Cutting a dash
Gucci just gave a preview of life after its turnaround. The most important brand at luxury group Kering beat sales estimates in the fourth quarter, the result of a creative revamp and slick advertising campaign. The Italian label is putting three years of bumpy growth behind it. Yet a falling operating profit margin will continue to keep the valuation in check.
Revenue growth at Gucci was pretty much flat in 2015 overall, but sales in the fourth quarter grew an impressive 4.8 percent, after stripping out currency moves. This was the first “clean” quarter when the new collection from Creative Director Alessandro Michele was in stores and his predecessor’s stock had been cleared. It got shoppers to part with their cash in spite of a harsh luxury environment in 2015, where global sales grew around 1 to 2 percent according to Bain.
Nursing Gucci’s top line back to health is important for Kering as it brings in half of revenue at the group’s luxury division. An 8 percent sales increase at the whole Kering group in the fourth quarter, excluding currency moves, puts it ahead of other big European luxury houses – LVMH sales grew 5 percent in the same period and Hermes 7 percent.
Yet Gucci’s operating profit looks on the slender side, because smartening up stores and shifting old stock cost money. Its operating profit margin fell 3.7 percentage points year-on-year, and at 26.5 percent is still a long way off the group’s longer-term 30 percent target, or the 31.5 percent it managed in the first half of 2014, when sales were shrinking. Other important Kering brands are also cramping its profitability. Bottega Veneta’s operating profit margin fell 2.5 percentage points year-on-year in 2015, and Puma’s has plummeted from 16 percent to 3 percent since 2007, RBC data shows.
Kering’s shares trade at a 15 percent discount to the luxury sector on a forward price-to-earnings multiple, according to Eikon, albeit above the company’s five-year historical average. Its sales are looking good, but until profitability follows the same trend, it is hard to justify a higher valuation.