Brunello Cucinelli Initiation Report

Potential signs of a slowdown at the Italian Luxury company

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Source: https://www.gq-magazine.co.uk/fashion/article/brunello-cucinelli-bond-street

Introduction

Shorting a luxury stock a couple years ago was an unheard proposition. Now with, the luxury market slowdown greatly affecting the share prices of stalwarts like Burberry and Kering, one can see/use this play to their advantage on firms who have not been affected yet or are climbing down the sector ladder. One may argue that firms will rebound due to their strong long term fundamentals and management team. One thing is for certain is that luxury once understood is very easy to predict and assess. Brand damage is usually long term and it can be difficult for firms to climb back up or even climb in the first place. That is why, we believe if we can find companies where the damage is long lasting and are trading at high valuations relative to peers, a short opportunity opens.

To assess whether a brand is climbing down the luxury ladder, it’s worth looking at previous cases to find similarities. Restoration Hardware, buoyed by a resurgence in the late 2010s and early 2020s through their CEO Gary Friedman, the management went into great detail about becoming a luxury brand and climbing the ‘mountain’. Post pandemic inflation and interest rates hike affected the company in a great way as the housing market slowed down. People spent less on furniture and demand for it’s high end products slowed and eventually decreased in 2024 by 15.63%. In 2022, the company launched RH Contemporary which was described as the most compelling new collection in its history. 2 years in, Gary admitted to overestimating demand and overpricing the collection at $24,000. Customers simply did not resonate with the prices and as a result, RH has been unable to climb the luxury ladder.

Across the pond, a super brand fell off the mountain and has struggled to reach previous heights. In 2015, Ralph Lauren (RL) was faced with a tough decision, where to look for growth? The answer at the time as believed to be to use channels that were seeing high demand. At the time, growth was available in the discounted market. RL decided to feed these channels by sending large volumes of apparel to retailers like Macy’s which accounted for 12% of sales in the mid 2010s. By using discounted wholesalers, RL was able to grow sales at a CAGR of 6.79% between 2010-2015 which was impressive given the maturity of the company.

The strategy made sense in the short term but negatively impacted the brand in the long run. In 2016, growth obsessed managers were afraid of producing too little inventory for retailers, so instead they produced large volumes. Often it was higher than what retail stores and wholesalers could manage to sell at full or near full prices. As a result, prices were slashed by upto 70% to clear out inventory. A lot of the inventory ended up in off price stores. This was simply against the luxury strategy and as brand equity took a significant hit.

Soon the CEO was let go and Stefan Larsson from Old Navy was brought in. A perceived fast fashion expert, he used his lead time expertise to solve a major issue. RL had a 15-month lead time from ordering merchandise to delivering it into stores. In fashion, that spells trouble as the company had to order next spring’s assortment before seeing the results of the current season before retailers ordering next season’s merchandise. This is why order volumes were so high as managers wanted to fill the long time period.