Description

Summary investment thesis

Moncler, a leading luxury outerwear brand specializing in high-end down jackets, presents an attractive investment opportunity for the long-term owner due to its strong brand identity, above average performance, and the visionary leadership.

Under the entrepreneur and majority shareholder Remo Ruffini, Moncler has transformed from a niche sportswear brand into a luxury powerhouse with its strategic focus on DTC sales driving profitable growth. The company’s two brands – Moncler and Stone Island – benefit from a blend of heritage and innovation appealing to a broad range of consumers in the high-end outerwear market and expanding into complementary categories like accessories, footwear, and glasses.

The financial performance underscores the company’s success: 2023 highlights Euro 3bn in revenue thanks to an impressive 18% 10Y-CAGR, the terrific gross margin has steadily improved to 77% and commanded a 30% EBIT. The net profitability translates into a robust free cash flow while keeping a consistent 40% return on tangible capital.

The stock is down 27% from the peak primarily due to softer demand expectations in the luxury sector establishing an attractive entry point for such a high-quality business. The current market price offers a compelling risk-reward profile: the Euro 14bn market value represents around 19-20x NOPAT implying a conservative nominal expansion rate.

Moncler Group presents credible long-term expedited growth prospects driven by further enhancement of its performing DTC model, geographic expansion into untapped markets and the upcoming transformation of Stone Island into a fully effective retail brand.

Moncler, briefly

https://www.monclergroup.com/en/investor-relations

                                         Stock Exchange: Milan        Price: Euro 51       Market Cap: Euro 14bn

Moncler S.p.A. is a 3bn-revenue global luxury fashion business specialized in outerwear led by the entrepreneur Remo Ruffini.

The group (“Moncler Group” or “Group” or “Company”) owns two independent brands: Moncler and Stone Island. Management’s vision is to keep alive the brands’ identities and the connection with the respective communities while bringing together the entrepreneurial and managerial culture, the business knowledge, and the technical know-how to strengthen the brands’ competitiveness in the market.

Under the leadership of Remo Ruffini, Moncler has implemented a growth strategy inspired by two key goals: (i) becoming a global brand and (i) to go direct to consumers. A parallel route is underway for Stone Island.

Historic background

Moncler was born in 1952 in Grenoble (France) as sports clothing for the mountain, creating garments conceived to protect workers who wore them over their overalls and that offered high resistance and protection against the harshest climates. Moncler became the clothes used for mountain expeditions.

During the 60s the business continued its expansion that culminated with the Grenoble Winter Olympic Games where Moncler was the official supplier of the French downhill team.

In the 80s, Moncler entered the city becoming the iconic garment of a generation of youth. At the height of the “Paninari” boom, Moncler was selling about 40,000 pieces; of those 30,000 were in the Milan area. It was the true must-have for the youth. The phenomenon lasted only a few years and afterwards the Company began a decline, remaining a small clothing brand principally with a sport connotation.

In 2003, the entrepreneur Remo Ruffini, the current majority shareholder (24%), purchased Moncler with the visionary idea to reposition a brand mostly used for sport to a versatile and exclusive line of products that a variety of clients can wear on many different occasions.

Under the leadership of Ruffini, Moncler has created unique products of the finest quality guided by the motto “born in the mountains, living in the city”.

In 2018 Ruffini introduced Genius, a revolutionary project responding to the new dynamic and frenetic framework brought by the digital revolution. The initiative has consisted of activating collaborations with eight highly talented stylists (“a hub of eight minds”) that while retaining their individuality can work for reinterpreting the essence of the brand through original creation of luxury garments, to be launched on the market monthly (breaking the traditional paradigm of “seasons”). This choice was dictated by the entrepreneur’s intention to closely track and follow the ever-changing needs and preferences of consumers.

At the end of this outstanding transformation path, Moncler is now considered a global luxury brand.

In 2021 the Company acquired Stone Island, a brand founded in 1982 with a focus on the constant research of fibers and fabrics applied to innovative designs. It was originally inspired by the military uniforms realized with a fabric that recalls the waxed jacket corroded by the sea and the sun. Clothes are intended as the synthesis between extreme experimentation and usability.

Under the control of Moncler Group and the leadership of Remo Ruffini, the vision is to strengthen the brand, addressing the identified weaknesses associated with (i) the limited control over markets and the partial retail culture, (ii) the low presence in the Asian markets, (iii) the insufficient exposure to contiguous products (shoes/accessories). That is under execution leveraging on Moncler’s learning curve.

Business model

The Company adopts an organizational model which, on the one hand, intends to preserve the identity and autonomy of its brands, and on the other, aims at exploiting synergies and economies of scale leveraging on a shared platform.

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Moncler’s success is based on a unique brand strategy aimed at developing innovative products that are strongly “anchored” to the history of the brand.

The strategy pursued with the business model is to influence and to connect with different audiences, creating long-lasting communities. Moncler Men and Women collections bring the heritage of the brand and are at the core. Moncler Enfant is a collection for boys and girls. Genius brings together different interpretations and visions while preserving the brand’s roots. Grenoble completes the offering targeting the sporty consumer interested in performance and design products. The collections are rounded off with footwear, leather goods (bags, backpacks, and accessories), and glasses.

The purchase of raw materials is one of the key areas of the value chain. Throughout Moncler’s history, down has been at the heart of its outerwear and has gradually come to be identified with the brand itself. Moncler purchases only the best white goose down, containing at least 90% fine-down resulting in a warm, soft, light, and uniquely comfortable garment.

The “cut-make-trim” phase is conducted both by third party manufacturers mostly located in Eastern Europe (façon manufacturers) and in the Moncler manufacturing plant in Romania.

As far as the distribution is concerned, Moncler is present in all major markets both through the retail channel, consisting of directly operated stores (DOS), the online store and the e-concessions, and through the wholesalers, represented by multi-brand doors, shop-in-shops in luxury department stores, airport locations and online luxury multi-brand retailers (e-tailers).

In 2023, the DOS channel accounted for more than 84% of turnover against 57% in 2013. On average DOSs generate Euro 8m in sales (10-Y CAGR ca 10%) and a record EUR 38,000 per square meter. The ambition is to reach EUR 40,000.

The breakdown by geographical area highlights a global coverage with Asia accounting for more than 40% of turnover and Americas 12%.

Stone Island’s offering is organized according to 4 collections that starting from the root core creation span from luxury inspired products to more fashion/innovative oriented ones.

The brand is currently present in the most important department stores, also with dedicated spaces (shop-in-shops), in the best multi-brand boutiques and in the main e-tailers, besides having developed a network of more than 80 directly managed mono-brand stores. Since entering Moncler Group, Stone Island has begun a path that will lead the brand to take direct control of the markets historically managed by distributors and to greatly expand the DTC channel.

In 2021 reported information refers to only 9 months (the brand was consolidated since 1st April while in the 12-month period revenue was Euro 310m). In 2023 the wholesale channel accounted for 58% of revenues while the remaining 42% was generated by directly managed stores and the online channel envisaged a remarkable management change with respect to the 2021 network structure because of the conversion into DOS of many stores.

Before the acquisition, Stone Island highlighted remarkable growth rates (+30% in 2018, +24% in 2019 and a rapid recovery from the Covid-induced disruptions). By geography the brand was mostly focused on EMEA while the new management is pushing development with Asia.

Financial performance

In 2023 Group’s revenue was Euro 3bn (10Y-CAGR 18% including Stone Island’s acquisition in 2021) with Moncler accounting for 86% of the business (10Y-CAGR 16%).

Gross Margin highlighted steady improvements from 71% to 77% driven by change in channel mix favoring the DTC.

EBIT was Euro 0.9bn highlighting a 30% operating profit margin.

2024 interim performance was rewarding with sales up by 8% led by Moncler (+11%) partially offset by Stone Island’s decrease (-6%) due to the ongoing distribution network restructuring. Overall, the Group’s profitability highlighted a further improvement.

Euro 0.5-0.6bn Free cash flow (after accounting for repayment of lease liabilities which are the rents since 2019) emphasizes outstanding cash conversion (on average 80% of NOPAT notwithstanding the remarkable growth rate) because of minor working capital absorption and Capex intensity stably at 6-7%.

In 2021 it occurred the acquisition of Stone Island for Euro 1.2bn (nearly 20x net income), half paid in cash and half with the Company’s shares.

Tangible Net Invested Capital (calculated adjusting the reported figures as per the effects of non-amortized assets originated by the acquisitions, Goodwill and Brands) sets at Euro 1.5bn with negligible net working capital figure and Euro 1bn investments under the form of owned stores.

A full equity financial structure features a rock-solid balance sheet. The cash position amounted to Euro 1bn as of the end of 2023 while Net Debt is close to nil accounting for leases.

As far as the ROIC is concerned, after having adjusted historic figures as per the estimated effects of the IFRS 16, I calculated the historic return on tangible invested capital exceeding 40% over the last 10 years with a sole outlier represented by the 2020 (Covid).

Market valuation

The stock is down 27% in the last few months envisaging a Euro 14bn Market Value. The decline occurred in response to the cooling demand expectations for luxury goods.

At the current market price, the 2024 NOPAT multiple sets close to 19-20x highlighting a 5% current yield.

Assuming an 8.5% cost of capital for the business, the current capitalization implies a ca. 3.5% perpetual nominal growth rate.

Competition

Within the global luxury market valued nearly Euro 300bn, Moncler Group's positioning is at the top on a par with the big global brands. Moncler’s core reference segment is the high-end outerwear and down jackets value globally ca. Euro 60-70bn (the down jacket subsegment is estimated to account for Euro 15-20bn).

Moncler competes with the biggest renowned luxury powerhouses in the field which among the numerous products offered also feature outerwear.

In consideration of the business size and the focus on a certain brand/line of products, my guess in that the more similar businesses are companies like:

• Canada Goose (www.canadagoose.com), known for its high quality down jackets and winter clothing. CG appears as the most direct competitor to Moncler in terms of product although its offer is mostly technical-oriented while Moncler’s one is perceived among consumers as more “fashion” and enjoys a luxury appeal. CG presents a wide geographical presence with DOS in Northern America and China while its European footprint appears minor. The financial performance is far from the Moncler’s one: after an accelerated expansion over the last 10 years (Revenue CAGR 24%), operating profitability has been between 10-15% in the last few years resulting in a 15% Return on tangible capital.
• Herno (www.herno.com), an Italian private and family-led company that produces luxury outdoor clothing and down jackets. This is a small niche player supposedly with 60 DOS and revenue in the region of Euro 150m.
• Burberry (www.burberry.com), the British luxury brand’s offer is wide-ranging encompassing men and women outerwear, clothes, and accessories. Burberry can be considered a closed competitor to Moncler because some iconic products are substitutes of Moncler’s down jacket and puffers. Furthermore, both the brands push with directly operated stores. The top line highlighted a modest CAGR over the last 10 years with no advances in terms of operating income. Following a recent Gross Margin’s weakening, the Return on tangible capital was down to 15%.
• Fay (www.fay.com), an Italian brand ranking in luxury, known for the elegance and quality of coats and jackets. It belongs to Tod’s. Revenue is in the region of Euro 60m.

There are some other aspirational brands specializing in the technical/sport and premium outerwear that do not feature a luxury positioning and shall be considered as challengers: the North Face (www.thenorthface.com) held by VF Corporation, Patagonia (www.patagonia.com), Arc’teryx (www.arcteryx.com) belonging to Amer Sports group, Bogner (www.bogner.com), Woolrich (www.woolrich.com).

Moncler’s strong competitive advantage consists primarily of its uniqueness as a brand mixing the luxury appeal with the technical features of the garments and the related absence of perfect-close competitors. The extraordinary development of a wide network of curated luxury DOS has greatly contributed to the brand awareness and to keep a close relation with the consumers. Moreover, the brand presents a set of collections that address and engage various age groups.

Investment considerations

The Company represents an attractive investment opportunity for the long-term owner, combining the prospects of an excellent business exhibiting further potential to grow with a rational entry price.

Below I summarize the key considerations supporting the investment case:

• Led by a visionary and innovative entrepreneur, Moncler Group is a unique global fashion company with an identifiable leadership in the high-end down jacket segment and credible ambitions to further expand into complementary products where it finds “recognition” and exhibits in-depth know-how.
• The Company commands pricing power by successfully passing-through the increases to customers and lifting the margins.
• This is a modern business that fully embraces the digital culture in an omnichannel perspective. The Company is client-centered leveraging multiple touchpoints with the customers (physical and digital) resulting from the DTC strategy pursued by Ruffini.
• The business has consistently generated an outstanding 40% return on tangible invested capital. The high profitability and the disciplined capital management translate into a robust cash generation.
• With Stone Island, Ruffini and the team aim at establishing a distinctive and engaging brand working alongside the three crucial dimensions of the business: brand, product, and distribution. The team is building a new image through a clear collection strategy to unleash the potential of the brand. By replicating the Moncler case, a fully integrated media approach targets the different customer segments while the distribution will be pillared around the development of the DTC channel embracing a full retail culture.

The investor can benefit from the abrupt price decline in the last few months (-27%) that materially lowered the multiples and raised the current yield above 5%. The 3.5% nominal growth rate implied in the current Market Value presents a compelling risk-reward mix for such a high-quality business. The envisioned growth strategy based on the further enhancement of the DOS network, the development of the untapped markets and the transformation of Stone Island delivers a realistic prospect of expedited growth over the long-term.

The alignment of interests with the entrepreneur retaining 24% of equity completes the compelling investment profile.

Risks

The Company’s success has been closely tied to the leadership and vision of the entrepreneur Remo Ruffini. This remains one of the key risks in evaluating the investment. As a mitigation factor, the recent addition of key top managers (Gino Fasanotti and Robert Triefus) has strengthened the management team and to a certain degree addressed the risk.

Competition: there is a potential risk connected with the high competition in the reference market from both established luxury brands and aspirational companies. Moncler has historically demonstrated the ability to protect its competitive advantage; that is confirmed by the steadily increasing Gross Margin. The challengers seem far from being able to position themselves in the luxury segment and challenge Moncler's leadership.

Challenges in raising the Stone Island brand: certainly, there is an execution risk associated with the transformation of Stone Island. The Company has a successful track record of brand transformation under Remo Ruffini and can leverage on the extremely successful “Moncler model”. The process appears to be rapidly evolving.

Appendix: Management team

Remo Ruffini, CEO, took over the brand in 2003 undertaking a global brand reset that elevated it to a luxury positioning. When he started working on this project, Moncler was essentially an Italian brand with wholesale distribution and revenues in the tens of millions. He revolutionized the brand and established a global network of luxury DOS.

Gino Fasanotti, Argentinian, is the Chief Brand Officer. He joined Moncler after working at Nike for 23 years rising from retail and marketing roles in many geographies. He led and contributed to some of the most iconic and awarded Nike marketing campaigns, new digital platforms, brand experiences as well as to new product concepts and collaborations.

Robert Triefus joined Stone Island as CEO from Gucci, where over 15 years he held roles of increasing responsibility on the company’s Executive Committee. Before Gucci, Robert Triefus was with Armani from 1999 to 2008 and Calvin Klein from 1994 to 1999.

Roberto Eggs, who joined Moncler in 2015, serves as Chief Business Strategy & Global Market Officer of the Group. He spent more than 25 years at Nestlè. In May 2009 he joined Louis Vuitton as President of Europe, Middle East, India & Africa until April 2015.

Luciano Santel joined Moncler in 2013 and is currently the Chief Corporate and Supply Officer of the Group. He had got various senior experiences at fashion brands like Luxottica, Geox, Stefanel.

Catalyst

Steady enhancement of the DTC channel’s performance by further pushing the conversion of the wholesale POS into DTC. Moncler increased DTC revenue by more than 22% in 2023 (+7% stores and +15% productivity) and highlighted a 20% 10-Y CAGR in the segment. Current trading has confirmed the positive trend. Expected expansion of the retail network is mid-single digit with the additional contribution of increased available sales space (newly opened stores are larger than the existing ones).

Expansion of the offer: with outerwear still the leading category, knitwear, footwear, and the other categories are growing faster. The product strategy is to invest more to enrich collections.

Geographical footprint: Moncler acknowledges that its presence in the American markets is currently underdeveloped compared to some of its competitors.

Stone Island transformation:

• DTC as a strategic priority: conversion into DTC of the wholesale channel, building a full retail culture: Stone Island is actively reducing its reliance on wholesale and transitioning towards a more selective distribution strategy. By controlling its distribution more tightly, it can better protect the brand image and potentially command higher prices.
• There is an ongoing deep work on product innovation and brand awareness and customer experience to replicate the “Moncler” model.