* Stock is pricing in limited EBIT growth at Gucci long term
Our Buy case on Kering is predicated on a recovery at Gucci together with optionality on a Puma disposal. Last Friday Kering hosted an investor day where it laid out ambitious plans to build Gucci into a €6bn brand. This stems from a complete product revitalisation and a store refurbishment plan leading to a 50% uplift in sales densities. The speed of change to date has been remarkable with 75% of all core categories now repositioned. We believe that the current share price is attributing limited growth at Gucci long term most likely given the difficult trading backdrop in luxury and fashion risk. Our base case reflects 4% EBIT growth at Gucci p.a. with our upside case of €208 per share reflecting the long term targets to reach €6bn of sales and an EBIT margin >30%. We see the risk reward as skewed to the upside here and reiterate our Buy.
* Gucci aims to be a €6bn brand long term
The brand targets sales to grow 4%-6% p.a. medium term. Over 75% of the move from just under €4bn of revenue today is envisaged to be driven by a 50% uplift in sales densities. We were surprised that these have fallen as low as €2,000 sales per square foot (historically €3,000 we believe). The new product launches and store concept (>80% uplift in sales densities in some cases) so far set the scene for success here. E-commerce will also support the growth. We were encouraged that the core leather goods category is now 75% repositioned and our UBS Evidence Lab pricing database suggests that 39% of SKUs in handbags are now from five new lines.
* Cost control and capex in focus; we estimate EBIT margins could be >32%
Despite ambitious top line plans, there will be strict control of costs and capex with opex expected to grow <4%-6% and capex <5% of sales. The brand targets a return to 30% EBIT margin medium term and >30% long term. Our calculations suggest that should the sales density targets be achieved an EBIT margin of at least 32% is possible for the brand. We see guidance of flat gross margin as conservative.