Kering: It’s Gucci - [Business Breakdowns, EP.199]
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This is Matt Russell, and today we are breaking down the global luxury group, Kering. You know Kering from their brands, Gucci, YSL, Bottega Veneta, Balenciaga, and the list keeps going. It's a luxury house with similarities to what you know from LVMH. But LVMH over the past five years is up over 40%, and Kering is down over 60%. To break down Kering, I was joined by Jonathan Eng, Portfolio Manager at Causeway.

John has spent over 30 years in the investment space, and he has seen his fair share of cycles for a company like Kering, which made this a fun and timely breakdown. We covered the Pinot family, the owners and operators of Kering. We got into wholesale distribution versus retail distribution and the margin profile of brands and the various levers that you can pull. But Kering's core brand, Gucci, is different than a lot of what you see in luxury.

And we spent a significant amount of time diving in there. What makes Gucci more cyclical than understated luxury? Where do we stand with Gucci today? And how does John think about all of this as an investor tapping into his historical context in the space? It was a very fun conversation. It's a very timely conversation.

So please enjoy this breakdown of caring. All right, John, I am excited to have you here to talk about caring.

It's one of these names where I think LVMH gets all of the attention in terms of the mainstream luxury houses that the market has studied and known so well. And this one kind of sits in the shadows a little bit. So maybe we could just start with an outline of the brands that sit underneath this umbrella and a little bit about the umbrella today.

Well, thanks, Matt. It's a real pleasure to talk about Caring today. Like you said, it has been in the shadows and there's been a bit of a quiet rivalry going on for a long time. Caring is a luxury goods company. It's got a number of brands, 15 or 16 brands now. The biggest one is Gucci. A position was started by Caring in 1999 and it steadily bought that up to a full position in 2001. And they've got some other brands like YSL, Yves Saint Laurent.

They've got Bottega Veneta, Balenciaga, and they've gone through some advertising challenges. They've got Eyewear, they've got Alexander McQueen, and now they've just started a beauty business. When you've got a number of brands like that, you could add beauty to a number of these brands. And I think that's a real opportunity for them in the next five to 10 years. You mentioned Gucci there.

I know it is the name that's most associated with the business. Does it represent a large percentage of whether it's revenues, profits, however you want to measure it? Is it really the dominating brand within the portfolio? It is right now. It's almost 50% of revenues and it's over 50% of profits. When I compare it to LV, it's got a bit more fashion to it. So LV has a lot more leather. It's a little more stable as a business. And if I look at

Gucci, its popularity comes in and out depending on how well its fashion does. It's about half leather and the other half is ready to wear and shoes. So

When someone like Alexander McKellie comes in and he does really well, then you see Gucci do very well. The multiple goes up and people start to talk about it kind of in line with the LVs of the world. You see it today where it's struggling a bit. They've changed designers. They want the design to be a little more quiet. You talk about this discreet luxury. It's been a very popular theme in luxury. Kering has hired for Gucci Sabato Di Sarno.

He's the new designer and he came from Valentino and they are now updating all of their designs, bags, shoes. We'll see what he does, but it's been a challenging time for them. So it's a good time to talk about it. You were tapping into some of the things that stood out to me just in terms of thinking about Gucci relative to some of those LVMH brands. Before we get

too far into the business today, I don't want to overlook the past. There's the family associated with LVMH. What is the backstory with Caring in terms of whether...

family operation, what other dynamics would you point to just in terms of the history? If I look at Caring, it was an eclectic set of businesses. Back in the 80s and 90s, they were in the timber business. They were in some distribution businesses. Very regional, very European. I think maybe 40% to 50% of their business overall, they had 22 billion in revenues, was European-related. When the father gave control to Francois Henry,

I think he looked at the portfolio and said, we've maxed out on what we can do in some of these distribution business. The electronic retailing, furniture retailing, they had construction goods retailing. So a lot of these businesses, given they were more local, they couldn't benefit from the expansion globally in international markets. And so-

There was a takeover attempt by LV in 1999 to take over Gucci. Needing a white knight, the CEO and the Gucci family came to Caring and they took a stake. And over the next two years, they won out and took over Gucci. So that was their first foray. And over time, they bought some other brands, Bottega Veneta, Balenciaga, YSL,

probably in a pretty quick period of time, three to five years. And they disposed of many businesses. They got rid of Conforama, Rexel, some of the electronic retailing in France, and then finally Puma. That was the final disposal. Since then, they've done a great job of scaling up a lot of these businesses. That's a challenge in itself in luxury.

With the Gucci acquisition, it was one that, as I read a bit about it, was particularly fascinating. But the idea of them being a white knight relative to LV at the time, would you say that they have a different approach or more brand friendly? LVMH certainly has some stereotypes that can be associated with it in terms of what they do when they take over brands. Would you say there's a large contrast in terms of what Kering is known for?

I think for Caring, they've done a really good job scaling the business.

Caring is a bit bigger, but if I look at businesses like Bottega Veneta when they took over, a lot of it is wholesale. It's a business, let's say, with 50 to 100 million. Putting that business into a company like a caring with different brands is a big advantage because you start out when you're smaller like that, more wholesale, and then you can transition as you get bigger to more retail. You might start out

70%, 80% wholesale. And then by the time you get bigger to the size, let's say with Gucci or even Bottega these days, you're 70%, 80% retail. And developing that is a lot tougher as your own company. Having the expertise of a multi-brand strategy really helps. Something like Caring, they can help you out with what type of store, what size store, how many pieces you need, all the backend stuff, all the logistics, all the IT, everything

helping you get a CEO, putting that someone in place, CEO and creator.

being on the same page strategically, developing the brand. It's a real challenge getting a luxury brand to a certain level and then taking it to the next level. That's what Caring is really good at. LV is really good too, by the way, and they've done it with many different areas. So I'm not going to dismiss anything that LV has done. If I look at Caring and what they've done with Gucci, Yves Saint Laurent, Bottega Veneta, that's their strength is really being able to scale up businesses and

developed them over time. Bottega Veneta was 56 million. It's now 1.7 billion. And that's happened in 25 years. It's pretty good. Impressive. Do you think there are any sharp contrasts between the two approaches of LV and Caring? I think LV, they've got Sephora.

They've got luggage, a business now. They even have a hotel brand. And they've got champagnes and wine. So it's slightly different. If I look at Kering, it's got more ready to wear, a little less leather. LV, it's got a lot more leather to it. They've done a phenomenal job with Dior, and they've got a little challenge going forward given the pricing's gone up for them. But really the difference between the two is the different areas that LV is in.

That's outside the LV and Dior brands. When you look at carrying, you mentioned there's been some divestitures. You referenced some of the brands. When you think about what's left, you describe the brands. I associate them all with luxury brands and basically a shift away from Puma. I wouldn't put it in that category.

Is that a fair way to think about it as luxury is a term that can be argued in terms of what qualifies and it could be viewed as a very, very, very small percentage, but it certainly seems that has been the direction that they moved. Is that a fair classification? Absolutely. It's been going on for a number of years now and Puma was the final divestiture. Puma was a 10% margin business. Gucci over the last 20 years,

It's been a 30% to 40% margin business. It's a big difference from Puma, which is a 10% margin business. Luxury overall, it's a 70% gross margin business. On average, it's about a 30% operating margin. LV, it's probably a bit higher. And Hermes is a bit higher too.

Thinking about revenue fluctuations at a higher level, I think you referenced one of the things that I was most curious about, which is Gucci, I certainly associate with fashion to a larger extent. And I think you helped answer some of it with reference to leather being maybe less

pure fashion forward. But Kering's portfolio and its tie to macro dynamics, what would you say? Is it something that is cyclical with macro environments? They show defensiveness through periods where there still is this demand from the top 1%. What has that looked like over time?

They are cyclical businesses because if I look at global wealth, it's a cyclical situation. If I look at the year 2003 when there's recession, 2009 is the big one with the big downturn. During those periods of time, luxury goods stocks derated. I remember buying back in 2003, 2009, Richemont, which we're not talking about today, but they own Cartier and Van Cleef. During that period of time, it went to one times book.

That was a great buying opportunity. And as an investor, sometimes we'll use book values, PE multiples, price earnings multiples to figure out how to value these companies. When global growth is doing really well, when asset prices are going up, the top 1% are doing well. These are great businesses. They grow 9%.

organically, price and volume. There's operating leverage on top of that. It's a great business. But when you have the downturns, like in COVID 2009, they're difficult investments to have. They're great for about eight out of 10 years, and two out of 10, they're pretty tough. But last year was a difficult year. Actually, this year in 24 is a difficult year. This is the sixth worst year in luxury out of the last 20. Certainly coming off a high, high

just in terms of what was happening, maybe a reset to some extent. On the price and the volume points, whether you want to use the 9% as organic growth as a reference, or just how you would frame that equation, is there a general framework that you think about for year to year? What

price improvement drives in terms of revenue, and then obviously volume is going to fluctuate, but those two components together and how you think about them? I usually think about 3%, 4% price and maybe 3% to 4% volume. There's some mix in there as well. So sometimes you will discontinue some areas or when you introduce, you'll come in at a higher price that leads to higher revenues as well. So there's a mix of all three of those that are helping revenues grow. And would you say that's fairly standard across the industry?

Are there certain players that are way more aggressive on price relative to others? I think they've all been pretty consistent. During COVID was very unusual. There were much bigger price increases during COVID, more like 10%, 15%, 20% a year.

And that's starting to catch up with the industry a bit, particularly in the soft leather area where there's a lot more competition. We've seen the likes of Chanel, Dior, they've raised prices 50% over the last three, four years. It's a lot. And consumers are starting to notice. You want to have that balance where...

You don't want to have too much volume growth. You don't want to make your product so available. So you want to make it something where people connect with, but they understand that price going up is a store of value. Hey, if I don't buy it this year, it's going to be more expensive next year.

It doesn't come down. It's not like I go to wherever and I can buy something 50% off. This is not going to be 50% off. It's training the consumer a certain mindset. I don't know if Chanel had a PR campaign that drove all of those Bloomberg articles referencing the price of those bags and how it has been a successful investment over the years. It sure was an effective one, I think, historically, just in terms of creating that mindset that next year it's only going to be costlier. Definitely true.

On the margin side, you talked a bit about the differences that you would see versus a Puma and a Gucci. Can you talk about some of the moving parts? I can understand if you have a store footprint, there's going to be some operating leverage associated there. But what are some of the key cost drivers or key cost levers that are involved in this business? It's making the product and that's probably 30% of the cost there. And you can see the gross margins are near 70%. So it's a very...

profitable business by itself, but there's a lot of support there. Obviously, you mentioned the store network. There's a bit of a wholesale network and salespeople to deal with. And that's a big part of the cost base. The other part is advertising and promotion. A lot of times you'll see it in the magazines that you see, the billboards, you'll see the name and they will get you as a consumer on your mind at the right points in time. You're out on wherever, on vacation and leisure and

you're playing golf, you'll see these sort of things. You'll see the names. And people's the other one.

There's a lot of people. There's a lot of creativity. And with creativity comes a lot of costs. So those are the three real buckets. When you see operating leverage in the business, thinking about these costs as a percentage of revenue, the store footprint, the real estate cost, that's going to be largely flat. So you're going to see operating leverage there. But with the others, do you see operating leverage on top of the advertising or are they just pumping that back into the business?

We've seen some brands do that, where they get to a certain level in operating margin, and they've said to us, you're not going to see any more operating leverage. We're going to reinvest it back in the business. We might open new stores. We might advertise some more. Some managements take a longer-term view, and they say, no, we're going to reinvest that back into the business. So there is a limit to how far that will go.

Now that they've divested Puma, which sounds like it was the lowest margin business within the portfolio, how much variability is there in the margin profiles of the various brands? And maybe just focus on, obviously, Gucci being the largest. You shared some of the dynamics there. But relative to some of the other bigger brands, is there drastic differences in terms of margin profile? With size comes better scale. So Gucci had higher margins. They have more fashion as well. So if I looked under...

Alessandro Michelli, when Gucci got to a 10 billion revenue business, operating margins hit 40%.

That was one year. When they were in that range, $8 to $10 billion, they were operating in that 35% to 40% margin area. Today, they're a $7.5 billion business. Obviously, that's why we're talking about it. It's so interesting where it is. And it's just over 20% margin. To answer your question, there's a lot of variability in their business. That's why historically, they've sold at a discount to LV because investors have looked at them and said, oh, I

I think there's more variability in your business. The last couple of years is a good indication of that because revenues have declined as there's been a design change and luxury has been tougher. So you've seen consumers say, "You know what? I'm going to pull back a bit. I'm going to buy a little bit less, but I'm only going to buy the really, really top brands or the brands that I really, really love."

Gucci has more aspirational as well. Those consumers were having a tougher time too this year and last year due to higher interest rates, and they've pulled back. And so you've seen operational gearing in reverse, basically. So you kept the cost base, you've reinvested back in the brand, maybe you've cut some wholesale back, but when revenues decline 25%, profits are down 50%. And that's basically what's happened at Gucci, but that's why it's so interesting. With the creative director...

You've had these icons, Tom Ford in the 90s, some of the names you've mentioned recently, and they feel so important. Most investors think about, you see a management team change, you might see the CEO or a CFO. This feels like one of the most relevant roles within a corporation that's not the CEO title. How do you just approach that as an investor? And when you see change, how do you get comfortable around what the new person is going to bring in?

A lot of times when we have a CEO change at a company, a normal company, we'll do a lot of background work on what have they done in the past. It's a good thing to look at someone's resume. Same thing is with a designer as well. Sabato was at Valentino, taking a look at what he has designed, his vision, asking yourself as an investor, is the customer base willing to change and go in that direction? I think that's a really important point because so far the answer has been not yet, to be

To be fair though, his designs are just coming out in the last three months. So a lot of leather bags are coming out in September. But as an investor, you're doing a lot of work around what do you do at Valentino? What did those sales look like? What do those margins look like? Was that a successful company? Can that be transferred over to Gucci, which is a little more fashion oriented in the past when it did well under Tom Ford and McKellie? Can that happen this time? That's really what we asked ourselves.

When it comes to something like this, I think you've referenced the difference versus traditional leather, something that's more timeless in design versus something that's fashion oriented. What does get you comfortable in terms of the direction and confidence that there is going to be

And this can span into the brand's impact on shaping fashion culture. So actually being the leader and telling people what they want to wear and how they want to dress. The easy way out would be, let's pick something timeless. There's going to be less variance in there. But I'm sure that's not the answer. We do a lot of work on Instagram following the strength of the brand on certain surveys like lists in the US and how certain brands are doing. I think it's important to look at those interwebs

indicators. You want to understand, okay, how is it going? Is it being well-received? Sometimes we'll talk to the stores. Obviously, we look at the Instagram following. We'll look at the likes. We'll try to understand how that brand is developing.

It's always dark at the bottom. You never have complete confidence. When it's at the top, everything is clear. There's never been a more bullish picture than when things are at the top. But at the bottom, things are pretty dark. It's like picking up a newspaper in the crash of 1929 and trying to find good news. That's what you're trying to do when you're looking at caring right now is, hmm, it's pretty dark.

People are telling me it's bad. Is it really that bad? Let me try to find some good news. That's what our analysts are trying to do. When we talk to the company, we talk to competitors, when we're looking for doing our researches, try to find that good news that gives you confidence to make this a big position and invest for two, three, four years. That's what we've done with Names in the Past.

And it certainly helps when a brand or brands have the history that these brands do. It is not something that is a pure flash in the pan from that sense. So there's something certainly to stick to with that IP. And I'm sure that drives a lot of confidence. You mentioned some of the things that you're monitoring, which 10, 20 years ago, not monitoring Instagram likes. So just how much has that changed in terms of having a feel or grasp on this market and

in your day to day as there has been a shift in terms of what's driving culture, technology, all these different dynamics? Has it drastically changed the investment process or maybe just the analytical process from that sense?

I think it's changed the analytical process. Decisions are still decisions. But today, there's a lot more data available. You have credit card data. We have Instagram likes. We have all this different information available to us as investors, all public knowledge. Why not use it to your advantage? The world has become more global too. 20 years ago, the Japanese were the big buyers of luxury. Obviously, the Europeans were too. The Chinese were very small.

Maybe the last 10 years, they've become a much bigger part of the industry. They were probably almost 50% of growth. The last 10 or 15 years, now it's down. The last few years, it's only down to 10% of growth. The Americans now have become a much bigger part of the luxury industry or luxury buying group. They are a third of wealth, but they buy 20, 25% of luxury products. So they underspend actually. Pretty interesting. The Chinese actually overspend.

They're probably in the 25% of wealth. Their wealth's come down the last few years, but they spend 35%.

That's why there has been so much focus on China, what's happening there. Investors are using this sort of data that we talked about. Do you have a preference in terms of those demographics, liking to see more exposure to certain regions? I'm sure that some type of diversity and spend would ultimately be the best. But if we were to put the North American customer relative to the Chinese customer, would you have a preference to see more growth from one specific subset?

revenue is revenue at the end of the day. Obviously, you'd like to have it balanced because you have a store base that you need to support. So you wouldn't want to have it 90-10. But as long as it's balanced is the answer. Thinking about the supply chain and the manufacturing process, more of the upstream inputs in terms of logistics, is there anything unique to what they're doing? You hear about the history of these brands and how it originally started. But over the years, thinking about that, is

Is there anything that stands out about the process at Kering? Well, I know at Kering, it could be this way at other luxury companies, but they've got development centers in Europe where they have a development center on leather. They have a development center on ready-to-wear. And so if a particular brand says, hey, I've got this idea in ready-to-wear, they can have it developed at their development center in Europe. This one, I believe, is in Italy. Right.

The development center will help them design, source the materials, and where to distribute it. It's a big advantage to be part of something like Caring. You can take a design concept and make it a reality a lot faster and a lot easier with these development centers.

It sounds like there is some centralized infrastructure that is available to these brands. Is most of the actual decision making on product and what's released still decentralized at the brand level?

It is. I think what you want to have is the CEO of a brand and the designer to be in concert with one another strategically. And you want the CEO to figure out and to implement that strategy, but you want the designer to design. You want them to do what they're really good at. I think that will always be local. I think it will always be decentralized.

And then on the downstream supply chain logistics distribution, really, you mentioned wholesale versus retail exposure. What does the difference look like just in terms of wholesale margin versus a mature retail operation? How drastic of a cut are you getting when it comes to wholesale? And what would the other factors be? It sounds like a balance is okay to have, but I sense that there's more opportunity when it comes to operating your own retail locations.

Well, you have more control over pricing and more control over product, and you have more control over the inventory. So you know when something is sold and you can replenish it or maybe not replenish it. Whereas in wholesale, you're selling and you don't have that visibility. The margins are good. I don't think there's a huge difference. There might be some.

but you don't have control over pricing. So when things are not selling well, there will be some degradation in the margin. So really it's about control and having the relationship with the consumer. And I think that's what luxury brands are trying to do these days is having that connection. Who are my consumers? What do they want? And I think when you're selling wholesale, which is fine when you're smaller, you don't have that connection as well. You don't know what the consumer really wants. You're

You do, but you don't get firsthand exactly what the consumer is looking for. The control point makes a lot of sense, particularly on pricing. As I think about it and clearance racks and seeing certain brands, it can tarnish things and then not having somebody who's going to tell you the story of that brand and delivering that message. And there are certainly great distribution channels in terms of smaller brands. But as you mentioned that, it starts to register a bit more. Great point about the salespeople, by the way, because they're representing the brand that

they have training, they can sell and help you fulfill that product. Whether it's a specific playbook when it comes to taking over a new business and hitting certain targets, or just in general, having a philosophy around retail versus wholesale targets, is there a deliberate strategy in terms of what that right balance is? When you're small, it's more 70, 80% wholesale. And as you get bigger to the size that the brands that we talked about

over a billion, you're really thinking 80% retail, 20% wholesale. There's a big switch. It's a big investment to make when you go from 80% wholesale to 80% retail. There's a big switch in terms of capital invested. When the company's doing that, are they doing some of these shifts at the same time where there's store build-outs? I'm not sure each one of those comes with

various challenges or as you mentioned, just a large capital expenditure program is something to get investors' attention. So when you look back over history, have there been examples that you can point to in terms of how long it typically takes and how often they're doing this with different brands? A lot of times a company like Caring or LV, they might locate the stores right near one another. So if LV is there, you might see Dior nearby. They might negotiate the rents together.

It's really important for corporate to understand what's the great location, what size store to put up. Is it supposed to be 2,000 square feet, 3,000 square feet? Do we have enough product to fill 3,000 square feet? Because if we rent 3,000 and we only have product for 1,500, we're in big trouble.

understanding the location, which is really important because that sends a big message, what size store, what product to put in there, what type of consumer we're going to get, and then co-locating a lot of these stores together, negotiating a better rent is also possible as well. So when you're just one brand, you want one location. When you're five brands, maybe you want five locations. That's a little more attractive in terms of the rental expense. I mentioned the

geographical exposure before just at the highest level. But for brands specifically, do you see a lot of preference, preference

for specific brands in specific regions. And where I'm going here is Bottega Veneta maybe has large exposure in Europe more so than in the US, whereas Gucci has outsized exposure in the US, just thinking hypothetically. But is that something common that you see with these brands where there's specific geographical domination within the brand specifically?

I think what you'll see sometime is a brand will have a better name actually in a specific region than it would, let's say, in another region. I think that's maybe through some historical presence. But if I look at the different brands, they're all positioned differently. I think that's important to understand within caring is that Gucci's position is different.

positioned differently than Balenciaga and different than YSL and Bottega Veneta. So they will have different geographic presence, to be fair, but it doesn't vary that much. But there are some like Bottega Veneta

is a little stronger in Europe and in Asia as well. As you mentioned, the stores being next to one another, it's something that made me realize going through certain shopping malls, I would see these brands that I wasn't familiar with before. Bottega Veneta was one of those many years ago. I started to wonder to myself, and my suspicion was that it was popular in Europe and maybe it was making a bigger splash in the US. But I think I'm connecting the dots at this moment. Balenciaga was a story that got

A lot of attention, very misguided ad campaign fallout from that. I associate many luxury brands with having this almost safe advertising strategy. This would not be categorized in the safe category, maybe because it was more fashion forward. How do you think about the fallout and just the brand value, the reputation of a brand and thinking about the risks associated with that? Because I think that one is fairly good use case for what can happen.

It's a great case and it's a very unfortunate case what happened. But I think it's really important to understand that caring is a multi-brand strategy. So when something like that happens at Balenciaga, it doesn't hurt the whole company. Obviously, it's hurt the brand. Same thing would happen with VW with the diesel crisis. VW has Audi, Porsche. They have other brands that they can support. Same thing with caring. But it's hurt. It's been very detrimental for Balenciaga, particularly in the US.

where sales really declined quite a bit and it's still struggling a bit. It's still having an effect because people remember

People have long memories. I know people who have Balenciaga goods or products and they are loathe to wear those products sometimes because the message it may send out. So brands really need to be careful what they say to the consumer and the message they say. Because when you make a mistake like this, it hurts for quite a while. We're still talking about it two, three years on. It's very detrimental.

Is this something where you could see a divestiture at some point? How do you think about it within the portfolio and getting past the point of whether it bounces back, whether things get cleaned up, or if it's that detrimental that it could ultimately destroy a brand?

I don't see a divestiture. I think they will trade through it. I think it's something where a big mistake was made. Obviously, they've corrected that. They have a lot of measures in place now. And they're moving forward with their design.

and their message, but I don't see them disposing it. The business is still doing okay outside the US. It's one where the damage control and the repair has to occur mostly in the US, I would say. Interesting dynamic, that specific geographic point. It feels like a campaign that could do that much damage, and then I would counter that with how much upside could you get out of a great campaign? How do you think about that

from the investor side of things, would you prefer if it was a little bit safer when it comes to something like that? It is thinking in the world of upside downside risk, just a very interesting case study to your point.

It is a little more edgy, a little more urban style. So the message is a bit edgier. If I look at LV, there's nothing wrong with having a bag strewn over a shoulder on a boat or on a dock or something looking relaxed. There's nothing wrong with that picture. Actually, it sells very well. I see someone like LV a little more of a conservative message and the product placement is perfect. Usually they pick someone who is very popular and has

has a great following. I don't think that formula is going to change. I think for brands that are a little more fashion, they will be a little edgier in terms of their message because that's the consumer that they're trying to attract. It really depends on what type of product you have and what type of consumer you're trying to attract.

On the portfolio side of things, you have LV, you have Caring. These are acquisitive businesses, at least when there are opportunities to acquire. How do you view the M&A landscape for Caring operations?

over the next three years. Do you expect that there's acquisitions out there for them to make? Is that something that you get excited about in terms of being a future growth engine? Well, they own 30% of Valentino and they have a put or call option to buy the rest in the next few years. So that's possible. Their balance sheet's a bit stretched. It's three times that EBITDA right now. And I think

For investors, that's hitting the limits and they've been quite acquisitive. They've bought Creed recently. They bought Eyewear. They bought this 30% stake in Valentino. I don't see them making a lot of acquisitions outside of this 70% stake that they may buy in Valentino. I see them disposing of some of the real estate that they bought, maybe selling a minority position in some of the retail stores they bought. I think one was in New York, one was in Italy, and one was in Paris.

They've bought some great locations to defend their retail sites. And so they'll keep at least 50% of that, but I see that disposing of that. But I don't see them making a lot of acquisitions. I think they have the portfolio they have for the next five years. On the real estate point, would that just be sale lease back transaction or an outright sale that could be split up in terms of many different partners? They bought the whole retail site. Obviously, it was pretty expensive. I think there were

somewhere over a billion euros each. And what they'll do is they'll sell a 49.9% stake. I don't know exactly what the numbers are making that up. It could be 40, something where they have control over that property. I think it's really important as a brand to have control over that site. So you don't want to have your moving the sites and losing that location that customers are so comfortable with really.

Interesting to think about from the real estate investor perspective. The Valentino 30% stake, the option to buy in the future, it does feel like there is this common theme with luxury brands. You go back to the Gucci acquisition, LV did have the stake in Gucci, and you see this building over time. What do you think drives that relative to just the outright purchase of a brand? It feels like there are various steps along the way that come when it comes to luxury. Part of it's the price. Well,

A lot of these are at four-time sales, five-time sales. They're not cheap. And I think there's almost like a dating process before you get married. You're kind of feeling each other out to see if it works. What happens here? What is going on with inside the company? Could we make these changes? Would this work if we did that? Somebody like Kering or LV would want to find out culture-wise, would this work? I think buying a 30% stake, 40% stake is a good way of just seeing if it works. Letting them know that you're there, for sure. Exactly. Exactly.

No, it's a very interesting dynamic and what it leads to in terms of sometimes that relationship not developing further or sometimes it does, but it's fascinating to see. The last thing I wanted to ask, I couldn't get a great picture of this, was the ownership in Christie's. Does that sit under the Caring umbrella or is it outside of the Caring umbrella? It's outside. It sits in Artemis, which is the family-owned company. And so that sits outside of

the Caring Group. So that's owned by the Pinot family. Do you have any sense of why they decided to go that route versus putting it into the business? Christie's doesn't really fit within the luxury brands. It doesn't have the synergistic development that Christie's would have. There's no development of a product. It's really a service. And it doesn't really fit within the Caring Group. It doesn't gain the synergies of

retail site or having these development centers and ready to wear and leather, it's harder to justify the synergies. And I think that's why it sits in Artemis and not within caring. On the valuation point, which I think you've given a few different frameworks for thinking about it, whether it's price to book, price to earnings, price to sales, how do you generally approach it for caring? And you could talk through the cycles, you can give various different ways of thinking about it. But what is your approach?

Price earnings multiple is always the best. I think right now, if you look at Caring, I think it's on 18 times earnings one year forward. That is close to where it should sit valuation-wise. The interesting thing about Caring is that Gucci and a lot of its brands right now are under-earning. If I look at Gucci, 20 years, it's a 30% to 40% margin business. When it was $4 billion, it was $30. When it was $10 billion, it was $40. And today, it's $20. So when I say it's on 18 times...

If we were to plug in 30% operating margin for Gucci on a seven and a half, eight billion revenue business, you get the P multiple down less than 10 times. We all know that's the wrong multiple in a market that's at least 12 to 13, 14 times earnings. That's a good way of looking at carrying it because some of the other brands are also under earning because they're struggling YSL as well.

Lensailier we talked about as well. So those brands are under-earning as well, but Gucci is the big one. And if you can buy this under 10 times earnings one year forward, that's pretty attractive. EV sales is also a good one because the enterprise value to sales includes the debt that's on the balance sheet.

Right now, it's near 2.5 times, which is extremely low. LV is on four times, which is low for them too. They've come down quite a bit. The sector is even higher actually, because Hermes is on such a high multiple, but carrying it's on a 50% to 60% discount on an EV to sales basis. I think that's also a big discount to historical valuations as well. The other thing I look at is private market value in this case too, because we talked about Valentino being bought for four times sales.

A lot of transactions have occurred four to five times sales in the past. And if I look at Gucci, seven and a half, eight billion of revenues.

at least four times sales, I believe, given that was 34% margin. That's almost the market cap today. Obviously, there's some debt that has some property, but there are other brands as well. So you're getting a lot of the other brands and those other brands account for almost 50% of revenue. You get those for free, pretty much. As an investor, you like to triangulate and look at different methods. But when you come to the same answer like we do with caring these days, and the stock is down from 800 to almost 200,

then you get more comfort. As an investor, that's what you're looking at to try to get comfort. Because as we mentioned before, when it's at the bottom, it's dark. So you want to be able to look at things where you say, that makes me comfortable. One, the valuation makes me comfortable. Okay, some of the data I'm looking here, that makes me comfortable. The management, what they've done, that makes me comfortable. Gucci, sales are down 25%. That's not good the last year or two. But over 10 years from...

1994 to 2004 when Tom Fover there was up eight times. McKellie was up two and a half times. When you look at the business over time, it grows and it grows nicely. Obviously, the last two years have been very difficult. It's very interesting and it's a show me story in terms of you're not banking on some multiple expansion necessarily. They can earn their way into stock outperformance. It feels like the market might be trying to imply that

The margin degradation is something that's not cyclical at this moment, in theory. I'm sure these things have that cyclicality. But has this margin compression lasted for longer than when you've seen it historically?

No, usually it just lasts for a couple of years, two, three years. That would be the most. And we've asked the company to protect the balance sheet now. Okay, you've done a good job of changing the designer. Okay, I know you're investing in the business. That's fine. But at some point, you need to protect the income statement. Maybe some costs need to be cut. Some stores need to be shuttered. You're not a 10 billion euro business anymore in Gucci. You're seven and a half.

Some of the costs need to come down to protect the balance sheet. And so I think it's really important as a shareholder to converse with the management team and share your opinions. And I think it's one of the benefits of being a big shareholder is you get to have these conversations.

So you might be the one mentioning cool it on the M&A for a little while, protect the balance sheet as well. That would also be me too. On capital allocation broadly, it sounds like there's going to be real estate sales that would go towards debt pay down, I assume. When you think about the general function of capital allocation and the different priorities that they have, what would you point to historically or dividends or buybacks ever a theme for caring? Dividends are a big one. There's

As I mentioned before, it's family controlled. And we mentioned before that Artemis, they own Christie's, just bought CAA.

And that takes money. Dividends are a big focus for family-owned companies typically, and that's definitely the case with Caring. Obviously, they've made some acquisitions, they've bought some real estate. It's still a very cash-generative business at the end of the day. There's not huge amounts of CapEx normally. I see Caring having a good dividend payout ratio, 40% to 50%, because the family's going to want that cash.

we've discussed risks in terms of what has happened to the business, that being a risk, that execution and seeing that margin compression is always going to be there. Is there anything you don't think we mentioned on the risk side of things that stands out to you? I always think the operational gearing of businesses, both on the upside and downside, is really important to understand. And it's misunderstood by a lot of investors. And it's underestimated a lot of times on the way up and on the way down. It's something we try to

look at historically, but it's one where I'm always in disbelief when it occurs. This time was a big one.

Very well said. I completely agree with you. And it continues to surprise you, even if you do appreciate it. So I love that point. This has been an excellent conversation. I was very intrigued by the business as I was researching on it. And you filled in a lot of the blanks for me. And your overall framework for thinking about this business was excellent. What would you point to just in terms of the key lessons that stand out from studying caring that you think could be potentially applied elsewhere as an investor?

Understanding that change takes time. When I look at Caring, they did so well under McKellie, the designer, that they became a 10 billion euro business. And I got to a 40% margin business. I think what happened was the popularity started to decline. The product may have been a bit too narrow. Making a change at the designer level and even at the CEO level takes time. Management change, designer change takes time. It takes time to...

change that product line, if I were to take a lesson from all this in myself, and that is just understanding how long it's taking to get new product in the store. Investors are saying, oh, the product's not working. Oh, the margins are down. It's not going to work.

But it takes time. The product is just getting in the store and it's almost two years later. It takes time to get there. That would be the big lesson for me is be patient. I love it. Thank you, John. This has been an excellent conversation. I've enjoyed it very much. I appreciate you sharing the knowledge. Thank you, Matt. Appreciate it. Thanks for having me on.

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