We never wanted the FALCON Method to be a black box. Hence, we are eager to invite you behind the scenes and give an inside view of how we operate our stock selection process. Lately, Italian company Moncler (known for its pricey jackets) provided an insightful example of how a purely quantitative approach could lead investors astray and why one should never omit the labor-intensive qualitative deep-dive phase.
As per our structured process, we begin by filtering the vast universe of global stocks, applying various EVA-based quality and growth criteria. Those that stand out in every regard and thus seem capable of producing double-digit fundamental returns (as a combination of value-creating growth and shareholder returns) make up our shortlist of EVA Monsters worthy of in-depth analysis and close monitoring. The last time our team did the annual screening process, Moncler comfortably qualified as an EVA Monster candidate based on its double-digit sales growth, EVA Margin, and other quantitative characteristics. Although this business is nowhere near the size of the heavyweight luxury companies, we still found that learning more about this supertrends-supported industry may be useful regardless of how Moncler fares in our qualitative framework. And this is where things got interesting.
The deeper we dove, the more warning signs emerged. Firstly, Don Thompson’s book, The Curious Economics of Luxury Fashion, classifies Moncler as a premium brand. The key insight is that premium labels typically sell for 40-60% of the price level of luxury brands (such as Louis Vuitton or Hermès), so Moncler must compensate for this shortcoming to produce those spectacular numbers that landed it on our EVA Monster shortlist. And compensate they do! How about a “Made in Romania” badge for starters?
While real luxury powerhouses invest heavily to maintain control of the supply chain, from the crocodile farm to store décor and stick with certain countries for the final assembly or manufacturing (as seen on product labels), others are closing production sites in their home countries, considering such cost optimization a logical progression. These decisions must always be analyzed and evaluated within the context of a strategy, as luxury’s ability to sustain high prices and profitability is governed by strict rules. Cost-conscious relocators are, in reality, discontinuing their luxury strategy in favor of a fashion strategy, without explicitly admitting this. In fact, the luxury strategy is a specific business model; fashion is another, governed by a completely different set of working principles. (Burberry and Prada are great examples of this shift, while Moncler was never a true luxury brand in the strictest sense.)
Moncler’s tangled heritage began in France in 1952. (You may notice it is still a toddler compared to seasoned luxury counterparts.) Then, a 2003 acquisition uprooted the 50-year brand and moved it to Italy, marking the beginning of its premiumization, direct-to-consumer push, and global expansion. While the numbers leave nothing to be desired, Moncler follows a finely-tuned fashion strategy rather than the classic luxury playbook. No artisanship, no “handmade in France” label, but cheap Romanian production along with dubious luxury positioning. And this is far from the last red flag we discovered.
The product portfolio also qualifies as thought-provoking. Outerwear contributes 70-80% of the company’s revenue, as Moncler is essentially a mono-category, mono-brand, and mono-product business. Being the category leader in down outerwear may not be enough for long-term success as the barriers to entry are relatively low in this sub-segment, and the exposure to short fashion cycles is also a negative. (Comparatively, the leather goods and hard luxury segments boast decade-long product cycles. Think about the Hermès Birkin bag or the Rolex Daytona watch.) Overall, we consider the apparel category the least attractive and most vulnerable within the luxury space, so Moncler’s positioning is not to our liking. Our research also revealed that Moncler items lack both resale and investment value, in stark contrast with traditional luxury products like Louis Vuitton bags, Rolex watches, and Ferraris (or even Nike’s collectible shoes). A second-hand Moncler jacket exhibits no luxury traits, which is quite telling.
The mono-brand business model can work for actual luxury powerhouses like Hermès and Chanel. Those companies have the haute couture and leather bags at the top of their product pyramids, while the widely available $30 Chanel lipstick at the bottom doesn’t diminish the brand’s perceived value. We wouldn’t bet on Moncler replicating such a structure, as it badly misses the top components and is essentially an apparel firm. To make matters worse, this is a fashion company that happens to sell its products at a luxury price.
Truth be told, Moncler’s down outerwear category has grown at over 20% annually since 2009, recently driven by the wardrobe casualization trend, and they benefited greatly through excellent strategic execution. From 2012 to 2022, Moncler more than doubled its global store count, and the company aims to expand selling space by mid- to high-single-digits in the next few years. This is a remarkable growth story, hence the quantitative EVA Monster qualification. Yet the puffer coat and jacket revolution may attract competition from new players and established brands expanding into the category, and Moncler doesn’t seem to possess any kind of moat that would warrant its luxury pricing in a more competitive environment. This brings us to the key question: How long do you think this company can keep up its value-creating growth without a protective moat?
Remo Ruffini has been the CEO since 2003, and it’s no exaggeration that all the success is attributable to his leadership. That being said, we don’t feel too comfortable betting on this CEO to recreate his magic over and over with different brands to keep his firm’s growth characteristics intact. Looking under the hood revealed that Moncler is lightyears from the true luxury businesses we are keen to invest in for decade-long periods.
Exceptional management can be the icing on the cake once we identify a company with a durable moat, but we’d generally stay away from mediocre businesses (except for our Fallen Angel picks, where we aim for mean reversion over a ~3-year period). In the luxury space, Hermès, Ferrari, Richemont, LVMH, and Kering qualify as reasonable investment candidates, while Moncler is out of our EVA Monster universe after the in-depth analysis revealed some alarming shortcomings.
Want to learn more about our stock ranking methodology and evidence-based investment approach? Start with this blog post!
Or read more like this in the Beyond Dividends book.
