RBC downgrades Kering, but still sees solid potential

Investing.com - The stock of the French luxury group Kering (LON:0IIH) SA (EPA:PRTP) plummeted last week, continuing the downward trend of recent months, and closed at €236.25 on Friday, the lowest level since April 2017, as more and more analysts downgrade their recommendations on the stock.

Today, it is RBC Capital Markets' turn to downgrade Kering, moving it from “outperform” to “sector perform,” with the target price reduced to €290 from the previous €310. This still represents an upside potential of 22.7% compared to Friday’s closing price.

To justify this more pessimistic outlook, RBC analysts highlighted that the luxury market is showing signs of slowing down, which could particularly affect Gucci. As the brand is in transition toward a new design aesthetic, it currently straddles its old and new product mix, complicating its performance.

The timing for a sales rebound is thus extended, with forecasts predicting a return to positive growth only from the second half of 2025 onwards. Consequently, RBC has revised its earnings forecasts downward for 2025, with EPS estimates 7% lower than the consensus forecasts.

The RBC report also indicates that Gucci's revenue trends should remain negative until the third quarter of 2025, due to declining demand for luxury goods and the delayed effect of integrating new products. This situation is likely to also put pressure on EBIT margins, which are expected to drop by 100 basis points in the first half of 2025, before a slight improvement towards the end of the year, according to RBC.

Analysts also estimated that Kering's revenues for the fiscal year 2024 should drop by 9.7%, with operating margins also under pressure. Conversely, a modest organic growth of 3.3% is expected for 2025, well below market expectations. RBC's revenue estimates for Gucci are thus 6% lower than the consensus forecasts for 2025.