(News Bulletin 247) – The German financial intermediary has raised its purchase recommendation on Kering, judging that the medium-term potential of the Gucci brand is largely underestimated.

The publishing season in the luxury sector has been more than mixed. Hermès lived up to its rank by publishing quarterly sales above expectations.

LVMH, for its part, recorded lower than consensus revenue growth in the third quarter. The world number one in luxury has been caught up by the slowdown in demand from the most aspirational consumers, that is to say those who are moving towards the least expensive and more fashionable brands.

As for Kering, the parent company of Gucci delivered the worst quarterly report of the three flagship luxury groups listed on the Paris Stock Exchange. On October 25, the group led by François-Henri Pinault saw its sales fall by 9% on a comparable basis (-13% on published data) between July and September 2023, further undermined by Gucci which suffers from a lower desirability of his products. The other Kering houses are not to be outdone and all showed a decline in their activity this summer.

Last September, Bank of America had already highlighted these risks ahead of this publication, and had estimated that Gucci’s recovery would be more complicated than hoped.

A potential for recovery

An opinion which is far from being shared by Deutsche Bank. The German bank is confident in Kering’s ability to restore luster to its Italian brand. The establishment estimates in its note published this Friday morning that Kering remains one of the largest luxury groups in the world and that “the medium-term potential of the group but also of the Gucci brand is largely undervalued”.

Deutsche Bank is not avoiding the “headwinds” which are currently sweeping the luxury sector in the short term, namely the slowdown in demand for these products. Risks which, in the eyes of the German bank, “have been largely taken into account by investors”. In this context, Kering presents “attractive medium-term risk/reward for investors” who are willing to be patient.

An optimism that contrasts with the ambient climate on value. Deutsche Bank thus raises its opinion on the stock to purchase while raising its price target to 540 euros compared to 510 euros previously, which offers a potential of more than 30% at current prices.

This valuable support from Deutsche Bank allows Kering shares to appreciate by 2.2% this Friday when the CAC 40 takes a breather the day after a good session (+1.85%).

Solid elements put in place

Regarding Gucci, the main beast of the markets, Deutsche Bank recalls “the very negative feeling regarding the brand’s recovery potential”, and cites a consensus which expects an average annual sales growth rate of around 4%. for the period 2022-2027″. However, this discouraging picture for Gucci is not justified given the efforts made by Kering to turn around the Italian label, according to the establishment.

To support its argument, Deutsche Bank is based on the previous achievements of the last two creative directors of Gucci, which made it possible to achieve growth of “from 8% to 18%, including during the periods of COVID and financial crisis.

The German bank also cites the assets already present which will favor the recovery of Gucci, namely a media reach for a brand weighing 10 billion euros on social networks similar to that of its largest peers, and the arrival of Sabato from Sarno, at the head of creation.

“Based on our analysis of the main areas of investment, we forecast an average annual growth rate of EBIT (operating profit before interest and taxes) above the consensus of 12% between 2023-2027”, abounds Deutsche Bank.

A very attractive valuation

If the renewal of Kering’s stock market history involves the recovery of Gucci, Deutsche Bank nevertheless forgets the other houses of the group. The financial intermediary believes that “other luxury brands (Yves Saint Laurent, Bottega Veneta and Balenciaga) and the development of complementary product categories in Kering Eyewear and Kering Beauté offer diversified and growing revenue streams in the medium term”.

Remember that the Kering Eyewear division – which includes optical frames and sunglasses – is the only one to have achieved growth in sales (+31%) between July and the end of September.

Finally, Deutsche Bank returns to the attractiveness of Kering on the stock market, with a price-to-earnings ratio of around 13 times, “a significant discount compared to the sector and its average multiple after having become a group entirely focused on luxury (around 19 from 2017 to 2019 on a pre-COVID basis).” The financial intermediary’s estimates already take into account a reduction of around 20% since the start of the year in its earnings per share forecasts for 2024 and 2025.