Cucinelli: The Clothes Look Good. And the Stock?

Brunello Cucinelli, the Italian designer who built a decades-old clothing empire on a foundation of cashmere, is suddenly having a rough go of it in the stock market. His company's shares are down 24 percent this year on the Borsa Italiana, while Bloomberg Indexes' Global Luxury Goods index is down 6.2 percent. Now the company is appealing to investors with a 40 million euro ($56 million) infusion of six new stores in five countries and a new men’s suit collection . Dandy, you say.

Well, that's just it.

These are hand-tailored suits in linen-wool-and-silk blends that "adhere to the body," says Chairman and CEO Cucinelli. At $3,000 to $4,000, they may also adhere to the wallet. They have a broad shoulder and narrow waist, suggesting that unfit, non-angular men need not buy. Trousers feature a lower-cut waist than your typical Brooks Brothers, with a slim leg and 50s-style ankle turn-up.

There’s an obvious British influence in the 2014 men’s collection, which Cucinelli, 60, says takes a page from the "Teddy Boy" fashion of 1950s London. Inspired by the style of Edward VII, it remains alive and well thanks to the tailors of Savile Row.

"Whether or not men work in finance, suits are going to be a very important outfit in the future," says Cucinelli. "And there are more young people nowadays who appreciate a more formal way of dressing."

By "young" he doesn’t mean the 15- to 24-year-olds in Italy suffering through a 42 percent unemployment rate. He’s referring to 30- to 40-something urban professionals, in Italy and elsewhere, who can afford his suits. Financiers are the typical customer.

"I prefer the European slim cut to the bulky U.S. block-cut suit," says Wall Street banker Eric Dinsdale, 43. "Maybe it comes from my days at HSBC or, previous to that, broking at Lloyd's of London next to Jermyn Street, but there’s an expectation of classic formal wear in the office. Navy and gray only, or pinstripes if you’re stylish. Colored shirts are for Fridays."

Got it.

Cucinelli’s ambition reaches beyond the Wall Street set. Starting in April, his stores will sprout up in the centers of Vienna, Sao Paulo, Taipei, Seoul, San Francisco and Atlanta. Manufacturing from Italy’s picturesque Solomeo village, Cucinelli is banking on the demand of the high-net-worth class for authentic luxury products. Bottega Veneta and Loro Piana are going after the same niche market with similar prices. The question is, how many people buy $1,000 cashmere sweaters and $4,000 suits? These brands figure: Enough to make a profit.

The other question is, will investors agree? The company's shares fell 22 percent in January alone. Cucinelli calls it a seasonal correction. "The stock was very high in December, when the sector was high. In January and February we balanced out," he says. "But my investors understand that about luxury. They understand the value of exclusivity."

While the luxury sector did come down from December highs (BI's Global Luxury Goods index fell 9.1 percent during the same period in January), that isn't the whole story. Cucinelli took a particularly bad hit the second week of January when Societe Generale rated it a "sell" for the first time and Nomura downgraded its rating from "neutral" to "reduce," citing a high valuation and earnings risk.

Analysts said it was an expensive stock, with a price-to-earnings ratio of 44.4 times 2013 earnings, and that they doubted earnings could keep up with Cucinelli's spending spree. "Upside risks include faster store rollout and growth than we expect," reads Goldman Sachs’s latest Cucinelli report. Over a three-year period, including this year’s $56 million spending spree, Cucinelli will have spent $146 million on various items, including the acquisition of Italian bespoke men’s clothier D’Avenza’s production site for $4.4 million.

The stock is still hovering at $19.70, just 3 percent higher than its January low. In its 2013 earnings report, released last week, the company reported net revenues up 15.5 percent and profit up 10.9 percent year on year. Neither Nomura nor Soc Gen has changed its ratings, but the earnings report did convince Mediobanca to upgrade Cucinelli from "underperform" to "neutral," citing confidence that the start of 2014 is "consistent with company guidance." Kepler Cheuvreux is more bullish, upgrading from "hold" to "buy," saying that 2013 fourth-quarter results "exceeded expectations" and that the "correction" seen in January and February "offers an entry point."

It seems the earnings report had just enough gold to keep the spindles turning. Now the pressure's on the new stores, and the new collection, to perform. Brunello Cucinelli is off on his mission to bring style to dandies everywhere, at least a portfolio's worth.

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