(BFM Bourse) – The American bank has moved to “underperformance” on the parent company of Gucci, judging that the current context is not conducive to the recovery of the Italian label. However, it is available for purchase on Hermès and LVMH.
The stock market downturn experienced by the luxury sector can also constitute an entry point. Since July 14, the pan-European Stoxx Europe Luxury 10 index has dropped 15%. In a sector note published this Monday, Bank of America reaffirmed its conviction in luxury and its structural strengths (excellent management teams, robust margins and cash generation, high barriers to entry, etc.) and thus considers that this recent decline “probably represents an opportunity”.
However, the industry is still expected to see a slowdown. The bank anticipates a significantly lower third quarter in terms of organic growth compared to the second (10.4% compared to 11.1%) and expects this same growth to then reach a low in the first quarter of 2024, at 3 %.
“In order to protect margins, companies will need to slow down reinvestment in brands. While this probably suits the big names in the industry who have invested heavily over the past four years, it makes it harder for those trying to turn around their brands.” , underlines Bank of America.
The American bank therefore recommends buying stocks that have shown their resilience. And Kering is not among them.
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The “aspirational” clientele in question
The American establishment, on the contrary, lowered its recommendation on the value from “neutral” to “underperformance” (equivalent to “sell” at Bank of America) while reducing its price target to 430 euros compared to 600 euros previously. This weighs on Kering shares, which lost 4.3% this Monday around 2:45 p.m. (at 440.55 euros) and showed the biggest decline in the CAC 40.
A normalization of demand has recently been observed in the United States (even LVMH saw its revenues decline in this region in the second quarter). This slowdown is notably due to a slowdown in so-called “aspirational” customers, that is to say less well-off and younger consumers who are turning more to products that are a little lower in the range and higher in the zeitgeist. According to Bank of America, Kering and Gucci, a brand which represents more than half of the company’s revenues and more than 65% of its operating income, suffered one of the biggest slowdowns precisely because of their exposure to this clientele.
Bank of America therefore believes that the United States constitutes “the canary in the coal mine” and is therefore a harbinger of trends which will spread to other regions. As a result, Gucci could be penalized in the same way in other countries around the world.
“In addition, Kering (and Gucci) underperformed (other luxury players, editor’s note) in the early stages of the consumption recovery in China. Given that (China) will be the main driver of sector revenue Next year, we fear that this will create a difficult context for executing the turnaround of the Gucci brand,” said Bank of America.
Milan fashion week
Kering is indeed trying to breathe new life into Gucci and recently appointed a new management team. And above all, at the beginning of the year, a new creative director, Sabato de Sarnodont’s roadmap is to create an “elevation” of the brand. The Italian designer and defector from Valentino also presented his first collection for the Italian label on Friday at Milan fashion week.
“If the new aesthetic proposed by Sabato De Sarno is part of the luxury trend that is taking over the market, we think it is difficult for Gucci to differentiate itself at this crucial moment,” analyzes Bank of America. “In our view, this will make it difficult to turn around a product-driven brand at a time when the market environment is normalizing,” the bank continues.
Note that Royal Bank of Canada was quite won over by Friday’s Sabato de Sarno parade.
“The collection clearly leans towards chic and street-smart Italian styles, very wearable and more neutral with a contemporary positioning, and marks a clear demarcation from previous style elements (under the direction of Alessandro Michele),” appreciates the design office in a note published this Monday. “We believe that this is a solid and low-risk starting point from which Gucci will be able to reposition itself in the quarters/years to come,” continues the Canadian bank, which confirmed its advice to “outperform”.
To return to Bank of America, the American bank recommends buying the two other French luxury stocks, LVMH and Hermès. For LVMH, its price target of 1000 euros gives the stock a potential of almost 40%. “We believe that LVMH’s portfolio of strong brands, its first-rate execution, the diversification of its divisions and its balanced geographic exposure are all assets” which create an optimal balance, both defensive via spirits and leather goods but also cyclical thanks to its exposure to tourism and travel retail (sales in airports or train stations), summarizes Bank of America.
As for Hermès, “history shows that Hermès is one of the most resilient luxury companies in periods of macroeconomic weakness, and we see no reason why it should be any different this time,” judges the bank.
Julien Marion – ©2023 BFM Bourse