Here at the Lab, post-pandemic outbreak, we were bullish on the fashion industry thanks to consumer spending revenge and luxury players’ pricing power with an ability to pass through cost inflationary pressure. However, the sector is not recession-proof, and many Wall Street analysts are pricing a lower growth rate for the next couple of years. For this reason, the luxury sector index has declined over the past few months, and we believe the sector might remain subdued for another five/six months. Since July, Moncler’s stock price has been down by approximately 20% compared to a sector average of 13% (OTCPK: MONRF). Moncler’s de-rating seems excessive in light of a high-quality equity story. Despite expecting a growth rate normalization in 2024, the company’s valuation does not look full. According to our estimates, Moncler’s current valuation is unjustified and represents a solid opportunity to re-enter, as the company could benefit from superior sales growth and should be able to protect its above-sector profitability. Despite that, in light of a potential slowdown, we updated our internal model, lowering our target price but reiterating our buy rating.

Looking at the sector, it is still too early to say whether a growth cycle that has lasted for decades and has also resisted COVID-19 has come to an end. However, 9M luxury sector results are giving mixed signals. The large French groups (LVMH and Kering) showed a slowdown. This also happened for Moncler, but it was less marked. Indeed, revenues increased only by 9% to €561.2 million. However, this number is close to +18%, considering only direct distribution, which absorbs 77.1% of the total company’s sales (Fig 1).

Why are we supportive? And Changes in Estimates

1. (Strong execution should be rewarded) In our initiation of coverage, we reported how the market underestimated Moncler’s pricing power and store openings. In September-end, Moncler’s single-brand network had 262 direct sales points, five more since June (Fig 1). These include the opening at Shanghai Pudong Airport in China and the store conversions at Terminals T1 at Charles de Gaulle Airport in Paris. This is a company’s specific tailwinds. In our Q1 2024 estimates, Moncler will likely face volume pressure; however, we are pricing higher revenue growth thanks to mid-single-digit price increases. Secondly, we are forecasting 10-15 new stores opening in H1, which will likely contribute to an additional 6% growth;
2. (Acquisition upside). Following Stone Island’s acquisition, the division should see the completion of its internalization distribution. The segment sales reached €310.1 million in the first nine months, with a low 3% increase compared to last year (Fig 2). However, Chinese e-commerce is planned for Q1 2024, and a marketing campaign in the region has already started in Q4 2023. Still related to Stone Island, divisional sales density is lower than Moncler. DC shift and marketing campaign should improve shop efficiency and improve profitability in the future;
3. (Operating leverage) Related to sales densities, Moncler is set to push further on the following spring/summer collection, after the solid 2023 results. This should support sales densities in H1, usually below Q4 (Winter is Coming). After the Q3 call, the only non-negotiable investment was marketing expenses, set at 7% of sales. In our view, this is the right decision. Beyond marketing, we are confident that Moncler is flexible enough to reduce costs and show operating leverage, if necessary.

Source: Moncler Q3 results press release – Fig 1

Fig 2

Fig 3

Changes in Estimates and Valuation

Following the company’s comments on a soft start to the fourth quarter, we lowered our 2023 estimates and now expect quarterly revenue of +7.5% year-on-year and fiscal 2023 revenues at €2.93 billion. Our EBIT margin is left unchanged on an annual basis at 29.8%. In 2024 and 2025, we forecast sales at €3.15 and €3.49 billion, respectively. We expect a 29.8% EBIT margin on the core operating profit margin in Fiscal Year 2024 and slightly above 30% in 2025. Despite that, lower revenue projection vs. our previous model translates into a 3/4% cut in EPS estimates for the period. Following our changes, our 2024 EPS is at €2.36. Going to the debt part, Moncler is cash positive, and according to our estimates, the Group will reach a net cash position of approximately €1 billion by year-end. CAPEX is set to increase with store openings, and in our projection, 2024 and 2025 investments are at €170 and €185 million. Wall Street focuses on the luxury industry outlook; however, Moncler is set to navigate a new normal demand environment. In our projection, the company will grow sales above average, maintaining a higher industry profitability. Despite lowering our sales, we decided to reduce our target price from €75 to €70 per share, valuing Moncler with an unchanged P/E target of 30x. As we enter the critical quarter for the company, some caution is needed. From a longer-term perspective, we are positive on the shares and our outperform rating.

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