Morningstar | Hugo Boss' Sales and Margins Hurt by Weather, Swelling Inventories; Shares Now Fairly Valued
We are maintaining our fair value estimate of EUR 62 per share for narrow-moat Hugo Boss, which reported somewhat weak third-quarter sales negatively affected by adverse weather conditions in Europe. We plan to reduce our gross margin forecast following stronger-than-expected discounting but expect this to be mitigated by stronger cost control (notably rental renegotiations and marketing cost rationalization). After recent price declines, we see the shares as fairly valued.Retail comparable sales slowed in the third quarter to 3% from 5% in the second quarter and 7% in the first quarter. European sales came under pressure in the quarter with a 2% currency-adjusted decline (versus 9% growth in the second quarter) with weakness in German and French market. Wholesale business declined by midsingle digits in the region. Sales in the Americas increased 5% at constant currency and Asia-Pacific sales continued their solid growth trajectory with a 7% increase, in line with the second quarter. Similar to its luxury peers that have already reported, Hugo Boss hasn’t seen a significant slowdown in Chinese spending.
Gross margin in the quarter was hit by higher discounting activity in Europe and the Americas as the discounted summer collection was selling better than anticipated, thanks to unusually warm weather, and full-priced autumn sales were delayed. Quality investments and currency effects also played a role in gross margin reduction. Further on the downside, the company saw a 20% increase in inventory levels year on year. Although management seemed convinced about the quality of inventory (consisting predominantly of carryover items) and actions taken to improve the situation (lower buying), further discounts may be needed to tackle the problem.
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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