On Monday, Citi issued a downgrade for Kering (EPA:PRTP) SA (KER:FP) (OTC: PPRUY), shifting its stock rating from Buy to Neutral. The financial services company also adjusted Kering's price target to €264.00, a decrease from the previous target of €350.00. This revision reflects Citi's view on the increasing challenges faced by the luxury goods company in executing brand turnarounds.
Kering, known for its ownership of high-profile brands such as Gucci and Saint Laurent, has historically succeeded in revitalizing its brands. However, Citi analyst Thomas Chauvet notes that the process of transforming luxury brands has grown more intricate and costly, with a shift in consumer preferences towards established brands rather than those undergoing change. This trend, along with a commitment to greater investment and reduced cost flexibility, is expected to disrupt profits and sales.
The downgrade comes amid a backdrop of softening demand in Asia, excluding Japan, particularly in China, observed through the summer. Citi anticipates a sluggish recovery in sales and margins for Gucci and Saint Laurent in the coming year. As a result, Citi has revised Kering's financial forecasts, reducing the group's sales estimates by 4% for FY24E and by 8% for FY25E.
These adjustments have led to cuts in EBIT (earnings before interest and taxes) and EPS (earnings per share) projections by 5% and 9% for FY24E, and by a more significant 17% and 21% for FY25E, respectively.
The revised rating and price target indicate a more cautious outlook on Kering's near-term performance, as the company navigates a challenging luxury market landscape. The lowered financial estimates underscore the potential impact of the current market dynamics on Kering's profitability and growth trajectory.
In other recent news, Kering SA is facing significant challenges as several analyst firms have downgraded the company's stock and reduced their earnings estimates. Goldman Sachs moved Kering's stock from Neutral to Sell, citing concerns over reduced earnings visibility and potential operational challenges for Gucci, Kering's main brand.
Meanwhile, Jefferies adjusted its price target for Kering SA, predicting difficulties due to a weakening market in China and its impact on the luxury sector.
Barclays, RBC Capital, and UBS also downgraded Kering SA's stock. Barclays' downgrade was influenced by a steeper sales decline for Gucci in China compared to competitors.
RBC Capital's downgrade reflects concerns over a softening luxury goods market, with their earnings per share estimates for Kering in fiscal year 2025 being 7% below the consensus.
UBS revised its earnings per share projections downward due to the time and costs associated with Gucci's new strategy implementation and the impact of a slowdown in sector trends on Kering's brands.
These recent developments highlight the challenges Kering faces in repositioning Gucci and its other brands. The downgrades and earnings estimate reductions suggest a cautious outlook for the company's future performance.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Citi's downgrade of Kering SA. The company's revenue growth has been negative, with a 10.25% decline in the last twelve months as of Q2 2024, aligning with Citi's concerns about softening demand. This trend is further emphasized by the quarterly revenue growth of -11.02% in Q2 2024.
Despite these challenges, Kering maintains impressive gross profit margins of 75.37%, showcasing the company's ability to command premium pricing for its luxury goods. This strength is reflected in an InvestingPro Tip highlighting the company's "impressive gross profit margins."
Another InvestingPro Tip notes that Kering "pays a significant dividend to shareholders," with a current dividend yield of 6.28%. This could be seen as a positive factor for investors seeking income, especially given that the company has maintained dividend payments for 33 consecutive years.
However, the stock's recent performance has been concerning, with InvestingPro data showing a 24.74% price decline over the last three months and a 26.85% drop over the past six months. This aligns with Citi's more cautious stance on the company's near-term prospects.
For investors seeking a more comprehensive analysis, InvestingPro offers 9 additional tips for Kering SA, providing a deeper understanding of the company's financial health and market position.
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