Business Breakdowns
· Chris Davies
[00:00:00] S1: The priority at the moment really is investing in the business they have today. So it's so early on still, there's so much left to do and maybe we'll get on to talk about some of those growth opportunities that they've got in the future. But there are still lots of them and they're still generating very attractive returns on capital. So if you're sitting there with a business that's able to do that and the runway is long, it's absolutely right. Your top priority is really reinvesting into the business. What does that mean? That means opening new stores. It means you are cultivating your brand. It means you're investing in marketing. It means you're investing in these crazy off-the-wall events that Ruffini is trying to bring in all over the place to make sure that Moncler and Stone Island are right at the cutting edge. So I think they're going to keep doing that for years and years and years to come. I don't think we're anywhere near the end of that reinvestment story. And I think for any company, really, if you're a long-term investor, the best ones to find are the ones that can just keep reinvesting capital at high rates of return well above your cost of capital for a long, long time. And Baillie Gifford has been very fortunate to find a few of these companies that we've already talked about. Hermès a few times. I mean, that's been owned by some of my colleagues for over 20 years and it's been an incredible success story. The acquisition side of things—I tend to see Stone Island as a bit of a one-off now. I'm not going to say that they'll never do another acquisition ever again. They've played it down somewhat. I don't think Ruffini is hugely keen on the idea of building a big Italian luxury conglomerate to stare down the French, the likes of Kering and LVMH. Never say never. Though I think for now his priority really is going to be reinvesting in the business. They pay dividends as well. They're pretty modest. I wouldn't say it's a big part of the story. Maybe acquisitions at some point in the future. I mean, Stone Island, remember, was the only deal they've ever done. It was the only acquisition.
· Matt Reustle
[00:00:00] S0: And you mentioned growth opportunities from here. What would you point to as those main levers of growth?
· Chris Davies
[00:00:00] S1: I mentioned earlier that you've got these strands of the Moncler brand. You've got Grenoble Collection and Genius. So I think the opportunity there is more of the same. Grenoble, however, I think is a bit earlier on. I think there's a really interesting opportunity there to start building out more and more of these stores. For example, this big show in Courchevel back in March. So this is a luxury ski resort town. It was the second big showcase of the Grenoble brand. I think that's got legs. So I suspect they're probably going to be doing more of the Grenoble stuff. Genius is that really powerful flywheel again—they'll keep on collaborating, keep coming up with these new and innovative ways of reimagining the Moncler brand and that will drive lots of interest in the collection. And it's interesting, actually, when you look at some of those periods where Genius has been a bit quieter, actually the core business has grown a little bit slower. So you can see that it is an important thing to keep pressing on with. There's a big opportunity in the US. Moncler is really under-indexed there. So roughly 14% of sales come from the US—that is quite a bit lower than most of the other big luxury houses, which tend to be north of 20%. So they're actually working on this right now. Various things going on here. They've probably been a bit slow to move to the direct-to-consumer retail model. I think they're trying to speed up that reduction in reliance on wholesale partners like Nordstrom and Saks and so on, which have tended to dominate the US business. So there's a shift definitely going on there. They're opening more stores. They've got this really big flagship store that's about to open on New York's Fifth Avenue, which is home to lots of other famous flagship stores—Armani, Cartier, Harry Winston, Louis Vuitton. Again, they'll be in very good company there. That's going to be their biggest flagship store, I think, in the world, and that's going to open in the US. But I think if you look at the east coast and the west coast, they're probably more penetrated, I would say, than everything in the middle. So it's interesting to me that they only recently, a couple of years ago, opened their first dedicated boutique in Dallas. There is a big gap I think they need to address in terms of growing brand awareness in a lot of these states in the middle of the US.
· Chris Davies
So I think they're only just getting going there, really. There's a long, long runway to explore there. It's worth touching on Asia and China because this is a really important part of the business. I mean, Asia was about half of the group's revenues last year. China's been a bit of a difficult market recently for lots of brands. We're starting to see some real signs of recovery coming through for Moncler, but the long-term is really what matters to us. And what we see from Moncler is a huge commitment to that market. Obviously, the Shanghai event was one event, but it was massive. Every year they have this Genius presentation where they put out the hint of what they're doing—they actually moved that to China for the first time, again breaking the mold somewhat. So they're going to be doing a lot more of that. They're going to invest heavily in China, but we're still in the foothills of growth there. And they've got a really interesting organization in China which is really digital-first, it's really client-oriented. They actually see it internally as run in quite a unique way. They've got somebody representing that business on the exec committee as well. And one thing they said to me was: we could learn something from what we do in China in our other businesses. So China and Asia more broadly I think is going to be really interesting. And Stone Island—this is possibly the second act. It's what comes next. And we talked about a lot of the growth drivers there, the growing direct-to-consumer. Your price points could be growing over time. I can see how that brand possibly splits into different pillars itself. So, for example, they've got a range called Ghost, which is more of a subtle, quieter version of the brand, which is not a quiet brand, Stone Island by any means. So I think there's room there and you're starting to see some of that come through. So if you look at last year, for example, for Stone Island as a whole, the top line actually shrank 1%. Now, if you look under the bonnet or the hood, as you North Americans say, Asia grew 23%. And again, Stone Island's barely got going there. It's much, much earlier than Moncler is. Direct-to-consumer across the board grew 23%. Wholesale fell 19%. So that shift is ongoing and it's still in the midst of that unfolding.
· Chris Davies, Matt Reustle
But it's going to end at some point and the baton will be very much passed to retail and then it'll be over to them to really drive growth. So it'll be interesting to see how that works. But I can see that really starting to come through as they build up their business in Asia, they build out a business in North America. I think that's going to be really interesting as well. [00:00:00] S0: And within that context, I mean, what risks stand out to you? When you think about main risks that exist within the business, what stands out for Moncler?
· Chris Davies
[00:00:00] S1: Yeah, I think with any fashion business you have to have a healthy skepticism about long-term sustainability of the business. Fashion can be quite violently cyclical. So we mentioned Gucci a few times. They had some incredible years under Alessandro Michele as creative director. That came to an end a couple of years ago. So they've had a really, really difficult period. I think there's that cyclical element to it now. I've got quite a lot of faith in Moncler because they've got genius. Because they're constantly staying relevant and fresh. That you can actually fend that off. The obsession with avoiding the boredom of your clients. I think that's really quite powerful. Another thing that worries me is when you are, as a lot of these genius collaborators are, operating at the edges of experimental fashion, there are dangers. We've seen various examples of this over the years. I don't want to pick on Gucci all the time, but it's one that comes to mind. If you go back to 2019, they introduced a sweater that was criticized for basically resembling blackface. So this sweater which came up over the mouth and it almost had this gap for your mouth and these red lines where your lips would be. And they did this during Black History Month, which in hindsight, of course, was an extraordinarily silly thing to do. I'm sure they wouldn't do that again if they had their time over. You could actually look at Moncler itself. There was quite a controversial collection back in 2016 when Thom Browne, who was a designer that they were working with at the time, basically had these models wearing what looked like military or camouflage-inspired clothes at a fashion show not long after the terrorist attacks in Paris in November of that year, which were absolutely terrible. People died. It was awful. So that was regarded by some people, a lot of French people, as really very distasteful. So that's a risk as well. I'll give you two more. One would be the supply chain. We've talked about this. But there is huge risk here if you get this wrong. And there's been lots of scrutiny in the press recently, particularly companies like Dior getting into hot water because their manufacturing arm was implicated in labor exploitation. And it became clear that there were big flaws in their audit and oversight process; that's a big risk. And the other one I guess would be Ruffini.