EUR 850.00 For Business Accounts Only

Morningstar | Hugo Boss Delivers Sales Improvement but Operating Leverage Doesn't Kick In Yet; FVE Maintained

We are maintaining our narrow moat rating and fair value estimate of EUR 62 for Hugo Boss as the company delivered second-quarter sales in line with our estimates, although this was helped by timing shifts in wholesale deliveries. Shares are moderately overvalued.

Margins were largely flat year on year as positive operating leverage in Europe was offset by negative currency effects in the U.S. and higher selling, general, and administrative expenses in the Asia-Pacific region. Gross margin was under pressure, owing to mix shift in the second quarter (higher growth in wholesale) and price/quality investments the company is making (as expected). We still expect flat gross margin for the full year, as price/quality investments should be offset by positive channel mix and reduction in discounting. Operating costs grew slightly less than sales in the first half of the year, despite improving retail efficiency, as the company made digital capability and marketing investments.

Sales in Europe have accelerated from the first quarter of the year to 9%, helped by delivery shifts at the wholesale business and solid demand in retail business (notably, sales in Germany are now in positive territory, up 2%, versus a 5% drop in the first quarter). Sales in Americas were flat, a deceleration from 7% growth in the first quarter, but on a tougher comparison base, as wholesale remained a drag in the region. Sales in Asia grew by 7% (versus 12% in first-quarter 2018 and our 8% full-year expectations).

From a product category perspective, lower-priced casualwear continued to outperform formalwear (sales are driven by better conversion and volumes). Formalwear (which we regard as a moatier business) still delivered growth for the Boss brand (versus declines at Hugo). Full-price stores and the own online channel, which the company claimed to be the most profitable channel, outperformed the outlet channel in the quarter, suggesting improving performance quality.

Inventories increased by 13% year on year versus first-half sales growth of 1.2%; however, management claimed inventories were healthy, affected by lower stock levels in the prior year, located mostly in central warehouse and composed largely of nonseasonal items.