EU CONSUMER CYCLICALS: Kering | 1Q results (x4)

(KERFP; NR/BBB+ Stable) (equities -6%)

We see a -37%yoy EBIT fall when it reports 1H results in late July

• This is based on guidance for continued double-digit revenue declines and a -500bp 1H EBIT margin contraction.
• This is not pretty - keep in mind last years 1H EBIT was already down -35%yoy.
• Uncertainty on the 1H number is fairly low given it is only yet to see 2 months of it.
• On early estimates we see leverage rising from net 3.3x to 3.7x this year (this includes the €1.2b in RE disposals done on both numbers).
• That is in downgrade threshold (>3.5x) but we think it will keep a lid on it from continued property divestments (~€5b in PPE, at Feb flagged another ~€2b in real-estate refinancing over next two years)
• We see S&P moving to negative outlook for now.
• Please do not use Kering to fan macro fears - it has been underperforming market for a while. Even management was surprisingly honest about macro holding largely unch in Q4. We see this as the consensus thus far among luxury Q1 earnings. Net tad positive for Burberry sentiment.
• Re. Equities they already trade on abysmal multiples and are not pricing a recovery this year.
• Re. Credit some of above is priced but we don't see the need to rush into it given the near term outlook and unimpressive carry vs. other non-lux (but performing) IG retailers (Pandora gives +40bps on 5Y).