EUR 850.00 For Business Accounts Only

Morningstar | Hugo Boss' Moderate Growth From the Existing Store Base Should Result in Margin Improvement

We think Hugo Boss’ strong positioning, with almost 10% market share and high brand awareness in the menswear category, as well as relatively high share of distribution control (over 60% of sales), should allow the company to generate average returns of 10%, above our 8.9% cost of capital estimate over the mid- to long term. Although we see apparel as a relatively weaker category in the luxury goods sector with little conspicuous value, a high level of fragmentation, and frequent fashion changes, we believe formal menswear is a relatively more stable market niche. Men display more brand loyalty than women, and formalwear is often a replenishment category, less exposed to fashion changes (only 20% of Hugo Boss’ sales are fashion items). We believe the recent move to a two-brand structure from four brands will allow the company to reduce the complexity of operations and customer confusion, while curtailing discount channel exposure in the United States. We think Hugo Boss is well positioned to grow from its existing retail platform of over 1,000 stores, including over 400 freestanding locations, as well as through its own online platform, which should help increase operating margins to over 14% from 12% currently. We forecast Hugo Boss’ revenue growth at a 3% rate over our five-year explicit forecast horizon, below the luxury industry’s 4%-5% growth due to higher exposure to slower-growing developed markets and the higher competitiveness of the apparel space resulting in lower pricing power. We believe this growth is not without challenges, as Hugo Boss has yet to regain traction with younger consumers who left the brand as it started to be considered too expensive or too classic. It is also facing slower growth in its formalwear business, which we consider to be more moaty, as wardrobes get casualized. We see relatively high outlet exposure (at 19% of revenue compared with 10% for the luxury goods industry) as a negative.