Tom Ford: an opportunity for Kering, or for Estée Lauder?
Tom Ford is very much an object of desire. The luxury label founded in 2005 by the eponymous designer has been up for sale since the summer. US cosmetics giant Estée Lauder and French luxury group Kering are both said to be in contention. According to various industry sources, acquiring Tom Ford could cost in excess of $3 billion. But what is the US label’s real value, and why is it attracting so much interest?
A number of analysts consider the $3 billion price tag as expensive, since Tom Ford’s revenue is in the region of $800 million. However, now that Kering has too entered the race, as the Wall Street Journal reported on Thursday, the bidding might rise even higher. Meanwhile, last Friday, the French group's share price climbed by more than 6% in mid-session on the Paris stock exchange. The market seems to welcome this potential acquisition by the group led by François-Henri Pinault, which could add another renowned label, to its galaxy, where Gucci, Balenciaga and Saint Laurent are the brightest stars.
For a long time, the market has felt that Kering is too dependent on Gucci, which generates more than half of the group’s total revenue as well as two thirds of its gross operating income (EBITDA). In the first nine months of this year, Gucci accounted for a revenue of €7.75 billion out of Kering’s total of €15 billion. In the last 12 months however, Gucci has been slowing down, and Kering’s dependence on the label could become problematic if Gucci should fail to soar again.
Even if Tom Ford’s valuation appears high, stockbroker Invest Securities considers the acquisition interesting for Kering, because it would enable the group to compensate for its flagship label’s slump. Ford’s standing as a designer and his international reputation, as well as his label’s elite positioning, all contribute to making this operation attractive, even if it will not bring about a major change for Kering in terms of size, according to analysts from RBC. Tom Ford’s contribution would nevertheless strengthen Kering's positioning in the uber-high-end market segment.
There is also the issue of Ford’s own role post-acquisition. Will he continue to be in charge of his label? Ford is 60, and has recently stepped down as president of CFDA. He has always been busy on multiple fronts, notably in cinema. If he were to leave the label, the latter would lose appeal. According to Bernstein analyst Luca Solca, “the master stroke would be to buy the Tom Ford label while at the same time tap Ford’s designer genius to rejuvenate Gucci. A Ford come-back at Gucci would attract universal attention, even if he only worked there part-time.” An opinion echoed by Jefferies, whose analysts think a collaboration between Ford and Alessandro Michele could fire up Gucci.
With his sexy-chic style, the Texan designer sits at the opposite end of the spectrum to Gucci’s creative director Michele, best-known for his eclectic, offbeat aesthetic. But the fact remains that Ford did leave his mark on Gucci's history when he took charge of style from 1994 to 1999, under CEO Domenico De Sole. It was their stewardship’s success that prompted Kering (then called PPR), via its holding company Artemis, to snatch up the Italian label in 1999 by forming the Gucci group, acquiring also Sanofi Beauté and Yves Saint Laurent. Ford was named the latter’s creative director, and also continued to oversee Gucci until the dramatic break-up between Kering and the Ford-De Sole duo in 2004.
“Tom Ford, on its own, is a fine label, but becoming part of [Kering] will not change the game,” said Solca. “There is no reliable data available on Tom Ford's revenue, nor on how it is split between [direct] sales and licensing revenue. It is therefore difficult to say in what terms this operation might benefit Kering,” said another analyst, who added that “[the acquisition] would surely help the group diversify, but Tom Ford’s size is not so significant, especially outside the beauty and eyewear categories.”
Following its launch, the US label has primarily grown via its fashion accessories, signing licensing deals with Marcolin for eyewear and Estée Lauder for beauty. According to analysts, the latter license generates a revenue of $275 million a year for Estée Lauder. It is the most important source of business for Tom Ford, which also commercialises a watches line. Sales for Tom Ford Beauty have reportedly posted record growth this year, especially in China, thanks chiefly to the launch of new perfumes.
Buying the label would enable Estée Lauder to add to its portfolio by strengthening its position in the luxury fragrance category, a strategic segment in the beauty market. An operation that would be all the more interesting because Tom Ford still has great growth potential, according to financial analysts. Estée Lauder could choose between keeping Tom Ford’s beauty business while ceding its other assets, or entering the fashion industry for the first time. In any case, the Tom Ford acquisition would be the biggest in the cosmetics group's history.
Instead, this could be the right opportunity for Kering to enter the beauty segment directly, developing products internally in combination with Gucci’s beauty business, once the respective license agreements will expire. “Beauty is certainly an area that we could consider in the future,” said Kering's managing director Jean-François Palus this summer, during a conference call with analysts, indicating he regards beauty as “a natural extension of our labels.”
“As for eyewear, once the contract with Marcolin will expire, Tom Ford’s collections could be integrated and produced internally by Kering Eyewear, which would certainly be a plus,” said another analyst, who also thinks that “[Tom Ford’s] leather goods [business] might be hard to develop.” Ready-to-wear accounts for approximately 20% of Tom Ford’s revenue, according to industry sources. Through its organisation and capabilities, Kering could surely enlarge the label’s women’s ready-to-wear range. As for Tom Ford’s menswear, up until Fall/Winter 2022-23 it has been produced by the Zegna group.
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