Moussa Bawa DIARRA

Raphaël ACOSTA

Valentin PICAVET

Valerio BINI

Kering SA: Probing the Performance Gap with LVMH

1. How well is Kering performing relative to LVMH ?

Since 1999, Kering has engaged in a diversification and acquisition strategy that allowed a
serious growth in profits.
However, this growth is still far from its all-time mark-up competitor LVMH. To start with,
we could take the lower operating profits observed during 2005-2017 Pinault’s leadership
creating a lower stock price.

We have used this benchmarking with LVMH to assess Kering’s current and past (5-year
horizon) performance. This allows a comparison and helps us draw conclusions.  
We can see that Kering is clearly underperforming LVMH from a financial point of view. 
2. From (a) the financial data and (b) what we know about Kering’s businesses, can we
identify the sources of Kering’s inferior performance?

We are going to use the following ratios to identify the sources of Kering’s inferior
performance: 
ROA = Net income / Total Assets
Operating Margin
Asset Productivity
Ratio of Sales to Brand Value

The Return On Asset (ROA) ratio will enable us to measure how much profit the company
can make from its own assets, as the two companies’ assets aren’t comparable. It will make it
possible for us to compare Kering’s and LVMH’s profitability.
For LVMH, we have:
ROA = 5 129 / 68 550 =7.5%
For Kering, we have:
ROA = 1 685 / 25 577 = 6.6%

Analysis of the results:

First of all, we can see that Kering’s ROA is smaller, so it reflects both a lower operating
margin and lower rate of asset turnover. Kering has higher fixed asset turnover and higher
inventory turnover than LVMH, due to its higher levels of intangibles on its balance sheet.
Furthermore we can see that Kering has a lower ratio of sales to brand value, which explains
the fact that Kering’s brands are less effective in generating sales.
Then the operating margin of Kering is lower because of its higher ratio of “non-recurring
costs”. These are restructuring costs and brand impairment costs that are primarily a result of
write-downs resulting from Kering’s extensive restructuring as it has sold retailing companies
and acquired fashion and luxury companies

Let’s now disaggregate Kering’s performance by business sector and by geographic region:
 Disaggregation by business. Kering has two divisions: Luxury and Sport and Lifestyle.
The breakdown of revenues and profits for these two reveals distinctly different
performance, with Luxury having almost five times the operating margin of Sport and
Lifestyle
 In relation to Luxury alone, if we compare the operating margin of Kering’s Luxury
division with the weighted average for LVMH’s Fashion and Leather Goods,
Perfumes and Cosmetics, and Watches and Jewelry divisions, we find that Kering is
more profitable than LVMH!
 A geographical breakdown of the revenue sources of the two companies indicates that
regional differences are minor and cannot account for any differences in performance.
Kering is slightly more European-focused, but this is explained primarily by the
importance of Europe to its sales of Sport and Lifestyle products.
 In terms of Kering’s Luxury division, the stand-out performer is Gucci: its operating
income increased by 69% between 2016 and 2107.

3. What can Kering’s management do to close the gap with LVMH ?

According to the financial analysis, Kering is performing very well in the luxury and fashion
sector. Despite lacking the long experience of LVMH in this sector and having paid
substantial acquisition premiums to acquire leading brands, Kering’s performance in this
sector has been even higher than LVMH.
Kering’s inferior overall profitability as compared with LVMH can be attributed to 3 different
factors:
 The poor profitability of the Sport and Lifestyle Division, of which Puma constitutes
the dominant part
 Higher non-recurring costs which are associated with Kering’s restructuring and
accounting items arising from acquisitions and divestments
 What appears to be a more generous valuations of brands as compared to LVMH

Thus, talking about historical performance, the decision to spin-off Puma seems sound. In the
short term, this will result in a boost to Kering’s profitability. Moreover, the rise in Kering’s
share price also reflects investor’s beliefs that this is a sound decision. What about longer
term: are Puma and Kering better off as separate companies rather than a combined entity?
The extent to which there are synergies between fashion/luxury brands and sport/lifestyle
brands is an interesting topic of debate.

On the one hand, the proponents of divesting Puma argue that Puma is a poorly positioned
firm that is at a distinct competitive disadvantage to Nike and Adidas. In terms of sales, Puma
is a distant number three behind Nike and Adidas. This is a business where scale matters—
major economies of scale in R&D, advertising, and sponsorship. Moreover, managing luxury
brands such as Gucci is fundamentally different from managing sports brands such as Puma.
On the other hand, the opponents of the divestiture argue that Sportswear offers better growth
prospects than luxury and fashion—especially as China and other Asian countries become
increasingly obsessed with soccer and that there are considerable synergies between luxury
and sportswear. As fashion clothing becomes increasingly informal, the barrier between high
fashion and sportswear is becoming increasingly blurred. Last but not least, they believe that
there are important technological synergies between the two—fashion can increasingly
benefit from the technology-intensive materials and designs deployed in sportswear.