Investors are too Fashion-Forward at Gucci

Brand’s parent, Kering, has an unflattering stock market valuation, despite strong quarterly sales growth.

By guest author Carol Ryan from Wall Street Journal.

Luxury investors need to be sensitive to the whims of fashion, but they have been too quick to predict Gucci’s demise.

The brand’s parent, Kering, KER said after the close of Paris stock trading on Thursday that underlying group sales increased by 12 % in the three months through September. The results put the French luxury company’s growth in the same league as Hermès and LVMH Moët Hennessy Louis Vuitton —two of the most prized stocks in the sector which reported sales growth of 15 % and 11 % respectively over the same period.

Kering’s stores in Hong Kong, which generated 6.5% of group revenue last year, did get hit by pro-democracy protests that kept tourists away. Sales in the city fell more than one-third, but much of this business was picked up in mainland China instead. And its most important brand, Gucci, increased sales by 11% in the quarter. Granted, that is a steep drop compared with the 35% increase it saw in the same period of last year. U.S. sales were lackluster, but demand for the label is healthy overall.

Investors already have decided to shop elsewhere though. Shares in Hermès and LVMH, whose brands are considered most resilient in an economic downturn, are up 28 % and 42 %, respectively, this year. Kering has gained a more modest 12 %.

Its shares now looks cheap, changing hands for just 17 times projected earnings compared with 24 times for LVMH. While Gucci’s parent has always traded at a discount to its larger rival, the valuation gap is approaching its widest level in a decade.

Shareholders are down on Kering because it is heavily dependent on Gucci. The Italian label generates 80 % of group operating profit and much of its sales growth. That is risky if it suddenly falls out of favour with fickle luxury shoppers.

But there is no sign of that happening. Meanwhile, successful turnarounds at smaller brands could help the group diversify—Bottega Veneta increased sales at more than double what analysts covering the stock were expecting in the quarter.

Investors no longer like the look, but Gucci has more room to grow.