Business Description: Kering group introduced its operation in 1963 and was recognised as one of the most evolved players in luxury products in 2018. Frederic Boucheron opened the first shop in Paris at “Galerie de Valois”, the company has earned an impeccable name and fame for their unique creation of luxurious “watches and jewellery” (kering.com, 2022). Mr “François-Henri Pinault” has been CEO of the company from 2005 to the current period. The company has currently 42811 employees currently working in it for the accomplishment of the “profit-maximation goal” of the firm. The present “market capitalisation” of the firm is $73.61 billion in 2021 with growth in sales and profit by 34.69 and 42.81% (marketwatch.com, 2022).
Products & Services: The company has focused on offering luxurious products of watches, jewellery and other leather products. The company has well-known for the production of jewellery and leather products like “Gucci, Bottega Veneta, Balenciaga, Saint Laurent, McQueen, Pomellato, Qeelin and Kering Eyewear” (kering.com, 2022). The company has focused on effectively managing the development in the Fashion industry by producing and offering superior designed luxurious products. The company has focused on promoting authentic, genuine and modern products to express its unique personality and approach in the fashion industry.
Key Assumptions:
Stage 1 Growth (annual): 20%
Stage 2 growth (annual): 6%
Ri (WACC-discount rate): 64%
Rm: 54% Rf: 1.08% inflation: 2.4%
Intrinsic Value (Buy/Sell):
Market Price: 606.84
Intrinsic Value: 716.74
Over/Under Value? Under value BUY/SELL? BUY
Limitations: The assumption related to growth rate can be unrealistic after the “outbreak of economic crisis” or natural disaster that can hamper the financial performance of the entity in future. The growth in EPS can be inaccurate this has created inaccuracy in the calculator of the “intrinsic value of the stocks” and shares of the firm. Furthermore, it has been identified that inaccuracy in discounting factors has hampered the amount of intrinsic value of the shares of the firm. The existence of “volatility in the stocks and return rate” has influenced and affected the expected or forecasted intrinsic value of the firm in future. Furthermore, the unrealistic or ineffective in the determination of Intrinsic value or future performance of the firm in the future The diversified value or nature of the growth rate has influenced the stock valuation frequency of the firm in the market.
Recommendation/Findings: Based on the entire analysis it has been evidently seen that the performance of the Company has been positive and it seems that the investment is going to be ideal. The earnings per share of the Company are also good market valuation is also seen to be ideal. The profitability of the entity is also good. The market performance of the entity can be reflected to be true and fair enough. As an investor, it can be seen that the stocks are performing well and are expected to grow in the upcoming time. Apart from that, it can be seen that it will provide a healthy return to the investor. The investment will be held to stay positive owing to the better ratios and comparison it is going to be financially stable. The stocks are ideal to be bought and sold in the market and it is expected to make the investor bring a higher return.
RATIOS
2017
2018
2019
2020
2021
Gross Profit Margin
56.56%
59.40%
59.70%
56.79%
60.23%
Net Profit Margin
15.99%
19.24%
13.66%
16.49%
17.90%
ROA
6.76%
12.31%
7.99%
7.71%
10.17%
D/E
0.34
0.32
0.64
0.61
0.49
Gross Profit Margin: (Gross profit/sales)*100, (6.12/10.82)*100 for 2017 The “GPM of Kering” was “56.56%, 59.40%, 59.70%, 56.79% and 60.23%” in 2017, 2018, 2019, 2020 and 2021. The continuous rise in “gross profit” earned by the company compared to the previous year has raised the GPM of the entity.
Net Profit Margin: (Net profit/ sales)*100, (1.73/10.82)*100 for 2017 The company’s “net profit margin (NPM)” has raised from 16.49% to 17.90% in 2021. The rise in net income from “$2.16 to $3.16 billion” has been the basic reason for the increase in the “NPM of the firm”.
ROA: (Net profit/ total assets) * 100, (1.73/25.58)*100 for 2017 ROA has reflected the return get by an entity compared to total assets held during a particular period (Ahmed et al. 2021). The “ROA of the Kering group” has increased to 10.17% in 2021 while the rate was 7.71% in 2020.
D/E: Debt/ Equity = (Long-term debt/ Total equity), 4.25/12.63 for 2017 The company has adopted financial stability approach to rely on equity more compared to capital. The company has introduced loan capital of 14%, 13%, 27%, 25% and 21% of total capital in “2017, 2018, 2019, 2020 and 2021”.
Financial Highlights:
2017
2018
2019
2020
2021
Amount (billion)
Amount (billion)
Amount (billion)
Amount (billion)
Amount (billion)
Sales
10.82
13.67
15.88
13.1
17.65
COGS
4.7
5.55
6.4
5.66
7.02
Gross Profit
6.12
8.12
9.48
7.44
10.63
Net Profit
1.73
2.63
2.17
2.16
3.16
DEBT
4.25
3.17
6.72
7.36
6.8
Total assets
25.58
21.37
27.15
28.01
31.07
Equity
12.63
10.06
10.44
12.04
13.74
2. Executive Summary
The report contains all the information about the economic analysis that is based on the identification of the variables such as GDP, rate of interest, inflations, and currencies. The implication of the economic approach for the prediction of the investment scenario has been outlined. The report contains all the information on the overall economic factors that are an integral part of the export and import performance of Keroing in the economic market. The overall financial overview that sheds light on the performance of the Kering group relative to the selection of the stock has been discussed in the report. The conduction of the SWOT analysis as well as the financial trend analysis of the entity in order to assess the internal and external environment has been done. The discussion about the various sources of funding has been done for meeting the adequate sources of capital and revenue expenses. The assessment of the risk analysis with the measurement of the WACC and CAPM has been done.
3. Economic analysis
a) Evaluation of the economy based on interest rates, GDP, currencies, and inflation
The contribution of “profit and non-profit” making firms towards society and the economy has been interpreted by the “economic analysis approach”.
“Component
Amount (Billions)
Percent %
Personal Consumption
316.689
10.7%
Goods & Services
60.0
2.0%
Investment
58.112
2.0%
Export
709.8912
24.0%
Import
334.24044
11.3%
Government Spending
1478.94
50.0%
Total GDP
2957.88
100.0%”
Table 1: Components contribution towards GDP of France
The above table has depicted the “GDP of France” and component that has contributed towards GDP during 2022. There are five specific components that have contributed towards GDP are “personal consumption, Goods & services”, “Investment, export, import and Government spending. The “government spending” towards GDP has been near 50% as reflected in the above table. The GDP of the company is $2957.88 billion in 2022 out of which 10.7% has gathered from personal consumption of the population in France (tradingeconomics.com, 2022).
Figure 1: France's Spending on GDP
The Economic authority of France has spent 61.42% of its total income towards economic growth and the GDP of the country. However, this has reduced to 59.05% in 2021 and 58.37% in 2022 (Statista, 2022).
Figure 2: Monthly inflation rate in France from 2018 to 2022
The “monthly inflation rate” of France from 2018 to 2022 has been outlined in the above figure. The inflation rate of the country has declined from 1.6% to 0.2% in 2020 and increased from 0.2% to 3.2% in 2021 while the rate was 6.5% in 2022 (Statista, 2022). The rise in the inflation rate has increased the interest rate and currency value of the country.
b) Impact of the above economic factors on the company
The decline in GDP has “reduced the currency value” of the country which has directly influenced the “export and import revenue” of Kering in the market. The decline in the “inflation rate” to 0.2% has reduced the price of the product produced by the firm which has reduced the “revenue of the company” to $13.1 billion from 15.88 billion in 2020.
Figure 3: Sales of Kering from 2017-2021
The above figure has depicted the revenue has increased from $13.1 billion to 17.65 billion in 2021 due to an “increase in the inflation rate” to 3.2% from 0.2% in 2021.
4. Financial Overview and Stock Selection
a) Background of Kering Group
Kering group introduced its operation in 1963 and was recognised as one of the most evolved players in luxury products in 2018. Frederic Boucheron opened the first shop in Paris at “Galerie de Valois”, the company has earned an impeccable name and fame for their unique creation of luxurious “watches and jewellery” (kering.com, 2022). Mr “François-Henri Pinault” has been CEO of the company from 2005 to the current period. The company has currently 42811 employees currently working in it for the accomplishment of the “profit-maximation goal” of the firm. The present “market capitalisation” of the firm is $73.61 billion in 2021 with growth in sales and profit by 34.69 and 42.81% (marketwatch.com, 2022).
Products: The company has focused on offering luxurious products of watches, jewellery and other leather products. The company has well-known for the production of jewellery and leather products like “Gucci, Bottega Veneta, Balenciaga, Saint Laurent, McQueen, Pomellato, Qeelin and Kering Eyewear” (kering.com, 2022). The company has focused on effectively managing the development in the Fashion industry by producing and offering superior designed luxurious products. The company has focused on promoting authentic, genuine and modern products to express its unique personality and approach in the fashion industry.
b) Financial trends of the company with SWOT and using ratios for interpretation
The trends in the financial performance and position of a firm have been ascertained or outlined by effective interpretation of its financial statements and growth rate. The “strength, weaknesses, opportunities and threats” of the company have been outlined by conducting a “SWOT analysis” of the selected firm.
SWOT analysis
Strengths
Weaknesses
? The authority of the Kering group has focused on an innovative approach to creating the superior design of luxurious products (kering.com, 2022). This has provided Quality products produced by the company. ? The company has adopted flexibility approach to ensemble “exceptional fashionable products” by implicating a “product segmentation strategy”.
? The company has avoided investigation into “tax evasion” which has hampered the reputation of the firm. ? The controversies related to a racist advertisement have outlined the brand weakness of the company (kering.com, 2022).
Opportunities
Threats
? The raised in revenue of the company has provided the opportunity for “product improvisation and product modification” in the firm. ? The enhancement approach of the authority to implement “e-commerce and online” activities has created “opportunities for growth and development”.
? The increase in the competitive environment in the luxurious fashion industry has created threats. ? The “diversified political environment” has created threats to the “customer satisfaction” of the firm.
Table 2: SWOT analysis
The above table has depicted both “external and internal factors” and the performance of the selected company in the dynamic market. The company might take immediate action to the determination of “mitigating threats and weaknesses” to avoid steady growth of the firm.
Financial trends analysis: The growth or decline in the “revenue, profitability, liquidity”, solvency and efficiency of an entity has displayed the financial trends of a firm. The sales of the company were “$10.82 billion, $13.67 billion, $15.88 billion, $13.1 billion and $17.65” billion in “2017, 2018, 2019, 2020 and 2021”. This has depicted that the revenue of the firm has raised to $17.65 billion from $13.1 billion in 2021. This has depicted the company has grown by 34.7% in 2021 compared to the previous year.
“2017
2018
2019
2020
2021
Amount (billion)
Amount (billion)
Amount (billion)
Amount (billion)
Amount (billion)
Sales
10.82
13.67
15.88
13.1
17.65
COGS
4.7
5.55
6.4
5.66
7.02
Gross Profit
6.12
8.12
9.48
7.44
10.63
Net Profit
1.73
2.63
2.17
2.16
3.16
DEBT
4.25
3.17
6.72
7.36
6.8
Total assets
25.58
21.37
27.15
28.01
31.07
Equity
12.63
10.06
10.44
12.04
13.74”
Table 3: Financial trends of Kering group
Figure 4: Financial trends of Kering
The above “table and figure” has clearly depicted that the “company’s financial performance” has increased at the maximum rate in 2021 in the last 5 years. The net profit earned by the firm increased from $2.16 billion to 3.16 billion in 2021. However, the profit was 1.73bn in 2017, 2.63bn in 2018, 2.17 billion in 20196 and 2.16 billion in 2020. The implication of “trend analysis” has clearly identified that the “financial performance” of the firm has been at its peak in 2021 in the last five years.
Ratio analysis: The “profitability and solvency” of the “Kering group” have been evaluated and interpreted to measure the financial performance of the entity from 2017 to 2021. The determination or estimation of “net profit margin (NPM)”, “gross profit margin (GPM) and return on assets (ROA)” have depicted the “profitability of a firm” (TURNA and ÖZCAN, 2021). Furthermore, the calculation of the “debt to equity ratio” has to determine the “solvency of a firm” to clear out or payoff their all dues obliged to be paid. The lower “debt to equity” and higher profitability have depicted the betterment of the financial performance of a firm.
Figure 5: Ratio analysis of Kering Group
Figure 6: GPM of Kering Group
The “GPM of Kering” was “56.56%, 59.40%, 59.70%, 56.79% and 60.23%” in 2017, 2018, 2019, 2020 and 2021. The continuous rise in “gross profit” earned by the company compared to the previous year has raised the GPM of the entity.
Figure 7: NPM of Kering Group
The company’s “net profit margin (NPM)” has raised from 16.49% to 17.90% in 2021. The rise in net income from “$2.16 to $3.16 billion” has been the basic reason for the increase in the “NPM of the firm”. NPM has reflected the relationship between the “net income and with sales or revenue” of a firm (Angelina and Nugraha, 2020).
Figure 8: NPM of Kering Group
ROA has reflected the return get by an entity compared to total assets held during a particular period (Ahmed et al. 2021). The “ROA of the Kering group” has increased to 10.17% in 2021 while the rate was 7.71% in 2020. The rate of increase in “net profit” compared to the rate of inclination in “total assets” has been the main reason for the increase in “The ROA of the company”.
c) Discussion on the financing sources in the company
The source from where a firm has introduced required funds to meet the requirement of “capital and revenue expenditure” to be operated in a market has been acknowledged as a “source of finance”. There are two sources of capital a firm has introduced finds in a firm these are “owned and borrowed or debt capital”.
Figure 9: Debt-equity ratio
The above figure has depicted that the company has introduced funds by “long-term loan and equity capital”. The company has adopted financial stability approach to rely on equity more compared to capital. The company has introduced loan capital of 14%, 13%, 27%, 25% and 21% of total capital in “2017, 2018, 2019, 2020 and 2021”.
5. Risk analysis
Risk analysis has been conducted based on the evaluation and measure of the risk exposures engaged in the “internal and external environment” of an entity. The variation in the industry beta and the “company’s beta value” has outlined the risk involved in an operation. The frequent diversification in the “tastes and preferences” of the customers has created risks and threats to the stable operation of a firm. Market risk has been identified as the systematic risk that has created a risk of “recession and financial crisis” in an entity (Turner et al.2021). The inflation rate has influenced the price factor in the market. Thai has decided on the financial growth and development of a firm.
“Kering
Industry
Beta
1.07
1.04”
Table 4: Beta influence
The above table has depicted the “beta value” of the industry and the selected company in the current period. The performance of the company has been identified to be better and less risky compared to average industrial performance. The “demand for the products” produced by the company has been more compared to the “average demand” for fashionable products in the country. The growth in profits of the company is 42.81% in 2021 while the market rate is 3.74% from 2021 to 2027 (statista, 2022). The “volatility rate of stocks” has been identified as the most significant factor that has determined the risk involved in “investment decision”.
6. Cost of capital
Determination and explanation of WACC by CAPM
WACC has been used to identify the cost paid by an entity to its “equity shareholders” at the end of a financial year. As per the reference of Almaw (2020), the CAPM has been used to estimate the return provided by a firm in return for assets held by shareholders. The “WACC of the company” has been estimated by the “CAPM model” by using “the risk-free return, market return and beta value” of the selected company.
The above table has estimated that company has paid 2.64% of the “cost of capital” to the shareholders of the firm during the specific year. The “CAPM rate” has reflected the expected return that company will be provided to their equity holders in future. Furthermore, it has been identified that the company has a “higher beta value” and “lower risk-free return” compared to its competitors. However, the “company’s profitability” has played an effective role in influencing the investors to hold the stocks of the firm. The WACC rate that has been calculated has been used to determine the “terminal value of the stocks” of the firm as discounting rate.
7. Valuation and reflection
a) Calculating the Intrinsic value of the selected stocks using two specific stages of the “multiple growth models”
The intrinsic value has calculated to determine the “future performance of stocks” or shares of the company compared to its “current stock price” with the reference of expected “growth rate and discounting factor”.
Assumptions: The growth rate for the two specific stages has been assumed to be 20% and 6% in the 1st and 2nd stages of determining the intrinsic value of the firm. The “EPS of the company” has assumed to be the cash flow of the firm in the upcoming 10 years. The “WACC of the firm” has assumed to be discounting factor.
Figure 10: Assumptions and intrinsic value
In the above figure it has assumed that the EPS of the company has expected to be the cash flow of the company in the upcoming 10 years with an effective growth rate. The discounting rate along with the “dividend and growth rate” of 20% has been added to ascertain the “terminal value of the shares” or stocks in the first stage. The above figure depicted that the company has earned 176.65 of present value by considering a 20% growth rate and 2.6% discounting factor on EPS. This has depicted positive growth in cash generated by the company in the market.
Figure 11: Intrinsic value
The above figure has depicted the “total intrinsic value” of the selected company to $716.74 after considering the assumed growth rate of 6% during the selected period. The current share price of the company has been determined to be $606.84 in the market. However, the “intrinsic value of the company” with a 20% and 6% growth rate has been assumed to be raised to $716.74 after 10 years.
b) Analysis of the vital ratios of these stocks
The assumption related to growth rate can be unrealistic after the “outbreak of economic crisis” or natural disaster that can hamper the financial performance of the entity in future. The growth in EPS can be inaccurate this has created inaccuracy in the calculator of the “intrinsic value of the stocks” and shares of the firm. Furthermore, it has been identified that inaccuracy in discounting factors has hampered the amount of intrinsic value of the shares of the firm. The existence of “volatility in the stocks and return rate” has influenced and affected the expected or forecasted intrinsic value of the firm in future. Furthermore, the unrealistic or ineffective in the determination of Intrinsic value to measure future performance of the firm in future. The diversified value or nature of the growth rate has influenced the stock valuation frequency of the firm in the market.
c) Recommendation on the buy or sell of the stocks with reasons
Based on the entire analysis it has been evidently seen that the performance of the Company has been positive and it seems that the investment is going to be ideal. The earnings per share of the Company are also good market valuation is also seen to be ideal. The profitability of the entity is also good. The market performance of the entity can be reflected to be true and fair enough. As an investor, it can be seen that the stocks are performing well and are expected to grow in the upcoming time. Apart from that, it can be seen that it will provide a healthy return to the investor. The investment will be held to stay positive owing to the better ratios and comparison it is going to be financially stable. The stocks are ideal to be bought and sold in the market and it is expected to make the investor bring a higher return.
The entire financial concept and its wide application have been understood by me during the session of learning and preparing the report. The assessment of the ratios analysis and its wide usage in the comparison of the trends and financial performance of the firm at the end of the financial year has learnt. This has enhanced my learning and held with me utter knowledge and guidance. The calculation of the CAPM has helped to understand the true valuation of the stock levels of the risks that are included in each stage of the market investment. The exposure of the external and internal risks is a part of the business environment. These factors are vital during the business decision-making process and understanding of the circumstances that are important to know for an investor has been done. The self-learning process states about the stock purchase and held knowledge that is important for any investment scenario. I have focused on understanding the use of business investment ideas and procedures which will be helpful to maximise the scope of investment in the upcoming future.
References
Ahmed, R., Aizenman, J. and Jinjarak, Y., 2021. Inflation and exchange rate targeting challenges under fiscal dominance. Journal of Macroeconomics, 67, p.103281.
Almaw, S., 2020. Determinants of Exchange Rate in Ethiopia: A Graphical Approach. International Affairs and Global Strategy, 84(7).
Angelina, S. and Nugraha, N.M., 2020. Effects of Monetary Policy on Inflation and National Economy Based on Analysis of Bank Indonesia Annual Report. Technium Soc. Sci. J., 10, p.423.
kering.com, 2022. Background of Kering [Online] Available at: https://www.kering.com/en/group/culture-and-heritage/group-history/ [Accessed on: 24th January 2023]
kering.com, 2022. Discover Kering products [Online] Available at: https://www.kering.com/en/group/#:~:text=A%20global%20Luxury%20group%2C%20Kering,as%20well%20as%20Kering%20Eyewear. [Accessed on: 24th January 2023]
kering.com, 2022. Kering and its brands stand in solidarity against racism [Online] Available at: https://www.kering.com/en/news/kering-and-its-brands-stand-in-solidarity-against-racism [Accessed on: 24th January 2023]
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Statista, 2022. France: Ratio of government expenditure to gross domestic product (GDP) from 2017 to 2027 [Online] Available at: https://www.statista.com/statistics/275345/ratio-of-government-expenditure-to-gross-domestic-product-gdp-in-france/ [Accessed on: 24th January 2023]
statista, 2022. Luxury Fashion – France [Online] Available at: https://www.statista.com/outlook/cmo/luxury-goods/luxury-fashion/france#:~:text=Revenue%20in%20the%20Luxury%20Fashion,(CAGR%202023%2D2027). [Accessed on: 24th January 2023]
Statista, 2022. Monthly inflation growth rate for Harmonized Index of Consumer Prices (HICP) in France from September 2018 to September 2022 [Online] Available at: https://www.statista.com/statistics/328581/monthly-inflation-rate-france/ [Accessed on: 24th January 2023]
tradingeconomics.com, 2022. France Consumer Spending [Online] Available at: https://tradingeconomics.com/france/consumer-spending [Accessed on: 24th January 2023]
TURNA, Y. and ÖZCAN, A., 2021. The relationship between foreign exchange rate, interest rate and inflation in Turkey: ARDL approach. Journal of Ekonomi, 3(1), pp.19-23.
Turner, H.C., Lauer, J.A., Tran, B.X., Teerawattananon, Y. and Jit, M., 2019. Adjusting for inflation and currency changes within health economic studies. Value in Health, 22(9), pp.1026-1032.
