In 2014, the brand consultant Interbrand added Hugo Boss AG (BOSSn.DE) to its list of the top 100 “best global brands” – an indication of the growing influence of this German luxury women’s and menswear fashion house. However, 2014 also saw a decline in luxury spending in the U.S., Russia and China, and Hugo Boss shares suffered. The company stretched its sales targets from 2015 to 2016. We take a look at whether this investment is back in fashion.
The company has two main brands: BOSS and HUGO. The core brand BOSS includes three lines: Boss Black (accounting for 71% of overall sales), the fashion line which defines their men’s and women’s modern and sophisticated business, sports and eveningwear; Boss Orange (12% of sales), men’s and women’s urban and casual wear; and Boss Green (8% of sales), the modern and active clothing and accessory menswear line. The HUGO brand (9% of sales) offers contemporary progressive men’s and women’s clothing, shoes, accessories, beauty products, eyewear and watches.
Boss’ strategy now involves investing more in its own retail store expansion while pulling back from wholesale. The company plans to focus on: expanding the womenswear range under the new creative guidance of fashion designer Jason Wu, elevating the BOSS core brand, building their omni channel and growing further on underpenetrated markets.
During Alpha Deal Group’s initial due diligence call, Hugo Boss’ Head of Investor Relations Dennis Weber, presenting for CEO Claus-Dietrich Lahrs, stated that Hugo Boss is targeting mid to high single-digit annual average sales growth and looking to further build upon their operational strengths. The retail store expansion seeks to increase the luxury segment to account for 20% of the brand’s sales by the year 2020. The current strategic focus rests on the BOSS core brand exclusively with a particular geographic focus on Eastern Europe and the Middle East.
A Stormy Luxury Market
Hugo Boss AG shares have dropped recently due to rough luxury market conditions (the biggest declining issue on a flat German mid-cap index MDAXI) but have still gained 13% YTD, in line with one of its main competitors Burberry (BRBY.L) but roughly less than half of the gains made by LVMH (LVMH.PA).
Hugo Boss group sales in 2014 totaled €2.57 billion with an expected growth rate of 5% for 2015 and a projection of mid to high single-digit growth rate for 2016. In the long-term projection with a new growth strategy focusing on expanding its own retail store business with new store openings and takeovers, the group expects its own retail business share to grow to 75% by 2020.
All of the main sales regions contributed to the group sales increase, with Germany and the U.K. leading in Europe, and the Americas growth being driven by its own retail stores.Modest growth in China led the Asia/Pacific region.
New Growth Strategies
The key drivers of Hugo Boss’ 2020 growth strategy are: elevating the BOSS core brand and making it exclusively sold in the brand’s own stores; leveraging the womenswear brand potential lead by a new creative team; building the omni channel to drive its own retail business both online and offline and exploiting its growth opportunities in rapidly growing underpenetrated markets like: Asia/Pacific, Eastern Europe, the Middle East and the Americas.
Hugo Boss is looking to better promote its core brands to reach higher margins by pulling back from its wholesale business and investing in its own retail shops. The group plans to open 50 new stores around the world in 2015 alone on top of its existing 1,041 shops (the majority in Europe and Asia/Pacific regions). One of the main goals is to elevate its in-store brand presentation and develop a dedicated womenswear store concept led by 27 ambassador stores in key metropolitan areas.
Although best known for its premium menswear, Hugo Boss is aggressively investing in its womenswear offering with a new creative team led by Michelle Obama’s favorite designer, Jason Wu. The brand is seeking to strengthen its emotional appeal and create desirability, upgrade the product refinement and expand on shoe and accessory lines to create a stronger link between its collections. The new creative team improved the brand’s awareness and recognition and grew the business by 18% vs. the previous year, which represented 11% of total group sales in 2014. Last year’s growth provides a strong foundation for expanding the womenswear business to at least 15% of group sales in 2020.
In order to satisfy the demand of today’s consumer and reach wider demographics, the group started to take over key elements of the e-commerce value chain (like online store operations) from their contracting partners back in 2014 and plans to finalize it by the end of 2016. Building a strong omni channel will drive retail sales online and even more so offline by creating a unified shopping and brand experience across brands and channels.
Important Brand Rankings
Interbrand isn’t the only firm taking notice of Hugo Boss. Based on an independent study conducted among 1,000 German consumers by market research institute GfK, Hugo Boss was named the “Best Fashion Brand” in 2014, evaluated by its commercial success and its emotional appeal. Another notable recognition followed as a result of a Chinese independent study, the most important ranking in the Chinese luxury goods market, conducted by the Hurun Research Institute on a sample of 376 mainland Chinese individuals with a personal wealth of at least RMB 10 million. HUGO BOSS was named the “Best Fashion Label for Men.”
Financial Performance
Preliminary results show solid top and bottom line growth in FY 2014. In the first nine months of 2014, Hugo Boss showed total revenue of €1.8 million, which equals 6% growth (YOY) with a gross profit increase of 9%.
Hugo Boss Share Price
Source: Thomson Reuters Eikon/StarMine
Fragrant Figures
EBITDA before special items in the first nine months of 2014 was at €423.4 million which equals 4% growth YOY and it comes behind a 40% comparable store sales increase with a 16% growth pick-up in the wholesale business and the successful launch of BOSS MA VIE women’s perfume fragrance. However, EBIT grew by only 2% YOY from €337.4 million in the first nine months of 2013 to 343.6 million in 2014. Earnings per share were €3.74, up 5% from €3.55. Hugo Boss maintains its industry-leading dividend payout between 60 – 80% of consolidated net income.
Hugo Boss Financial Strength
Source: Thomson Reuters Eikon/StarMine
Outlook and Conclusion
At the conclusion of Alpha Deal Group’s due diligence call, Weber stated that despite the tough market situation and the recent share drop which prompted Hugo Boss to revise its growth strategy to mid to high single-digit average annual sales growth, the company is strongly committed to achieving a 25% EBITDA margin target. At current levels, Hugo Boss may represent an alpha opportunity.
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