23 to 24.7% in H1’24. The management is solving this challenge by closing underperforming stores.
Turnaround to take time
Kering’s crash is mostly because China’s growth has stalled as consumers focus on reducing their debts after the crash of the real estate boom.
There are also some geopolitical risks between Europe and China. Recently, Europe imposed some sanctions on China’s EVs, a move that Beijing vowed to retaliate. While the EU has walked away from the tariffs, there are signs that these geopolitical issues will continue for longer.
China tends to target key sectors when it retaliates on countries and the luxury brand market could become a victim.
I believe that Kering’s turnaround will take time because its sales suggest that consumers no longer find Gucci appealing. That’s because, for a long time, Gucci has been all over, which has diluted its brand. In comparison, Hermes is known for engineering shortages of its Birkin bags to boost their value.
There are also signs that Kering is being distracted. In April, the company spent €1.4 billion acquiring Milan’s iconic Via Montenapoleone, a move that was criticised for its timing. In good times, it made sense to make such a pricey acquisition.
Analysts believe that the funds would have been used to either boost shareholder returns or creating more designs to lure shoppers.
Kering trades at a big discount to its peers. Its price-to-earnings ratio has moved to 15.78, much lower than companies like Hermes and LVMH, which are trading at multiples of over 20.
While Kering is cheap, I suspect that the company will continue underperforming the market for a while before its eventual comeback.
Kering share price analysis
The weekly chart shows that the Kering stock price has been in a strong freefall this year. Most recently, it dropped below the first support of the Woodie pivot points. It also dropped below the key support at €400, its lowest swing in October 2022.
Kering shares have moved below the 50-week Exponential Moving Average (EMA) while the MACD has remained below the neutral point since July last year. The Relative Strength Index (RSI) has moved to the oversold level.
Therefore, the stock will likely continue falling as sellers target the key support at €400. In the future, however, I suspect that the stock will bounce back as the turnaround continues.
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