The company responded to the allegations yesterday and strongly denies them, although the market was not convinced, with the stock continuing to fall today.
Bernstein analysts point out that the scandals involving the supply chains of Dior and Loro Piana (unacceptable working conditions, use of illegal labor, opaque subcontracting, very low wages) had virtually no impact on sales or on LVMH, the owner of both companies. Luxury goods consumers demonstrate contradictions between their beliefs and their buying behavior. However, the case of Brunello Cucinelli is different. The company was built on a structuring vision of "humanistic capitalism," centered on an ethical and sustainable promise that goes far beyond the usual brand marketing drivers.
As such, Brunello Cucinelli's reputation has significantly contributed to its commercial success and valuation: sales and EPS have tripled in ten years, while the stock was trading at over 50x earnings before the publication of the second report (by Morpheus Research). This is more than Hermès (48x profits) and, of course, more than all other listed players in the market.
Before the war in Ukraine, the Russian market accounted for nearly 9% of Brunello Cucinelli's revenue, thanks to three company-owned stores and wholesale distribution through multi-brand retailers. Subsequently, the group announced that it would keep its stores open but limit sales to existing stock and products that comply with European thresholds: a ban on exporting luxury goods to Russia above €300 factory price and less than €1,000 retail price. These sales generated only around €5m last year, so the contribution is fairly modest on a group-wide scale. Short sellers blame, amongst other things, the presence of products that exceed these thresholds.
While this market has little impact on overall sales, the fact remains that Brunello Cucinelli has built its success on reliability, the reputation of its products and the value of its brand, and total control over growth. These three assets could very well disappear overnight.
The 25% drop in its share price illustrates a new aspect for the Italian company: risk. Investors are not anticipating poor operating performance in the future, but they see the accusations as an increase in perceived risk compared to its peers. While the outcome of this case is, of course, completely unknown at this stage (possible sanctions, impact on sales and margins, etc.), the brand will have its work cut out to restore the confidence that it has just undermined.
