Morningstar | Hugo Boss Reports Weak 1Q, Driven by Declines in the U.S., Investments; Fair Value Estimate Intact
We are maintaining our narrow moat rating and fair value estimate of EUR 65 per share as Hugo Boss reported disappointing first-quarter profitability and sales declines in the Americas region. Management kept its guidance for mid-single-digit growth in revenue at constant currency and high-single-digit growth in EBIT (broadly in line with our estimates), however, the weak first-quarter makes the guidance look more ambitious.Currency-adjusted total sales grew by 1%, versus the 4.5% growth we expect for the year. Retail outperformed wholesale (3% versus negative 4%, respectively) with like-for-like sales growth of 4% (3% excluding online). Wholesale business has been negatively affected by delivery shifts in Americas and Europe. Regionally, sales in Europe increased by 2% with stable sales in Germany, up 5% in the U.K., stable Benelux, and a 7% decline in France. Sales in Americas dropped by 8% at constant currency rates, with a 10% decline in the U.S. driven by ongoing intense competition and poor demand backdrop. Sales in Asia-Pacific were up by 4%, with good momentum in China, but store closures negatively impacted sales in Hong Kong and Macau.
Operating profit was down 22%, negatively impacted by USD strengthening on the gross margin side, phasing of marketing costs (management expects marketing expenses to be flat as a percentage of sales for the full year), increasing investments in digital, and some restructuring costs. Management expects those costs to scale better during the coming quarters with less restructuring impact and normalized marketing cost phasing. Revenue growth is expected to be boosted by online business conversions to concessions (Zalando being the major one), improvement in like-for-like sales, and moderating pace of store renovations.
Businesswear business declined at both Boss and Hugo brands, offset by growth in casualwear and athleisurewear. Although consumer preferences continue shifting toward less formal dress codes, we continue to view the casualwear segment as more competitive.
Further, we note that inventory growth continues to outpace sales growth with inventories growing at 9% currency-adjusted versus 1% currency-adjusted revenue growth.
HUGO BOSS Group is engaged in the global apparel market. The Group, which is based in Metzingen Germany employs almost 12,500 people, generated annual sales of EUR 2.4 billion in fiscal year 2013 and is an apparel manufacturer. The Group focuses on developing and marketing high-end women's and men's fashion and accessories. With its brand including the BOSS core brand, the lines BOSS Orange, BOSS Green and the progressive brand HUGO, Co. targets different, consumer groups. The brands consists of modern business wear, evening wear and sportswear, shoes and leather accessories as well as licensed fragrances, eyewear, watches, children's fashion, home textiles and mobile accessories.
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