Gucci still looks Nouveau Riche to Investors

The brand’s parent company Kering had a better 2018 than rival LVMH, but shareholders aren’t convinced it will last

By guest author Carol Ryan from Wall Street Journal

Gucci is a huge hit with millennials, but investors are proving a tough sell.

Kering , the French luxury company which owns the Italian brand, as well as Yves Saint Laurent, Bottega Veneta and others, Tuesday reported 29 % underlying sales growth in 2018—close to three times what rival LVMH managed. An operating margin of 29 %, up 4 percentage points in a year, puts Kering among the world’s most profitable luxury brand owners.

The company’s shares fell 4 % at the open but regained their losses by midmorning. They are now the second-cheapest among Europe’s 10 main-listed luxury companies, fetching just 18 times projected earnings. Despite the recent sale of less luxurious names in its portfolio, such as Puma and Stella McCartney, Kering’s shares maintain their decade-long discount to compatriot LVMH.

Investors, however, are worried about Gucci’s staying power. Since the fashion label’s hugely successful revamp in 2015, revenue has doubled and operating margins are up a third. Although there is no sign of a meaningful slowdown, Kering does look heavily reliant on Gucci, which now generates 83 % of group operating profit.

That makes LVMH the steadier bet for investors. Louis Vuitton’s parent has a more diverse business, with beauty, jewellery and champagne brands that capture luxury spending in categories other than clothing. Its recent purchase of Belmond, which runs the Orient Express, gives it a foothold in the fast-growing luxury travel and hotel business

Kering has the cash to do something similar, if it wants. With net debt of just 0.4 times earnings before interest, taxes, depreciation and amortization by the end of last year, the company has at least EUR 8 billion (USD 9.04 billion) to spend on new brands if it takes borrowings to two times Ebitda. A more balanced look could help Kering get more credit from shareholders.