Shorts have collapsed shares of luxury brand Brunello Cucinelli. Should we buy them on a downturn?

Shares of Italian luxury cashmere brand Brunello Cucinelli have lost almost 19% - or about €1 billion - of their market value in two days. Quotes collapsed after accusations of short-seller Morpheus Research that Cucinelli continues to do business in Russia, despite EU sanctions, than misleading investors. On the stock exchange in Milan on September 26, the securities fell by 1.7%: the closing price was €83.6 - the minimum for the year. Trading was suspended due to high volatility. A day earlier, the value of shares collapsed by 18%.

The company denied the claims, while Wall Street was divided on the matter. The situation did not prevent some analysts from reiterating their advice to buy the stock, emphasizing the fundamental strength of the brand and the stability of the retail segment, while others warned about the risks of negative dynamics of quotations before investor confidence is restored.

UBS analysts, although recognizing the potential reputational risks associated with Brunello Cucinelli's operations in Russia, reiterated a Buy rating and a target share price of €123. This implies an increase in Brunello Cucinelli's market value by another 47% from Friday's close. The analyst emphasized: the key indicators of Cucinelli's accumulated inventories do not look critical - they account for 28% of sales, which is close to historical levels, and they have even decreased in retail. In addition, the company's business structure has changed in favor of retail, which supports margins. UBS believes that fundamentally the brand remains strong, with its premium positioning and revenue growth in retail outweighing short-term concerns.

On the other hand, RBC Capital Markets analysts Nikolaos Lafioniatis and Piral Dadhania noted that the stock is "likely to react negatively and remain in a limited range in the short term until clarifications emerge and investor confidence is restored."

Brunello Cucinelli needs to take urgent action to preserve its reputation, which plays a key role in evaluating a luxury company where customers particularly value ethical brand positioning, Bernstein analysts added.

Now Brunello Cucinelli's securities, which used to be considered relatively protected from the general decline in the luxury segment due to its premium positioning, are almost 40% cheaper than their high, which was reached in February. But the majority of analysts (9 out of 16) who track Brunello Cucinelli's stock performance advise investors to buy the stock (Buy Outperform ratings). Another six are neutral with a Hold rating (advice to hold) and only one suggests selling. Wall Street's consensus target price of €113.6 on the company's securities implies an increase in its market value by another 36% from the close on Friday, September 26.

Quotes collapsed after Morpheus Research, a shortseller, said on Thursday that it had taken a short position on Brunello Cucinelli shares (in anticipation of a fall in the securities). In its report, Morpheus, which specializes in investigating corporate misconduct, accused the company of misleading investors about the scale of its business in Russia. According to the investigation, Brunello Cucinelli stores in Moscow continue to operate and products are sold in TSUM and through partners, despite EU sanctions banning luxury goods over €300 in Russia and imposed after the start of Russia's full-scale war in Ukraine.

The company itself has denied the allegations, emphasizing that all deliveries to Russia comply with EU rules and that the share of the Russian market in revenue has fallen to about 2%. However, Italian financial regulator Consob has sent an inquiry to the company in connection with the short-sellers' allegations, sources told the Financial Times on September 26. According to them, this is not a formal investigation, but a routine check that the regulator carries out if shares fluctuate sharply over a single day without any connection to general market dynamics.

This is not the first time that shortsellers have accused Cucinelli of violations. In the summer, London-based fund Pertento Partners, which held a short position in the company's shares, also claimed that the brand continued to operate in Russia and sell its current collection "at prices many times higher than the sanctions limits". In response, Brunello Cucinelli CEO Luca Lisandroni told the FT that the brand's boutiques in the country are closed, but that employees are conducting "individual sales" in the Moscow showroom, offering only goods authorized for sale under EU regulations.

This article was AI-translated and verified by a human editor