EUR 850.00 For Business Accounts Only

Morningstar | Hugo Boss Results and Outlook as Expected, Inventory Remains a Concern; Shares Fairly Valued

We are increasing our fair value estimate for narrow-moat Hugo Boss’ shares to EUR 65 from EUR 62 previously largely as a result of the time value of money. The company reported annual sales and profit broadly in line with our expectations and pre-announcement in January. We believe shares are fairly valued.

The company issued outlook for 2019 of mid-single digit revenue growth at constant currencies (versus 4.5% in our forecasts), EBIT growth at a high-single-digit percentage rate (versus 11% we expected), and a strong increase in free cash flow. Management's outlook is broadly in line with our estimates, although planned capital expenditure in 2019 is higher than we forecast, at EUR 170 million-EUR 190 million  versus the EUR 160 million we expected. Outlook for profit growth hinges on gross margin improvement driven by lower discount levels and higher growth in own retail, while operating costs are expected to be affected by further investments in expansion of digital activities (eg. new online market entry) and some store openings in the Asia-Pacific region.

We are more cautious in our forecasts versus management's midterm plan announced at the capital markets day: 5%-7% currency adjusted sales growth per year till 2022 and operating margin of 15%. Rather, we expect low- to mid-single-digit growth in revenue, given the higher competitiveness and slower growth of the premium apparel niche versus other luxury goods segments and operating margin increasing to over 14% by 2022.

Inventory buildup remains a concern with a 15% year-over-year increase in inventory position versus only 2% growth in sales at actual exchange rates (this is a slight improvement from the 20% increase in the third quarter). Although, according to the management, inventory is composed largely of carryover items and can be sold at full price, it remains to be seen whether the plan for reduced markdowns in 2019 would be implementable given the adverse inventory development.

Regionally, sales in Europe and Americas in 2018 grew by 4% during the year at constant exchange rates, with double-digit growth in the U.K. and mid-single-digit growth in the U.S. Sales in Asia-Pacific grew by 7% at constant currencies with a high-single-digit increase in China. We expect continuous outperformance of the Asian region in the years to come. Online was the fastest growing distribution channel with 41% constant currency growth (online is now contributing 4% to revenue), wholesale increase by 5% in constant currency terms (in part thanks to delivery shifts compared with the prior year), while outlet sales grew somewhat faster than full-price retail at 4% (versus 2% for full price).