TIVP013: Moncler (MONC): Zipped for Success w/ Daniel Mahncke & Shawn O'Malley

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29:30To begin getting smarter about investing, just visit theinvestorspodcast.com slash get started with stocks. That's theinvestorspodcast.com slash get started with stocks. And for a limited time, you can use code stocks15 for a 15 % discount at checkout. All right, back to the show. I know you elaborated in your list briefly already, but perhaps in more detail, can you explain why DTC is so important for luxury brands? There's a qualitative and a quantitative side to this. First, you just give up a lot of autonomy by not having full control over the brand, over the brand image and customer experiences anymore.

30:14The retailer decides where they would place your products in the store and also how they would market them alongside their other brands. This will never deliver the same experience as in a Montclair store. Their flagship stores look somewhat like an art gallery or even a fashion show. And they generally make you feel like it's about a lot more than just buying a new jacket. Some years ago, I was in Milan and I visited the Montclair store on the Via Monte Napoleone, which is kind of the main street for fashion in Italy and also in some ways in Europe. And it's the largest single brand boutique in the world.

30:56It spreads across four floors and it's just, it's huge. It's full of black marble and it just looks incredible. One law in the luxury strategy is that your marketing shouldn't sell products. It should sell a story. And when I walked into that store, I felt the same. I didn't feel like they want to make me sell their product. It was more about telling me who they are and what they stand for. They are not built to maximize profits. although Montclair stores are actually among the top three most profitable in the industry they are still part of a story making process and they showcase how the brand views itself and to get to the next point about why you want DTC channels to be a main part of your business if you are in in the wholesale sector you also give up a lot of control over pricing and discounting because when brands sell through wholesalers, they often have to accept discounting at the retailer's discretion to move unsold inventory.

31:58And those discounts, they will hurt the premium image and they create the perception that the product isn't actually worth the full price. That's kind of like the qualitative side of this question. And then there's the quantitative side, so kind of the financial argument, which is that you improve your gross margins by cutting out the middleman, which in this case is the retailer, because you do not have to pay a share of the sales. So Moncler does have significantly higher gross margins than any wholesale focused brand. Although you have to say that some of those gross margin advantages are offset by higher SG &A costs because those wholesalers also cover part of the marketing and the sales costs when they handle distribution for your brand.

32:45Also generally, I would want to mention that the importance of wholesale in the fashion business and for fashion brands shouldn't be underestimated. I mean, Nike, the perhaps best known fashion brand in the world, had to learn this lesson the hard way. After shifting its focus to DTC in, I think it was 2017, they pulled back from wholesale. And when they saw slower than expected growth rates in their DTC channels after just a few years, they tried to set foot back into the retail stores like Foot Locker or DSW. And they found themselves negotiating from a much weaker position. And if even Nike struggled getting back into wholesale, I think it's safe to say that any other brand would face even greater challenges.

33:33Only if you have a truly luxury stand in the fashion industry, you can get away with shutting off that part of the business and focusing solely on DTC. And I consider that risk of permanently damaging your brand when trying to shift to DTC as part of the mode surrounding those luxury brands that were able and that managed to do so successfully. A couple of years ago, I would have told you that I felt like branding was a lot of marketing nonsense. And it was a lot of people saying what they work on is important and then that these things are important to the consumer and kind of naively not believing that that really mattered.

34:17But I also kind of have a very functional mindset of like, oh, something works and it's the best working product, then that's what I want. And I'm not maybe necessarily inclined to consider, or at least I typically think that I'm not the type of person that would be inclined to consider some of the abstract storytelling around a brand. But again, I think that's just completely wrong and probably naive. And I've since realized that a lot of these subtle things really tilt subconsciously how we think about brands. I know, for example, Uber has gotten a really bad rep over the years for this perception that they take advantage of their drivers and that their driver should probably be considered employees, not contractors.

35:00And that's a whole other tangent to go on. But the point being, my perception of Uber is probably permanently scarred by my feeling that they have not managed their brand well. And they've had a lot of other issues, some issues with their founder and sexual harassment, scandals around the company and cultural stuff like that. But all of that matters. When I'm about to go click that button to pay for an Uber or to purchase a Montclair or to buy Nike shoes, there's this collage of all of these perceptions that are amalgamating together that influence your decision in that moment. And a lot of it comes down to just as simply, do you like the brand or not?

35:38And if you don't like them, that's one more barrier of many that's preventing you from making the purchase and just makes it all the harder to sell or all the easier to sell if you've got your branding done really effectively, which is kind of a rambling way to get to the question with Montclair, how has Ruffini focused on rebranding this company despite the DTC focus that you've already mentioned? Kind of played into my love for psychology because I like to think of myself as well, I just buy the best quality product and I do not fall for marketing. But how would you know about any product out there and what it can do to you if the marketing isn't great, right?

36:17and Ruffini's playbook is a masterclass in building a luxury brand and communicating to people why they are luxury why they have the highest quality and what the brand can do for them part of that is just like LVMH to ignore some of the common wisdom in the luxury industry but let's start with one of the most obvious characteristics which is definitely part of the common luxury wisdom and that's craftsmanship and quality it's like the pillar of every luxury brand and we mentioned it a couple of times already now the most important raw material for montclair's jackets is white goose down and every jacket has to contain at least 90 fine down and that's by the way the same standard that canada goose uses as well and there's a huge process in place to ensure this high quality.

37:09I think it's like 11 parameters that each batch of down has to fulfill before it can actually be used in a Montclair jacket. An example of that is fill power. I mean the numbers do not tell me too much but there has to be a minimum fill power of 710 cubic inches per 30 grams and that just ensures better insulation and lighter weight which means the jackets are light but they do keep warm pretty much whatever the weather is outside right then you have the second pillar which are strategic collaborations and shows and that's the main part of moving away from a functional brand to a fashion brand and it's also one of those laws that montclair breaks in regards to the luxury playbook because they use a lot of celebrities in their commercials or at least in their collections that's something where luxury strategy would tell you not to do that because you kind of get exposed to the image of the celebrity and montclair likes to do that anyway and it's one of one of the things that differentiates it from canada goose which still sees itself as a functional and a luxury brand if you take a look at canada goose's website you can see technical details like temperature rating and all the functions of the jacket and all the details about the materials.

38:33And that's something that Montclair just doesn't care anymore. For them, it's about fashion over function. And its website shows that because it focuses on its newest collections. There are few to no technical details on their actual products or their jackets. Like I said, part of Uffini's trademark is to have these collections of designers and artists that are displayed through big and extravagant shows. they were actually one of the first companies to have i don't know if you remember the trend they used to be flash mobs i think it was in the early to early 2010s when kind of instagram came up and there were these flash mobs and montclair had some huge ones they had ones they had one in central station new york they had one in milan and it was kind of the first marketing that built hype around the brand as i mentioned this is kind of where he he goes off limits for luxury branding and he doesn't care about the luxury wisdom to not work with celebrities, to not do these huge campaigns of like flash mobs somewhere, somewhere in any city, right?

39:37And one of those flagship collections is called the Genius Project and it was established in 2018. The idea is that you have 10 collections, each created by a different designer and among them are famous people like A$AP Rocky, Rick Owens, Willow Smith, Fowell Williams or Jill Sander. and this is what Ruffini said about the Genius Project. Quote, We have chosen designers that differ greatly from each other as we have always spoken to different generations. We have overhauled everything by overcoming the very concept of seasons. Our approach is monthly, weekly, daily. An approach which considerably reduces the time that elapses between the collection's presentation and when they actually arrive in the stores.

40:26So, fashion has become a lot faster in recent decades. And this project is Montclair's answer to that. Not waiting for the new season to drop a new collection, but simply putting it out there. Now, at first you might think that sounds counterintuitive to the point of scarcity, and it's kind of like Montclair's putting out clothes just like a mass producer. But of course there's a catch. The Genius releases are so-called capsule collections, which are highly limited standalone drops that are outside of the regular seasonal calendar that are only sold at small quantities and select flagship stores so it's not easy to get those clothes and what this is doing it creates artificial scarcity combined with the high building measures of montclair's shows it doesn't feel like flooding the market and it's quite the contrary where it always feels like you gotta be quick and you have to get a piece of this new limited collection.

41:27Now last but not least let's discuss Ruffini's strong focus on the Asian market which is also a main part of his strategy. The Asian market has become increasingly important to every luxury brand out there. I'm curious if you know, perhaps you do, what country spends most on luxury goods if you count it per capita? I did my homework for this one. For anyone who listened to our second episode ever of the Intrinsic Value Podcast, I did that one solo, but it was on Coupang, which is a company that operates specifically pretty much only in South Korea. So I believe from that episode, the answer is South Korea.

42:09I kind of knew you would be well prepared for this one. South Korea is actually the correct answer. And it's an average spend of $330 per capita compared to, for example,$280 for Americans and only$55 for Chinese nationals. And the trend is definitely going towards Asia. Montclair is already generating 50 % of its revenues in Asia, and their market is far from being saturated. Robert Leonard When looking at jackets in this price range, my feeling is that they're typically seen as one-time, almost lifelong purchases. I know Canada Goose, for example, only has 30 % repeat customers and offers a lifetime guarantee, implying that it is sort of a forever purchase, which is how you might justify spending so much money on what is a high quality and highly fashionable jacket.

43:02it. Moncler doesn't disclose how many customers exactly are repeat customers. However, I consider Moncler's fashion over function strategy to be an advantage in that matter, because customers who buy luxury clothes for the fashion aspect tend to be repeat customers. They don't buy a Moncler jacket because they're in need of a jacket. They buy it so they can wear it as a fashion statement. And they probably already have 10 of those jackets in their closet at home. So there's a fine line between fast fashion, which has become this huge trend in recent years, with big players like Primark or Timu, and still being able to have the luxury dynamic while accompanying this fast fashion dynamic of having a lot of collections and new clothes that people can get out there and buy to not only have a customer at once every 30 years.

43:58And Onclair's Genius Collection is the perfect example for that. Instead of only having two seasonal collections, they are monthly or biweekly, and you have the obvious advantage of creating repeat customers, and you have a high volume of sales just because you put new stuff out there. The disadvantage is that you have an increased focus on novelty rather than long-term timelessness. If you compare it to LVMH, They pretty much, just like Apple, put out the same product year after year, but it's timeless and people still want to have it. They want to own it. And it's perhaps not the same for Montclair if they put out so many different collections and so many different clothes on a bi-weekly schedule.

44:40Still, I would say that at the current moment, the advantages outweigh as long as Montclair is the in-style brand. But customers would go somewhere else when there are changes. gucci is an example of that it's a fashion brand for pretty much everyone but especially in the last couple of years for millennials and gen z over 62 percent of their customers belong to those groups and you do sell a lot to them but at a lower price point and you have this i would i would consider a risk of losing your your fashion status maybe you know the song gucci gang which got hundreds of millions of views and i would argue it was not beneficial for the gucci brand even though it probably generated a lot of sales.

45:25And there are only two ways to overcome that problem. And the first one is to be an established luxury brand like LVMH, which takes decades. And you would have to go back to these timeless designs. And the second one would be to be a luxury brand within a niche, something like Canada Goose is doing to still focus on functionality and saying, we build jackets to go outside and you can buy one of those jackets even if it's a lifetime purchase but you know what you will get and that results in fewer sales but also in customers that know exactly what spot the brand is filling in the industry once you enter the fashion game you compete with all the brands who have a similar value proposition and target customer and i would consider monclair and gucci to be kind of the same in that way because monclair might be a bit more classy than gucci at least in my perception but they're similar in targeting or in going the the fashion way instead of lvmh which is a lot more classy and timeless and uniqueness and brand image is is then dependent on every new collection that you put out and once a brand misses on that front it can be replaced very quickly i could mention here balenciaga or prada who both had very questionable products and advertising campaigns a couple of years ago, and it hurt them a lot.

46:50What I want to say with this is that fashion is fast, and a brand might look like it's up and coming now and even well-established in the industry, but that can change pretty drastically if you just miss out one year of good collections or make a mistake by branding it the wrong way, like Balenciaga did. What do Montclair's plans look like to become an established luxury brand such that they can escape the fast fashion luxury market? Moncler's strategy is to first reach diverse audiences and then turn them into community and therefore long-lasting customers. And they do that by leveraging their collections.

47:33So the brand core lies in Moncler men and women collections. They are focused on Moncler's heritage as an outerwear brand so they're pretty basic you could say that and then you have the montclair on four collection which is for younger audiences starting with baby clothes up until the age of 14 so if you want to you can buy your one year old 700 montclair down jacket that won't fit him next winter if it's i mean that's up to you right and then last but not least you have the Grenoble collection, which targets the more sporty consumer, focusing on ski wear, combining technical performance with fashionable designs.

48:14And that kind of is the whole portfolio of collections that is targeted for each audience and trying to get them into the brand and keep them as long as possible, turning it into a well-established luxury brand. We should mention too that in 2020, Montclair acquired an Italian high-end streetwear brand named Stone Island in a$1.4 billion deal. So what is the plan with that brand and how will we see another chapter of Ruffini's playbook unfold? Stone Island was Montclair's first ever acquisition. Up to this point, it's also their only one. and the 1.4 billion were paid half in cash and half in Montclair's shares back then and that price tag valued Stone Island at about 20 times earnings so it wasn't cheap but as you mentioned he knew his playbook and he was probably very confident to get this brand where Montclair once started and then evolving it or developing it into a huge global brand and Stone Island is an Italian luxury brand focused on men's apparel.

49:21Although its history is a bit unusual for a luxury brand, its founder Massimo Osti experimented with many fabrics and created new and unique designs. This experimental background is actually fitting very well into its north Italian background, which is known for industrial and automotive design, for example Ferrari and Lamborghini, whereas the south of Italy is usually known for all these high-end fashion brands. When Stone Island entered the market, its customers were young, wealthy, middle-class teens. And then there was kind of a switch. Suddenly, Stone Island became popular with English football fans in the mid-80s.

50:05You might not be familiar with English football culture, but especially in the 80s, there were a lot of hooligans and that's kind of what stone island became associated with then and they were okay with it they even played into that image by putting keffler so a bulletproof fabric into a couple of their clothes but still in the 2000s they decided to go for an image change which brought the brand back into the mainstream when montclair acquired stone island ruffini said that the brand was quote 2010 montclair the revenues back then stood at 280 million euros with 35 percent generated in italy and 27 percent via dtc channels for montclair and stone island's numbers they were pretty similar about 240 million in revenues 28 percent in italy and 22 percent via the DTC channel.

51:05So it's pretty similar, although Stone Island was, you know, a bit below the Montclair level. And then over the next 10 years, Montclair was able to grow revenues at a CAGA of 19%. So domestic revenues decreased by almost two thirds to only 11%. And DTC revenues tripled to over 77%. And that's kind of the path that Montclair wants to take Stone Island on. And to get there, Orffini, like you said, applied his signature playbook. So he wanted to make it a global and a DTC-driven brand. Despite being less concentrated in Italy than Montclair was in 2010, Stone Island was still very European-focused, with a whopping 80 % of revenues coming from European countries.

51:55Now that we're halfway through this 10-year plan since Montclair's acquisition, how is the plan unfolding well stone island has made tremendous progress in the first two years in 2021 so the year after the acquisition revenues grew 35 compared to 2020 and 26 compared to 2019 and it makes sense comparing 2019 numbers because then you adjust for the covet year right and even in 2022 so a year after revenues were still growing fast with 28 and the dtc channel grew by 93 so it almost doubled and revenues from asia they actually doubled so they kind of made or enabled this huge revenue growth while the wholesale channel was growing slowly with seven percent and that's totally fine for him because his strategy as i mentioned is on dtc and in fact we should see in 2023 and 2024 that wholesale is declining very fast and that actually makes the the top line suffer so while the underlying trend kept improving with DTC growing almost 20 percent and Asia growing double digits as well Stone Island's top line was growing significantly slower only by four percent because the impact of the wholesale decline and it was the same narrative in 2024 there has been another weak year for revenue growth with actually no growth and one percent decline and the underlying trend kept improving but it wasn't enough to kind of adjust for the wholesale decline so DTC grew just like Asia their revenues also grew by 23 percent but the other markets America and Europe they declined so heavily that they couldn't make up the huge amount of growth that you did see in DTC and in Asia.

53:50So you saw a declining top line, but all of that was communicated by management and it was okay with both the market and analysts as you would see in the market's reaction. I know this has been a lot of numbers, so let me summarize quickly. We clearly see that Ruffini is using the same playbook as he did with montclair which is a strong focus on dtc and building out the operations in asia and while both of these objectives do remain intact top line growth has slowed recently and the main reason being restructuring from wholesale to dtc and with the wholesale still being 50 of the business it's just a lot of impact right and so the declines they weigh heavily on the overall results And that's what we see in the top line in recent years.

54:43Did Montclair ever have a similar phase? I asked just because I know Ruffini called Stone Island the 2010 Montclair. And so in that vein, when is Stone Island's top line expected to recover? Unfortunately, we can only go back as far as 2014 for Montclair because it was a private company before it then IPO'd in December of 2013. and at that point Montclair was already well diversified globally and DTC was about two thirds of the entire business so it's not really comparable to the numbers that we have from Stone Island in 2020 after the acquisition and because of that we cannot really know how Montclair kind of went through that phase but we do know that it was in the years prior in the early 2010s and perhaps even before because Montclair was acquired in 2003 where Ruffini turned over the business and we did see revenue decline in in those years and regarding the question of how long we will see the top line of Stone Island decline or even be kind of flattish I see it taking another year or two before Stone Island's revenues will return or will be more stable and return to growth.

55:58Although the management said that the declines in wholesale in 2025 and also going forward shouldn't be as steep anymore just because they decided at the beginning to make this transition quickly and they did so. So I only expect low single digit declines in wholesale going forward. And then three years ago for example Stone Island had more than 85 % of revenues coming from wholesale and now that number is halved in 2024 for the first year DTC actually overtook the wholesale segment and as a Goldman Sachs analyst put it in the Q1 results for Stone Island which she called quote absolutely fantastic it does seem like both the market and analysts are okay with waiting another one or two years if the underlying trend keeps improving for Stone island i'm a bit surprised by that because i know the market and i know you do as well and usually the market doesn't like short-term pain for the greater good in the long run but it seems like they are okay with it in moncler's case Let's take a quick break and hear from today's sponsors.

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58:07I'll be waiting for you back here. Just like everybody else, there was a time when I was a beginner investor, and I have to say, investing is particularly filled with jargon that can just make it so difficult for new investors to understand what is going on. But it's never too late to get smarter about stock investing from the ground up. At The Investor's Podcast Network, we've made a habit of studying the world's best investors, and now I'm distilling those learnings into a simple course for you or for anyone in your life who you might want to share the gift of knowledge with. With my How to Get Started with Stocks course, you can master the principles of excellent lifelong investing with valuable insights for both beginners and pros.

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1:00:45it montclair was quick to deny those rumors and i would be surprised to see any acquisitions before stone island is fully on track and that also includes returning to top line growth and additionally burberry would be more of a turnaround play and that is different from what they started doing in in stone island right nevertheless i did come up with a list of pros and cons for this deal not only to see if Burberry would be a deal that makes sense for but also to figure out what Moncler generally should look for in a brand if they consider any takeovers going forward. So Stone Island was a young luxury brand with special appeal to Gen Z customers.

1:01:32They were growing rapidly and there was and is a lot of potential regarding DTC adoption and diversifying geographies. for Burberry the picture looks a lot different the brand is mature sales are actually declining and so are the prices and Asia is already 50 percent of their sales and DTC is 78 percent so there's not much room for improvement if we go by Ruffini's basic playbook it would be kind of like a turnaround and it has to be about turning around the brand image creating demand or hype again and and also trying to keep its position. And the emphasis is on keep its position in the luxury brand segment instead of building it, which is the case for Stone Island.

1:02:20And it looks like the new CEO, Josh Shulman, is moving into that direction. Although he initially said, quote, we took pricing too high across the board, which would indicate that Burberry would see price reductions, which I was skeptical of at the beginning. it now looks like they actually only lowered the prices of entry-level products and the focus was shifted back to their flagship products like the trench coats and scarves and those were kept at high-end prices and they're regaining momentum so i think burberry is doing a lot better and it's also not a perfect fit for mcclair anyway burberry has such an iconic style that is instantly recognizable.

1:03:05I don't think I have any products, but in high school, I remember, I think I bought some Burberry cologne that I probably still have stashed away somewhere to this day. And I know my wife loves Burberry's print and kind of the style behind the brand. And she has a Burberry wallet. It's more of a classy vibe for Burberry. Would that even fit with the brand that Montclair has built? Yeah, that's one of the main differences, right? Between Burberry and Montclair. and generally you could say that there are different types of luxury brands and they are not all the same. Canada Goose for example we mentioned it emphasizes functionality.

1:03:43Montclair emphasizes extravagant fashion and then there's Burberry with a more classy and timeless fashion and if acquisitions should become effective long-term Montclair will also need to integrate brands that don't follow Ruffini's exact paybook. The luxury segment is just so small that there's not a vast pool of possible acquisition targets that they could choose from. So despite not being a perfect fit, Burberry does have many characteristics that make it attractive as a target. And the most convincing one is its price. Its stock is down 60 % from all-time highs and it has been 75 % down when all the takeover rumors started.

1:04:28And Bernard Arnault, who's the CEO of LVMH, as you obviously know, is actually a minority shareholder in Montclair now since September last year. And allegedly, he favored the takeover, at least if we trust the reports of Reuters and the Daily Mail. That would be pretty exciting, I think, to shareholders. How plausible is that, that Montclair itself becomes a takeover target? Well, technically LVMH didn't acquire a share in Montclair directly, but in Ruffini's holding company, Double R. And it's a 10 % stake that they bought in September last year. And Double R itself has a 15.8 % stake in Montclair.

1:05:10So it's still a rather small position, but it does give LVMH a seat on Montclair's board. And the position could increase due to a special clause in the deal, which is that over an 18-month period, Double R can buy additional shares in Montclair, which would be funded by LVMH. And if all of that funding would be used, LVMH could potentially have a 22 % share in Double R and Double R, or basically Ruffini, could in turn have an 18.5 % share. Now, that's once again a lot of numbers, but if you would add all of them up, LVMH could end up with as much as 4 % in Montclair which is still pretty small but sizable enough to make you think a bit about the long-term prospects of LVMH and Montclair working together and to me this does not yet look like a takeover attempt at this stage but it is like maybe planting a seed in Montclair's business especially if you consider one last clause that the deal also includes which is a priority purchase right so if ruffini sells his share it's first offered to lvmh and vice versa from ruffini's perspective it makes sense because his share in montclair increases a lot and he concentrates even more power on himself he said about the deal quote this partnership reinforces double r's position in montclair and provides the stability needed to execute my vision for the future.

1:06:44I have long admired Bernard Arnault's entrepreneurial spirit and unique understanding of the luxury sector and I'm delighted he so clearly supports my long-term ambitions for our group's extraordinary brands. And Bernard Arnault said, quote, Moncler has been one of the most significant entrepreneurial success stories in the industry over the past 20 years. Remo Ruffini's vision and leadership are remarkable and I'm delighted to invest in his holding company to reinforce his position as leading shareholder on Montclair and support the independency of the Montclair Group. Now, if you just look at this first glance, it does not sound like LVMH has any plans right now to take over Montclair, but who knows?

1:07:32I mean, whether we can trust Arno saying that he supports the independency of the Montclair Group is kind of unknown for the leader of a brand which has 75 positions under his umbrella company. So I guess we'll just have to wait and see. With that Burberry acquisition likely being off the table and not that many other targets being available, where will Montclair's future growth come from? Will it primarily be organic instead? The main driver will definitely be its core business. So the Montclair brand and Stone Island. and although there were some immediate rumors that the stone island acquisition could be the start of a new chapter for montclair that could in the long run make it italy's first luxury fashion conglomerate ruffini and the management have already said in some of the last earnings calls and also some interviews that this is not a topic for now so i would say the focus is on their brands and i wouldn't guess that there are any acquisitions coming in the next couple of years over the last five years montclair has doubled its revenues to over 3 billion euros and compounded by 20 annually so the grant is definitely still growing and there's a lot of room for further expansion and the same goes for stone island too i mean even if you would combine them they only have a three percent market share of the current luxury fashion market which is also supposed to grow by four percent per year and montclair also still generates 87 of total revenues so stone Island has even more potential to become a significant part of the business in the long run.

1:09:07A key short-term catalyst would definitely be the inflection in Stone Island's top line, which like I said, could happen in the next one or two years, and then could be followed by an expansion in store count as well. Before we get into the valuation and some more about the future growth for Montclair, we should probably take a moment just to stop and talk about the risks, right? So what should investors keep in mind when it comes to Montclair? The main risk for every luxury brand is losing its prestige and appeal. And there are different ways that can happen. One is diluting the brand by just having too much output.

1:09:46And another one is discounting. So perceived value goes down, and people are not interested in the brand anymore. And then you have the lack of creative vision. And lack of creative vision is something that hits most companies at some point especially if they work with just one key person designing all the new collections and clothes and in moncler's case i see no risk of discounting or lack of creative vision as long as ruffini is on board so too much output and declining quality might be more of a concern regarding too much output we've talked about the genius collection and it has been successful in driving relevance and creativity but the sheer number of annual collaborations could potentially dilute Moncler's core identity.

1:10:37If the volume of releases increases too much of the collaborations start to feel repetitive, Moncler is risking to lose the exclusivity and also the uniqueness that defines luxury positioning. Moncler has made efforts to appeal to younger and streetwear influenced consumers through collaborations with designers or companies like palm angels and hiroshi fujiwara and if montclair should expand too much into the streetwear segment and also the mass market it could turn off its traditional high-end customers and and therefore hurt the brand's exclusivity and then you have the second risk the loss of product quality.

1:11:24Moncler focuses less on functionality than Canada Goose and as I mentioned they still have high quality down that they use for their jackets and they are focused on keeping the quality high. Nevertheless Canada Goose produces solely in Canada while Moncler has long moved its factories to East European countries like Bulgaria, Georgia or Hungary and that's another violation of the good old luxury wisdom which is to not move your factories and this is especially true if you are a company from the US, Canada or Western European countries where producing in your own country is still mostly seen as the highest possible quality production and as an Italian high-end luxury brand most customers would simply expect you to produce in Italy as well.

1:12:18Perception is really everything. Something as subtle as the tag saying made in Italy versus made in China makes a huge difference in brand positioning, as you know. Luxury streetwear, though, is just such an interesting trend to me because on the one hand, there are people who wear Montclair daily while out and about. And on the other hand, this is sort of at tension with the athleisure movement in the US, where it's totally normal and even glamorous to wear things like Lululemon products out in public, even if it's just sweatpants and leggings. So I'll be the first to say I know nothing about fashion, but it is fascinating to me how and where luxury branding can emerge in the clothing world.

1:13:01And there's a significant cultural element to it. When I've traveled across Europe, I've certainly noticed athleisure is far less common than it is in, say, Miami or New York. And so what is maybe prestigious and popular in one place, like walking around in expensive gym clothes, is seen completely different somewhere else. And that's what I might hang up with clothing brands generally. Fashion is so ephemeral, which is not a profound statement to say. But not only is Montclair, for example, trying to cater to the idiosyncrasies of different European cultures and preferences, they're also trying to do the same across North America and Asia at the same time, which is just tricky to do.

1:13:43Going back to Ruffini and his role with the company, what does that impact look like? And is there any key man risk going forward with Montclair such that the future of the company is wholly dependent on this one person? Maybe one short comment on the cultural differences. An interesting example of that has been Dolce & Gabbana, who had an incident in 2018 where they wanted to do a fashion show in Shanghai. and as part of that they had shown an ad a couple of weeks before where there was a Chinese woman trying to eat pizza with chopsticks and this has been a total outcry in China and I mean it already sounds like a bad idea but it just shows how simple it is or how easy it is to lose credibility overseas if you do not know how to approach a culture the right way but getting back to your question about Ruffini and a key man risk for Moncler.

1:14:40Ruffini's vision and his implementations have definitely made Moncler what it is today. So if he would leave, Moncler would definitely lose a lot of that expertise. But personally, I do not see major key man risk because while there's a leadership dependency on Ruffini due to his strategic vision, he's not the designer of montclair's successful collections that reduces some of the risks that you usually have in the fashion industry with one person just being responsible for all the collections he kind of diversified montclair with regard to the genius collection and all the different designers for the genius collaborations however uncertainty around his stake in montclair and also the succession plans would definitely hurt the stock in the short term and perhaps they would leave a mark in the long term as well.

1:15:34Moncler's management team has been strengthened in the last couple of years. You now have people on the board like Gino Fasanotti, who joined as the chief brand officer in 2021. He has 23 years of experience at Nike, where he led some of the biggest marketing campaigns. You have Robert Trifus, who joined as the CEO of Stone Island, and he spent 15 years at Gucci, nine years at Armani and five years at Kevin Kline. And he's a British guy. So he has this special connection to Stone Island because he grew up in London, but then he transferred to Manchester for his studies. And Manchester is one of the hubs for British football.

1:16:14And as I mentioned, there was this connection in the 80s between British football and Stone Island. So he's kind of ingrained in the DNA of that brand, which I think is very helpful for his long-term vision. And then you have people like Roberto X or Luciano Santel, who also have tremendous experience in fashion and in high-end fashion. So I do think that Ruffini has also built a team that is capable of turning his vision into reality, even if he should leave at some point. Although that's not an option at any point discussed prior. It sounds like there's a very promising group of people at top running the business.

1:16:55But to sort of do a rough transition here, this is the Intrinsic Value Podcast. So how about we get to talking about intrinsic value and the valuation of Montclair? Sure. So like we said, assume no acquisitions going forward in the next couple of years. So all that I would say regarding the valuation will be based on the assumptions I make for the Montclair brand and for the Stone Island brand. And maybe to give some perspective before we start into it. Gucci is a company with about 7.6 billion euros in revenues and over 500 total stores. And their revenue per store is 11.4 million euros. Versace is a brand which has a billion euros in revenue, about 230 stores and 4.2 million euros revenue per store.

1:17:43So you see there's kind of a discrepancy and Moncler kind of fits right into the middle of that with 3 billion euros in revenues about 280 stores and 8.4 million in revenue per store and i say all of that because there are two main drivers that are important it's store account expansion and it's how much money a store makes so the revenue per store and that's kind of what i base my my valuation of monclair on if we start with the monclair brand and their retail store expansion in the last earnings call luciano santer said regarding the store expansion plans that quote in the past and also for 2024 we said that space should represent mid to high single digit growth i can tell you that for this year it will be more mid than mid to high growth and i think that in the future it will be the same because our store base has been growing so what he says is basically that because they have more stores than they had a couple of years ago growth will be slower going forward because of that i've made some assumptions which is four percent store growth for asia which already is its highest market in absolute numbers but it's definitely the least penetrated if you compare to the total size of the market then i will assume a bit slower growth for europe which is its most mature market so three percent over there and then i kind of take a leap of faith.

1:19:10And when I say that the Americas and especially the US will grow by 10 % per year, because of the comments made by the management, I will use another quote. So here we go. In the way we foresee our investment in 2025 to 2026. And this is a multi-year investment that we're going to do, not only in terms of retail expansion, but also in terms of visibility that we want to give to the brand. We are going to focus on the Americas and mainly the US with a city approach. What they mean by city approach is that they will go for the most or best known cities. For example, a store in New York, something like that.

1:19:50And because of those comments and the plans that they outlined in the earnings calls, I expect faster growth in the Americas. You mentioned that growth assumption in the US, and it is sort of a leap of faith, as you said. When I look around in the US, I don't think I've ever consciously noticed Montclair products, but especially in places like New York, Canada Goose is everywhere. So there is a big head start there that Montclair is working against. Which gives it even more potential to grow in the future, right? So even if you look at the revenue per store numbers, you see that America is still far behind the most mature market, which is europe as i said before monclerc stores are already among the most efficient in the industry the management mentioned that increasing prices would only be done going forward or in line with inflation and in line does not necessarily mean they will just use inflation numbers because they said mid to single digits and in most mature markets inflation is currently standing between two to three percent so i would expect them to go a bit higher with price increases but they do not want to increase prices if there is no inflation.

1:21:05That's basically what they are saying. And the luxury fashion sector in general is expected to grow by 4 % per year. And if I just combine this, I use 6 % as an expected revenue growth rate per store for the Montclair brand. And I consider this pretty optimistic. So I wouldn't say that this is a conservative estimate at all. And in the long term, this would probably be too optimistic. But I only assume this until 2030. So I think it could make sense in that case, especially considering that, as you mentioned, the Americas are kind of underdeveloped and even decreased in the last two years. So there is a lot more room for growth in the US in the future.

1:21:45What about the plans for Stone Island store expansion? We've talked about them a lot today, but how does that look? Stone Island had a fantastic year in 2022, where they ramped up their stores in Asia. from i think a count of four to 44 so 40 stores in a single year in asia and that shows that it's not about how many stores stone island is able to build but it's how many they want to build and stone island ceo which i just mentioned robert trifers said they want to improve the stone islands store economics before they go all in on on building new stores so that's why i assume slower growth with just four per year in asia and two in europe and once again i take a leap of faith for the us where i think that there's more room to grow and he also kind of expanded on the vision of connecting stone island to the sports in the us so for example in football because it worked great when they did it in europe so maybe that's a playbook they want to go further in and doubling down in in the us as well and because of that i think they can build a bit more stores in the US going forward, although it will take some time before they start ramping up.

1:23:01So that's what I also show in my model. And if we combine the store expansion aspect and the revenues per store, we have the first pillar of our revenue assessment. And the second will be the wholesale business. And this time we keep it simple and we just assume that they will have 5 % declines per year, which is pretty much in line with what management said and history also shows us so expecting the gross margins to already be mature at 78 just as the EBIT margins at 30 percent this all combined would give us a present fair value for maclera of 55 dollars and as i mentioned i think this is not a conservative estimate used pretty optimistic scenarios at times comparing it to the to the current price of 61 euros this would indicate a downside of 10 percent However, the outerwear business is a cyclical business.

1:23:58And you can also see that in Montclair stock price. And the last quarter has been somewhat of an upward cycle. And it still trades 30 % above the lows of late 2024. So right now, that means that the peak could be behind us. And we could see an ongoing correction. And in the past, that correction has been bottoming somewhere in the low to mid 40s. which would indicate that if we reach those levels, Montclair could be a great buying opportunity. At current prices and even in the mid 50s, I personally see too many downside risks, especially fashion, which is just fast changing and most of my assumptions are already in line with management guidance, not leaving too much of a margin of safety.

1:24:45The point being, I wouldn't consider my assumptions as conservative. However, at a PE of 25, it might not be worth the risk when buying LVMH, which is a much more diversified and established brand at a forward PE of 21, is also an option. But I've talked a lot now, as always, in the evaluation. So what's your take, Sean? I think fashion goes in the too hard pile for me. I tried to come into Montclair with an open mind, but I can't help but think about the fact that we don't want to, of course, copy Berkshire Hathaway and everything they do and what Warren Buffett has done. But I think generally, we can find a lot to learn from looking at the trends and the types of companies and opportunities he's invested in.

1:25:32And correct me if I'm wrong, but as far as I know, Buffett has never had a core holding in a fashion brand. And that signals something to me about maybe I should be more cautious with these companies. And if I were going to go into the kind of fashion, high-end luxury branding, I would probably be more inclined to own LVMH, which maybe we'll cover in a future episode. And I see, I don't want to call it a value trap, but I do see how investors get lured into these types of companies. Because you're taking clothes that even though they're very high quality and you're still marking them up, you're adding five, six, seven,$800, dollars, whatever it is, to the cost of production, you're going to get massive gross margins, you're going to get massive operating margins, you're going to get really good conversion to free cash flow, they might be able to do a lot with share buybacks.

1:26:23And it can look like this hugely profitable, stable brand. And yet, as an outsider to the fashion world, I just have no concept of the durability of those sales and how sustainable the earnings are and what the opportunities really look like? Because we're not talking about something like John Deere, where we know people need these tractors, and it's the best in class for a necessary piece of equipment, or there's not a network effect to the same extent of, we know everybody uses Airbnb or Uber or Facebook, and therefore other people are going to want to use those platforms. I just don't see the same advantages working in Montclair's favor, which is why I say I would be more inclined to consider a company like LVMH, where they have a very proven track record of showing that, okay, we're so diversified and we've had so much success.

1:27:12This is not a one-off thing. Not to say I think that of Montclair, but they are sort of in different leagues in this industry. So yeah, for me, it's the too hard pile. I'm happy to set it aside. Unless you feel strongly we should add it to the portfolio, I think I'm happy to pass. I think Montclair is very attractive at certain prices. I mean, if you look at their balance sheet for example they have 1.3 billion in cash and they have no long-term debt so they are definitely financially sound and i think what you point out to is is a main difference between italian fashion brands and french fashion brands french are used to being more timeless and having those kinds of brands like lvmh or even ms and then you have the italian ones which are and they do not necessarily have to be italian or french but it's kind of categorized in that way and the italian ones are more fashion pronounced so they want to be on top of the newest trend and the new hype as i mentioned that is a risk because as soon as you lose out on the next hype you might be out of the game where i maybe disagree with you is the long track record while i get i mean you know me as a value investor as best as better than many other people and i like to buy cheap companies and i like to buy them when the situation going forward is maybe more certain and that's not the case for Montclair but they have the possibility of expanding into different brands maybe the more classy ones like Burberry would kind of give them more of a feel like LVMH and I think there is potential at the right price but currently we are not at that price in my perspective.

1:28:52All right now before we close it for today let me quickly mention as always that you can track the intrinsic value portfolio that Sean and I build on the show week in week out. You can see our position sizes and holdings in our newsletter and you can sign up for it for free in the show notes below or at theinvestorspodcast.com slash newsletters to get weekly outlines of our company breakdowns, portfolio and even the valuation models that we use when we cover each stock. Last but not least, Sean, how about a little teaser for the company we will hear about next week? I'm not very good at keeping secrets, so I'll try to keep what I say to a minimum, but it's a promising company, one that does have a very strong network effect, which millions of people use every day, and which also IPO'd last year.

1:29:48I know the company particularly well because I participated in the IPO, and for anyone who knows me that is already giving away too much. So I'll pause there, but I think it's an exciting company that you won't want to miss out on. Let's close it with a quote from the king of luxury fashion, Bernard Arno. What I have fun with is trying to transform creativity into business reality all over the world. To do this, you have to be connected to innovators and designers, but also make their ideas livable and concrete. With that said, we'll see you again next week.

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