Gucci’s Wardrobe Shakeout

Kering’s decision is all about improving its valuation.

Investors are taking it like a fashion faux-pas.

Rather than find a buyer willing to pay a premium for its stake, French luxury group Kering plans to distribute 70 percent of its holding in Puma SE to its own shareholders. That sent the German sportswear company’s stock down the most in almost 17 years on Friday. The French luxury firm’s own shares slipped as much as 2.4 percent.

Investors should get over their disappointment. It’s a well-timed move that should help Kering to attract a premium valuation as a pure luxury brand. It should also provide some defense for when Gucci’s phenomenal growth begins to slow.

Puma’s performance has been improving, thanks in part to growing demand for athleisure — sportswear worn outside the gym. With the stock up 38 percent in the past year, now is an opportune moment to realize value.

Kering appears to take the view that avoiding disruption to Puma’s business is more valuable than an immediate monetary gain — something that suggests that Puma’s rebound will continue. If that happens, Kering still stands to gain from the 16 percent stake in the company it plans to keep.

The French luxury group’s own sales — and share price — have enjoyed phenomenal growth over the past 18 months, thanks to the revival of Gucci, which has been nothing short of miraculous.

But that’s likely to moderate over the coming quarters. The mania for its branded loafers and floral blouses is cooling, and the year-on-year comparisons are getting tougher. John Guy, analyst at Mainfirst, estimates Gucci’s organic sales growth will be about 15 percent in 2018. That’s impressive, but short of the 49 percent seen in the third quarter of 2017.

The Puma deal helps. By removing a lower-margin business, Kering should be able to lift its own profitability: group operating margin was 16.9 percent in the first half of 2017, well below the luxury division’s 24.9 percent.

Kering, which also owns brands like Stella McCartney and Saint Laurent, will also become a purely luxury group. That should lift its price-earnings multiple closer to that of Hermes International, one of the more highly-rated stocks in Bloomberg Intelligence’s luxury peer group.

There will be a cost: Puma accounted for 27.2 percent of Kering’s sales in the first half of 2017, but just 9 percent of recurring operating profit. But those reductions should be offset by the margin gain and re-rating.

Kering’s fortunes will be determined by Gucci’s success. By chucking the trainers, the luxury group is preparing to soften the blow when the shine finally comes off the loafers.

Originally brought to you by Bloomberg.