#LBSSfinance: Kering Group

A bit of… history!
Founded in 1962, Kering Group is now one of the most well recognized Luxury Brand Groups in the world, with a team of more than 30,000 professionals employed all around the globe to run more than 15 Luxury and Lifestyle brands under its wing such as Gucci, Saint Laurent, Bottega Veneta, Pomellato, and Qeelin, just to name a few.

Everything started when the progressive mind of Francois Pinault created Etablissements Pinault, a company that initially focused its business activities on the wood industry, which then moved towards the Retail & Distribution market. It did so initially with the acquisition of Conforama and Fnac during the 90s, and then also when it changed the company name to Pinault-Printemps-Redoute (PPR).

Nevertheless, the true turning point for the company was 1999, when PPR acquired a 42% stake in Gucci and started its successful journey into the luxury sector. This was quickly followed by the acquisition of Saint Laurent Paris and Sergio Rossi, and some signed partnerships with the British brands Stella McCartney and Alexander McQueen.
The Group grew even more, expanding its horizons towards the East, with the recent acquisition of a majority stake in Chinese Jeweler Qeelin in 2012.

In 2013, the group was renamed Kering by Francois-Henri Pinault, the son of the founder and current Chairman and CEO of the Group.

Strengths, Weaknesses & Opportunities

Let’s now analyze the business model promoted by Kering, focusing on its strengths, weaknesses, and future opportunities:

  •  Strengths:
    – Widespread in new geographies. The Group has 1,565 directly operated stores, and almost half of them are in ‘Emerging Countries’, which shows the interest of Kering in expanding its horizons, especially in the APAC Region. Additionally, 233 stores out of that total are in Japan. Almost half of Gucci’s revenue comes from APAC and Japan.
    – A multi-brand company supported by vertical integration is is one of the most critical aspects of Kering, and is something that fosters and supports its success and growth. Particularly, since 2013, the Group has been strengthening its vertical presence in the production chain by, for example, acquiring leather tanneries to guarantee the supply of raw material to its Couture & Leather Goods brands. This guarantees to the Group more agility and flexibility, along with operating more quickly and effectively.
  • Weaknesses & Threats:
    – COVID-19 pandemic – the pandemic has definitely impacted the financial performance of Kering Group, although its resilience made it come through the crisis even stronger than before. Particularly, the closures of physical stores, along with the collapse in tourism, have dragged down the profits of thesubsidiaries.
    – Low-cost brands. Low-cost brands can be certainly seen as a true threat for a Luxury multi-brand group, not on the side of consumer change, but rather in terms of the stealing of intellectual property on designs. Indeed, one can constantly witness to examples of fashion items that directly took inspiration from iconic pieces first put on the market by giant luxury brands.
  • Opportunities:
    – NFTs and digital assets – the Group seems very open to innovation in technology. Indeed, it has created a full team of experts to follow, step by step, the emergence of web3 and metaverse. Additionally, Pinault showed a very proactive attitude towards the possibility of integrating cryptocurrencies as method of payment and towards NFTs, which are seen by the CEO as a ‘new category of product’.

Key Financials: Equity Value, Enterprise Value, EBITDA & EV/EBITDA

Let’s now put ourselves in the shoes of an investment banker who wants to understand the ‘health’ of a company.
What will be the very first step of this valuation?
First, it is fundamental to calculate the Equity Value and the Enterprise Value, two ‘steppingstones’ to conducting a financial valuation of a business.
The Equity Value is the market cap of a company, which as of April 15th sits at €66.561 million for Kering.
From the Equity Value, one can calculate the Enterprise Value (EV), by adding Net Debt (accounted at 184,4 million euros as seen from the Financial Results of 2021), Preferred Stock (which in this case are not assumed) and Minority Interests (accounted at 389,4 at the end of 2021). We, therefore, obtain an EV of € 67,118,800,000.
Then, we calculate the EBITDA (Operating Income + Depreciation & Amortization), which accumulates to €6,470,400,000.00.
We conclude our ‘basic’ analysis by calculating one of the most important (and used!) formulas to evaluate a company: EV/EBITDA. In this case, our ratio will be equal to 10.42x, indicating a very healthy company, something that we could already visualize by simply going through the financial statements of the company, its amazing growth rate, and the resilience it showed during the COVID-19 pandemic.

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