Gucci Underground

I know it feels like forever ago but cast your mind back to 2021 or so, where the Gucci store on Queen St was choka-block, Alessandro Michele’s designs seemed to be in every second Vogue spread, and the Ponsonby Housewife Mafia was decorating their houses with Gucci screens and incense. Let’s not forget deal sleds — at least every second banker I know was wearing Gucci loafers — they had their DEAL SLEDS on and they were making DEALS! Life was fantastic for a while for Kering shareholders, Gucci’s parent company, and the money flowed like boats down the river Styx.

Then something awful happened. One day, people stopped wearing the tacky-wink-wink-kitsch-loving designs of Michele, and by that time he had left anyway, and Gucci bought in a new designer — Sabato De Sarno — who suffers from the common affliction in fashion of “understudy” syndrome — he was at Valentino (really playing second fiddle to the ghost of Valentino himself) and now he is at Gucci, designing in a confused vernacular that is part the Temu version of Tom Ford and partially the hush-hushed nondescript tones of Loro Piana. It’s not anything, and despite management’s protests that only 7% of the line being sold in stores is Sabato’s (inventory issues anyone?), I’m not convinced it’s any good. It is the same issue that Lagerfeld’s successor at Chanel, Virginie Viard, encountered too — great technician, no pizazz (Lagerfeld was never a great technician IMO, but he understood the zeitgeist better than anybody — the whole point of a Chanel collection was that it is in the now). To take over a house with such a strong brand, you need to be strong yourself — you need to be Tom Ford, or whatever.

This is a huge problem for Kering, because Gucci accounts for 40-50% of the group’s revenue — €2.1 billion this quarter (Saint Laurent’s revenue was mere €740mn, by way of comparison). Revs at Gucci were down 21% YoY, and the co warned of a 40-50% drop in profit to Kering for the HY (obviously, stock fell about 7% by way of response).

I have a few “radical” assumptions, which may make a case for Kering as an interesting annex to a luxury-forward portfolio (I still prefer Hermes, LVMH, Richemont and Brunello — however —!)

How Kering could save itself (and why the answer might not be Gucci)

Ok buckle up. Get your tin foil hats on. The first thing I’d like you to assume is that perhaps — just maybe — Gucci is not going to be the cash-cow it has been in the past. I’d also like you to think about the other houses that Kering owns: Saint Laurent, Balenciaga, Bottega Veneta, Brioni, and 30% of Valentino with the option to buy the rest of Valentino by 2028. Here’s my first example: in 2020 Saint Laurent did €1.72bn of revenue; last year they did about €3.2bn. Bottega made €1.21bn of revenue in 2020; last year they did €1.6 billion (it’s not as exciting as Saint Laurent’s powerhouse growth, but it’s nothing to sneeze at). So — here’s my first proposition — these other houses are far more interesting than Gucci, growth at them is not minor, and they haven’t reached the point of cultural exhaustion that Gucci did (this is arguable for Balenciaga, but Demna’s managed to put out some very subtle and interesting collections recently — he is that rare combo of master technician and innovator — anybody who thinks Balenciaga is just provocative collections for young trust fund art kids ought to see his couture — it’s pre-tay, pre-tay good). So here is one option for Kering — keep growing those smaller houses that haven’t reached saturation point yet.

The CAA giant laser beam

Here is the second part of what “could” happen — Pinault, who controls Kering (we’re going to call him FPH from now on) recently bought the talent agency, CAA, via his family office. No, Kering did not purchase it itself — but c’mon, do you think that FPH isn’t going to exert his power and large economic interest in Kering to benefit Kering? If you don’t believe you will, I have a bridge to sell you. CAA is a $7bn talent agency. Here’s an extract from Lauren Sherman’s always excellent column on Puck:

Sánchez’s Met Gala move: Who is walking the steps with whom on May 6? I’m hearing that Kering-owned Balenciaga is bringing a whopping 10 people—another major endorsement for Demna. The big news among my whisper network, however, is that Oscar de la Renta will be dressing none other than Lauren Sánchez: pilot, entrepreneur, philanthropist, new Daily Beast chew toy, and Jeff Bezos fiancée.

A major win for Kering — and for Demna — a whopping ten people. And, I’d argue, a kind of loss for Oscars — Bezos and co aren’t making any best dressed lists anytime soon. Ignore that — the point is that CAA is a giant laser beam, and much like how Rupert Murdoch doesn’t exert editorial control, I’m sure FPH won’t be exerting stylist control. Ha ha ha.

Also — acquisition options (tin foil hat stuff below this line)

A mentor (really, the person who taught me most of what I know) suggested to me that Richemont should merge with Kering. I would love to see this — Richemont has the ying to Kering’s yang (i.e Cartier). I don’t see it happening because of the ego clash. You have FPH on one hand, the scion of a very wealth family, and at Richemont you have Johann Rupert, also the scion of another wealthy family (far in the distance you have Arnault, the superior operator among all of them — which is why LVMH is so far ahead).

I don’t see Rupert and FPH holding hands and walking into the sunset. I just don’t. Look at Paramount — which was once worth much more than it is now. Shari, or her father, could’ve done a deal like Murdoch did with Disney and sell assets at their peak — but ego got in the way and now Shari is engaged in a convoluted sale process where she will get a fraction of what Paramount was once worth. Billionaires are not always rational.

Here’s a very theoretical list of possible options — if I was their M&A advisor I would be proposing these:

Option one: buy Prada

There have been persistent rumours that the family would like to cash out — Miuccia Prada is 74, and the company has previously done acquisitions with mixed success (Helmut Lang, etc, didn’t really go as planned). Acquiring Prada — with Miuccia and her co-designer, Raf Simons — still involved, would annex Kering’s portfolio of Italian brands (noting that Miu Miu sales increased +89% YoY). Prada’s EV is $21bn USDS while Kering’s is $56bn USD (using all USD amounts — Prada is, confoundingly, listed in Hong Kong). A merger would create a small powerhouse — I imagine would need to be a stock-and-cash deal that would give Prada and her hubby, Bertelli, a meaningful stake in the new company. That’s an option. Likelihood: two tinfoil hats out of ten.

Option two: buy OTB Group

OTB is controlled by another Italian — Renzo Rosso. Here’s how I imagine him:

Renzo Rosso to the mama-Mia rescueeeeee!!!

Renzo is smart. He built Diesel up, but he also made a series of very prudent acquisitions — Margiela, Jil Sander, Marni, Viktor and Rolf. He’s been considering an IPO for a while. He made a masterstroke buying Margiela and installing John Galliano as creative director (back then Galliano was persona non grata). The group made €1.9 billion in revenue last year (i.e. about what Gucci makes in a quarter). Again; this could be an interesting way to acquire a number of brands and annex Kering. Margiela, in particular, shares some of the same “DNA” as Balenciaga. Likelyhood: five tin foil hats out of ten.

Are any of these options likely?

Short answer — I don’t really think so, but stranger things have happened! OTB is more likely than Prada (less spenny) but as I wrote before — egos be egoing. Luxury these days is completely in two camps — there are the ultra-high quality operators (i.e Hermes, Brunello). There is LVMH, which stands as the Deathstar of fashion — it simply is in another category — so much so that LVMH accounted for 4% of France’s total exports last year — that is more than all the cheese and wine exported in France combined. Combined. And then there is everyone else.

The small fashion houses need to compete against LVMH. LVMH is so much bigger in scale that, to me, the best option seems to consolidate. If you are a small house like Ferragamo you are competing against companies that are orders of magnitude bigger than you. If I were one of the smaller houses, I would be eyeing up Arnault, wondering how I could compete against his machine. Scale can help.

On the other hand — I do think it is likely that Kering’s “smaller” houses become increasingly more important. It will take a while for Gucci to find its footing again. And I do think Kering is an interesting proposition at 13x earnings, versus LVMH’s 24x. If you think the company could re-rate to a higher multiple then it is perhaps an interesting stock to buy — even re-rating from 13x to 18x represents +38% upside.

Global Model Portfolio changes

CYTD — +9.25%1. Best performing position — Hipgnosis — +65%

Sorry, you have to pay for this part — upgrade for less than the price of some avocado toast so I can buy a Lear jet…

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