Kering

Kering (formerly PPR), the owner of Gucci and Bottega Vanetta, is a conglomerate and has recently streamlined its operations to focus on Luxury. 66% of revenue (and 96% of operating income) were from Luxury in 2013.

The Brands

Gucci

Gucci is positioned slightly below LV/prada, above Burberry/Coach.  From visiting a small Singapore store (6 months ago):

• The store was slightly busy/crowded.  We just walked in, they do not make people wait in line like Prada/Vuitton do.
• Price tags are on the items, unlike Vuitton/Prada. 
• Bags are sometimes on sale.  With a sale tag attached to a bag.  Unlike Prada/Vuitton.  Loudly proclaiming a sale is terrible for a luxury brand - it makes people hesitate to buy because it may go on sale later.  From their website:

• Most products on display were still logo-ed: Only a small display of their bamboo shopper was in the center of the store.
• Shoulder and tote bags were available for less than SGD 2K.  Cheaper than Prada/Vuitton.

Gucci manufactures all their products in Italy.

Most sales are through directly operated stores: 77% in 2013, up from 70% in 2008 (compared to 82% for Prada brand in 2012).  In the early 2000s, I remember seeing Gucci items for sale at "pop-up" discount outlets by enterprising merchants, but this no longer happens - they have tightened up their distribution.

By sales, Gucci is probably the second largest, after Vuitton:

• LVMH Fashion & Leather (all brands): 9.8bn sales in 2013.  I;m guessing 60% of this is probably Vuitton, so lets say 6bn.
• Gucci (3.5bn in 2013)
• Prada (2.6bn in 2012)

Like Vuitton, Gucci's products are now out of favour due to logo fatigue. As buyers become more discerning, they move away from the blingy products covered in logos, especially those everyone else is carrying. They tend to move towards more subtle products, which people 'in the know' will know about, to express their 'taste', rather than wealth.  For Gucci, this means moving away from their easily recognisable canvas logo bags:

Towards newer styles, mostly leather bags:

Gucci charges a lot more for leather bags (e.g.: Sukey Medium Guccissima Leather Tote for SGD 2235.40, while an equivalent canvass bag was SGD 1357.)  So the new product mix should increase profitability.

No-logo products have been increasing.  Some numbers:

• They accounted for half of 2013 leather goods sales, up from 37% in 2012.  
• In 2013 Q1, no-logo products accounted for 37% of sales in Asia Pacific 30% in Korea (vs 9% a few years ago), and also over 30% in China.
•  For Q4 in 2013, management said the number of entry-level products had been cut by 25-30 percent and the proportion of sales from no-logo products reached 62 percent in the fourth quarter, against 44 percent the previous year.

Management has guided that, long term, logo products will still make up 40% of sales.  Gucci is “zoning” stores so fans of its famous GG logo see what they want, while customers for whom the logo is al­ready too brash a fashion statement are catered for elsewhere in the same shop. I don't like this - it is moving towards having the same brand in two market segments.A Luxury brand should be very clear what it stands for and which price range it targets, it cannot be everything to everybody.

Despite its shortcomings, I believe the brand still holds.  For a luxury company, this gives a sustainable competitive advantage.  Or at least, one that is theirs to lose.

Bottega Veneta

Competes at the high end, near Hermes and Chanel.  Tote bags with their signature weave look start at 3.7K:

Surprisingly they also sell plain bags significantly cheaper: Plain tote at 1.2K, and plain tote with a little weave at 2.1K.

Not much to say about them - they are doing everything right: selling at the highest end of the market...very subtle and refined...mostly through their own stores, which do look and feel the part.  Although sales are one third of Gucci's, operating margins are similar at around 30%.  Remarkable for a small brand.

(Yves) Saint Laurent

Seems to be placed slightly above Gucci -  they have no canvass bags.  2.7K SGD for mini tote bag (from Saks), 3000 SGD for a non-mini tote.

Still quite small, only 8% of revenue and 5% of operating income for the Luxury Division.

Puma

With sales of 3bn, Puma is the second largest sports brand in Europe. Worldwide, it lags far behind Nike (18.5bn) and Adidas (14.8bn in 2012 - includes Reebok).  Europe accounts for 30% of Puma's sales, of which 80%  (of sales/income?) are in France and Italy.

Operating margin is around 6% - so although they have the 80% of the revenue that Gucci has, and more employees, they produce less than 1/5th of its income.  Nike has a 13% operating margin, Adidas had 8%.

Kering has appointed a new CEO, and designed a new marketing campaign to turn the brand around.  Given how far it trails its compeditors, I am not optimistic.

Income and profitability

Since the company has been shedding many of its businesses in the past few years, we'll only look at the  Luxury division for historical profitability.  Gucci is responsible for 2/3rds of the Luxury Division's recurring operating income, BV around 20%.

Sport and lifestyle (in 2013), despite having the same revenue as Gucci (or half the luxury Division), had only a 6% margin.

How cyclical is this business?  Looking at the 2013 Annual report to estimate fixed and variable costs, I guess that 1/3rd of their revenue is for fixed costs.  If so, a 20% drop in revenue would halve profits; a 30% drop would quarter them.  I could not find any information in their 2009 results about why revenue increased (was it from China?) and margins decreased.

A significant number of their sales come from Mainland Chinese nationals.  HSBC estimates they are responsible for 28% of Gucci's 2012 sales.  A hard landing in China would lead to a significant profit drop:

Source: The Bling Dynasty (p17)

Redoute loses 30-40m a year, so selling it off should boost earnings by about 2%.

Balance Sheet

Kering's total debt of 4.8bn is high, at 3.2 times recurring operating income (before tax). Most of it is financed through medium term bonds - 5 and 7 years bonds issued recently has a yield of 1.8% to 2.5.  Two thirds of the total debt is fixed rate, and more than 85% of it is in Euros.

When is the debt due.  A large chunk (1.7bn) is due this year, the remainder is evenly spread out over the next 5 years:

Debt increased nearly 30% in 2013.  This was mostly due to acquisitions (1,154m spent on more Puma shares, Queelin, Chyristopher Kane, France Croco, Richard Glmort, Pomatello, and Altuzarra).  Looks like that they are continually buying up small brands in the hope that they can transform some of them to make it big.

Cash on hand is 1.4bn.  This may or may not include 315m recapitalization of Redoute prior to sale.  It does not include the the social guarantees to be paid to Redoute and Relais Colis employees, which cannot be estimated yet and will be recognized next year.

So net debt in 2013 is around 3.1 to 3.4bn, or 2 to 2.3 times recurring operating income (before tax).  Then we have to account for an one-off unknown deduction next year.

Cash Flows

Despite its history of under-performing units and continual restructuring, Kering has generated free cashlows most years:

Looks like their biggest mistake was buying Puma in 2007.

The CFI in 2013 is from acquiring a number of small companies (345m), 306m for store openings.

Summary

Kering is the cheapest of the Luxury stocks, trading at around 14X earnings (I don't consider Coach a Luxury brand).  Currently unpopular, because of the switch to non-logoed products.  Main Risks are:

• China.  With mainland Chinese nationals responsible for an estimated 28% of Gucci sales, a hard landing in China would affect them badly.  If it happened, I'd want to buy afterwards, not before.
• I'm not sure how cyclical its earnings would be.  They did not drop during 2009, but this is probably because of expansion in China.   The stock price is volatile: it dropped by 70 percent in 07/08, and has risen 4 times since then.  Again, better to buy after the drop than before.
• Kering has operating leverage (high fixed costs due to stores, marketing, etc) as well as little financial leverage of 2+ times earnings - a little more than I'd like.  Hope they pay down their debt.

I have bought half my position, its priced reasonably but is not cheap.  I'd buy more if it went down to 120 Euros, or when there is a crisis/recession.