Analysts weigh up impact of Kering's Italian tax settlement

By

Dominique Muret

Published
May 12, 2019

On Thursday it was announced that Kering has agreed to pay a record fine of 1.25 billion euros to settle the tax evasion investigation being carried out concerning its Gucci brand in Italy. The settlement represents one of the largest sums of money to be paid to Italian tax authorities in this kind of case. And yet, the day after the announcement, the French luxury giant saw its shares rise 1% to 507 euros on the Paris Stock Exchange before midday on Friday, 10 May. 

Kering is certainly facing a hefty fine but the company looks to have the financial wherewithal to swallow the pill without too much of a shudder and had already forewarned the markets about the situation. Indeed, analysts estimate that the group is sitting on a cash pile of some 10 billion euros and it also holds a residual interest of 16% in Puma, which is valued at around 1.3 billion euros. 

At the same time, the fine is actually lower than the 1.4 billion euros in alleged evaded taxes being investigated by the Italian authorities and will be paid in four years. Furthermore, the settlement allows François-Henry Pinault to draw a line under the longstanding litigation, which, had it been allowed to drag on, risked doing some serious damage to the company's image.

The Milan prosecutor's office accused the French company of having declared operations carried out in Italy in Switzerland in order to benefit from more favourable tax rates. The investigation, which covered the period 2011 to 2017, was focused on Kering's Swiss logistics and distribution subsidiary Luxury Goods International (LGI). 
 
In its press release about the settlement, the company did not provide any case details related to Gucci's current CEO Marco Bizzarri, or Patrizio Di Marco, who held the role before him, both of whom were also under investigation. It remains to be seen whether the settlement agreement will also put an end to these proceedings or if they will be subject to a separate ruling. 

"From a purely financial point of view, the implications are relatively limited. Kering had warned investors that its tax rates were going to grow in the coming years and that was assimilated into its stock value," explained Bernstein analyst Luca Solca. "In terms of reputation, this is a slightly more important concern as Kering has stood up as a champion of ESG (environmental, social and governance), and paying taxes is one of the most important social obligations of a successful company."

Before Kering and Gucci, other big luxury industry names have been accused of the same infractions and paid large fines to the Italian tax authorities without their image suffering too much. Giorgio Armani, for example, Bulgari and even Prada, which signed an agreement in 2013 which saw it pay a fine of a little over 400 million euros. In the same year, Dolce & Gabbana was sentenced to pay 343 million euros to the Italian tax authorities before being acquitted in late 2018. 

Some of the highest fines imposed on multinational corporations by the Italian tax authorities in the last few years include that of Facebook, which was sentenced to pay 100 million euros in 2018, Google and Amazon's fines of 306 million and 318 million euros, respectively, in 2017, and the 318 million euros demanded from Apple in 2015. 

In 2018, Kering reported a 26.4% increase in revenues, which came to 13.66 billion euros. Gucci accounted for 8.28 billion of the total – a rise of 33.4%, or 37% on a comparable basis. The Italian fashion house also represents 80% of the group's operating profit. 

With Reuters