Brunello Cucinelli S.p.A. : comments with regard to the 1rst half 2017 results.

We have a double-digit growth in both revenues and in profit. The perfomance is better in the international markets than in domestic market. However, overall, the results are good. 

Net sales benefit from the forex : at current exchange rates, net sales rose by 10.7% ; at costant exchange rates, net sales rose by 9.7%. 

The brand has a great perception among the customers and among the different distribution channels ("digital" and "physical"; retail, wholesale multibrand and wholesale monobrand).

About the net financial position, we have a decrease due to the good cash generation from operating activities (+26,519 vs +4,339) and due to the positive changes of the net working capital (for further info consult the consolidated statements of cash flows).

It was used cash flow in investing activities (-22,749 vs -16,849) to support the brand, to safeguard its prestige and its exclusivity.

The following table shows the income statement data : there is an improvement of the items (double-digit growth, like I said previously) and, at the same time, an amelioration in the margins. 

The management explains that this good policy will be proposed also in the future, thanks to the investment plan 2017-2019. To read the full press release, please see the link (Brunello Cucinelli investor relations) :

http://investor.brunellocucinelli.com/yep-content/media/BC_1H_17_Consuntivo_ENG.pdf

At the release of the data, the market reaction was good : the volumes increased and there was a white candle. However, just after, the candles presented some shadows (Doji Star Bearish pattern). 

It means a weakness in the bullish wave, a resistance in the maximums and a pressure from the sellers. The BB shows an high volatility that may be absorbed, subsequently. See the chart.

Chart from Investing.com

The stock is not at all cheap. 

If we project the growth of the first half of the year, applied to the full year 2016, we get :

Full Year 2017 Revenues  = 457,029 * (1 + 10.97%) = 507,165.1

Full Year 2017 Net Income = 37,119 * (1 + 23.88%) = 45,983.02

If we project the margin of the first half of the year, we get :

Full Year 2017 Net Income = 507,165.1 * 8.12% = 41,181.8

At the current prices, we have a market cap of  1,731 EUR M. It means about 40X the expected earnings and about 3.40X the expected revenues.

There is a premium compared to the peers (considered also the smaller size of the firm). 

This premium can be explained by : 

• The high brand perception ;
• The rarity and the craftsmanship of the product ;
• The quality of the management and of the business ;
• M&A opportunity, having regard to the small size ;
• The higher defensiveness of the stock (low beta 0.29, Brunello Cucinelli overview from Investing.com, vs the industry average). On the long run, it is a safety for the price stability. 

Geox S.p.A. : the FY 2016 results undermine the ongoing turnaround.

The FY 2016 results are under the expectations of the analysts' estimates and of the targets of the business plan. The revenues grow by 3% (vs the CAGR of the BP, about +6.5% or +5.5% with the lower range of the guidance). Of course, the margins are really under pressure : the gross profit decreases, the same both for the EBIT and for the net income. The results should be considered net of extraordinary items. However, the business is not proceeding well and the cost savings policy is not giving the desired results.

We have an increase of four percentage points, with regard to the cost of sales margin (from 48% to 52%). Overall, there is a great margins erosion. About the expectations, they were estimated stable or slighty higher compared to the FY 2015 results. 

See the link to read about the related press release and compare it with the consensus. 

On many fronts, they are disappointing, more so after the good trend of the 9 months 2016 (appreciated by the market at the time of the release) and a fortiori with the good progress of the triennium 2013-2014-2015 (appreciated by the market with an excellent stock market performance from 2 to 4 eur/share). 

In my opinion, the management's credibility is in doubt for the above reasons. The market is discounting it. Secondly, in particular :

1) They failed the previous business plan ;

2) With insight, the change of the CEO is probably regarded as a rupture ; I would have appreciated more if the management had much clarified about that. Instead, substantially, they only confirmed what it was said before, in the press release ; 

3) The results are now under the targets of the current business plan ; 

4) The 2016 was supposed to be a transitional year but the results marked a strong deterioration ;

5) The loss of the profitability in the first half of the year 2016 had to be compensated along the second half of the year but we have a clear decline of the margins. 

Press release, first half 2016 results

Press release, 9M 2016 sales

They should work well over the next two years of the plan, to regain credibility, also focusing on the new CEO and on the new markets, like China. The small margins are the great problem ; they must work in that direction (improvement of the margins). Otherwise, the market will probably dislike with a bad price performance ; the decrease of the stock is the evidence, after the earnings release  (the negative impact was partially offset by the good performance of the FTSE-mib ; Geox, beta of about 0.80/0.90). 

Chart from Investing.com