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Sunday, 7 February 2010
Hugo Boss crimped by small Asia exposure
As shoppers across the world gingerly start spending again on luxury, German fashion house Hugo Boss risks being left behind because of its dependence on department store sales and European customers.
As shoppers across the world gingerly start spending again on luxury, German fashion house Hugo Boss risks being left behind because of its dependence on department store sales and European customers.
Recent results from Richemont, the group behind Cartier watches and Chloe handbags, Burberry and Swatch indicate the wealthy, especially in emerging markets such as China, are opening their wallets a little wider.
Richemont and Burberry recorded forecast-beating sales gains for the fourth quarter of last year.
But Hugo Boss, which reports in April, expects a drop of about 9 per cent in fourth-quarter sales.
“In comparison to other peers, recovery could possibly be less strong, also because wholesale is still under pressure,” Bernstein senior analyst Luca Solca said. “Department stores are still quite cautious with their commitment.”
Known for its sharply cut suits, Hugo Boss has one of the strongest exposures to department stores in a sector that also includes United States rival Polo Ralph Lauren and Italy’s Ermenegildo Zegna.
While Zegna makes just one third of sales from wholesale, that figure is two-thirds for Hugo Boss, which loses out by not having the same responsiveness to customers enjoyed by fashion makers with retail stores.
Last year, as the financial crisis bit, Hugo Boss was hit by cautious orders from wholesale customers such as US upscale retailers Saks and Neiman Marcus and German fashion department store Peek & Cloppenburg.
Buyers for the current winter season posted their orders in late 2008 and early 2009 - at the height of the financial crisis - which meant they were very cautious. Nine-month revenue from wholesale customers fell 16 per cent.
“Last year’s purchasing strategy worked out well for retailers and many buyers are taking the same approach this year - initially ordering cautiously to later reorder if needed,” said Siegfried Jacobs, a vice-president of the German association for textile retailers, BTE.
Boss chief executive Claus-Dietrich Lahrs said the company benefited from retailers’ reorders in the fourth quarter as some had been too cautious.
But in Europe, where Boss makes about two-thirds of its revenue, rising unemployment is expected to translate into lethargic growth that will not gain pace until the second half.
To secure growth, a strong foothold in fast-growing emerging markets such as China is key, analysts said, and Boss is pushing expansion in the region, acknowledging its need to catch up.
“We are taking future growth potential in Asia and in particular in China very seriously, but we won’t neglect our home markets,” Lahrs said, adding he was confident of capturing growth in Asia in the medium term.
But Hugo Boss’s firepower is limited, given its financial position. Boss carries net debt of €459 million (HK$4.9 billion) and its gearing - the ratio of long-term debt compared with equity capital - is relatively high at 260 per cent, based on 2009 estimates, MM Warburg analyst Thilo Kleibauer said.
So far, Boss makes 10 per cent of its business in Asia and 20 per cent in America. Ermenegildo Zegna, the leading global menswear brand, already generates more than 88 per cent of its business overseas, 40 per cent in emerging markets.
Italian fashion house Versace saw sales rising more than 20 per cent at its stores on the mainland and in Hong Kong and Macau in January and Florence-based house Salvatore Ferragamo said it expected Asia, and in particular China, to drive growth this year.
US consultancy Bain sees China as “the new real frontier for luxury brands” and fashion retailers are lining up to feed China’s hunger for designer goods.
From 2011, Boss plans to open 50 own stores per year, about 20 of which will be in China, to boost its share of self-generated retail sales to 60 per cent from 30 per cent.
This is part of the new strategy introduced by Lahrs, who has worked for Christian Dior and LVMH Moet Hennessy Louis Vuitton in the past.
He has closed underperforming stores and some showrooms, renegotiated contracts with suppliers, repositioned Boss’ brands, stopped delivering to high-risk customers in Eastern Europe and is pushing own retail stores and overseas expansion.
The firm, in which private equity group Permira holds 88 per cent of the voting rights, trades at about 15 times projected 2011 earnings, while Polo Ralph Lauren, Richemont and Burberry are at a multiple about 18, says StarMine.
Analysts blame lower visibility and sweeping management changes following the 2007 takeover by Permira for the discount.
Lahrs took over in August 2008 from Bruno Saelzer who left after falling out with the new owners, taking a vast part of management with him.
The stock’s average monthly trading volume has fallen about 12 per cent since Lahrs took over, and the company’s share price underperformed the Dow Jones Stoxx European personal and household goods index by about 4 per cent over the period.
“An investor faces a lot more risk and uncertainty now than about three years ago,” said Scilla Huang Sun, the manager of Julius Baer Luxury Brands Fund. She sold her Boss holdings in 2007 after Permira made its takeover offer.
Hugo Boss is still a strong brand with a diverse product portfolio and a solid business model, but it remains to be seen whether the new management’s strategy will pay off, she added.
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Hugo Boss crimped by small Asia exposure
Eva Kuehnen
05 February 2010
As shoppers across the world gingerly start spending again on luxury, German fashion house Hugo Boss risks being left behind because of its dependence on department store sales and European customers.
Recent results from Richemont, the group behind Cartier watches and Chloe handbags, Burberry and Swatch indicate the wealthy, especially in emerging markets such as China, are opening their wallets a little wider.
Richemont and Burberry recorded forecast-beating sales gains for the fourth quarter of last year.
But Hugo Boss, which reports in April, expects a drop of about 9 per cent in fourth-quarter sales.
“In comparison to other peers, recovery could possibly be less strong, also because wholesale is still under pressure,” Bernstein senior analyst Luca Solca said. “Department stores are still quite cautious with their commitment.”
Known for its sharply cut suits, Hugo Boss has one of the strongest exposures to department stores in a sector that also includes United States rival Polo Ralph Lauren and Italy’s Ermenegildo Zegna.
While Zegna makes just one third of sales from wholesale, that figure is two-thirds for Hugo Boss, which loses out by not having the same responsiveness to customers enjoyed by fashion makers with retail stores.
Last year, as the financial crisis bit, Hugo Boss was hit by cautious orders from wholesale customers such as US upscale retailers Saks and Neiman Marcus and German fashion department store Peek & Cloppenburg.
Buyers for the current winter season posted their orders in late 2008 and early 2009 - at the height of the financial crisis - which meant they were very cautious. Nine-month revenue from wholesale customers fell 16 per cent.
“Last year’s purchasing strategy worked out well for retailers and many buyers are taking the same approach this year - initially ordering cautiously to later reorder if needed,” said Siegfried Jacobs, a vice-president of the German association for textile retailers, BTE.
Boss chief executive Claus-Dietrich Lahrs said the company benefited from retailers’ reorders in the fourth quarter as some had been too cautious.
But in Europe, where Boss makes about two-thirds of its revenue, rising unemployment is expected to translate into lethargic growth that will not gain pace until the second half.
To secure growth, a strong foothold in fast-growing emerging markets such as China is key, analysts said, and Boss is pushing expansion in the region, acknowledging its need to catch up.
“We are taking future growth potential in Asia and in particular in China very seriously, but we won’t neglect our home markets,” Lahrs said, adding he was confident of capturing growth in Asia in the medium term.
But Hugo Boss’s firepower is limited, given its financial position. Boss carries net debt of €459 million (HK$4.9 billion) and its gearing - the ratio of long-term debt compared with equity capital - is relatively high at 260 per cent, based on 2009 estimates, MM Warburg analyst Thilo Kleibauer said.
So far, Boss makes 10 per cent of its business in Asia and 20 per cent in America. Ermenegildo Zegna, the leading global menswear brand, already generates more than 88 per cent of its business overseas, 40 per cent in emerging markets.
Italian fashion house Versace saw sales rising more than 20 per cent at its stores on the mainland and in Hong Kong and Macau in January and Florence-based house Salvatore Ferragamo said it expected Asia, and in particular China, to drive growth this year.
US consultancy Bain sees China as “the new real frontier for luxury brands” and fashion retailers are lining up to feed China’s hunger for designer goods.
From 2011, Boss plans to open 50 own stores per year, about 20 of which will be in China, to boost its share of self-generated retail sales to 60 per cent from 30 per cent.
This is part of the new strategy introduced by Lahrs, who has worked for Christian Dior and LVMH Moet Hennessy Louis Vuitton in the past.
He has closed underperforming stores and some showrooms, renegotiated contracts with suppliers, repositioned Boss’ brands, stopped delivering to high-risk customers in Eastern Europe and is pushing own retail stores and overseas expansion.
The firm, in which private equity group Permira holds 88 per cent of the voting rights, trades at about 15 times projected 2011 earnings, while Polo Ralph Lauren, Richemont and Burberry are at a multiple about 18, says StarMine.
Analysts blame lower visibility and sweeping management changes following the 2007 takeover by Permira for the discount.
Lahrs took over in August 2008 from Bruno Saelzer who left after falling out with the new owners, taking a vast part of management with him.
The stock’s average monthly trading volume has fallen about 12 per cent since Lahrs took over, and the company’s share price underperformed the Dow Jones Stoxx European personal and household goods index by about 4 per cent over the period.
“An investor faces a lot more risk and uncertainty now than about three years ago,” said Scilla Huang Sun, the manager of Julius Baer Luxury Brands Fund. She sold her Boss holdings in 2007 after Permira made its takeover offer.
Hugo Boss is still a strong brand with a diverse product portfolio and a solid business model, but it remains to be seen whether the new management’s strategy will pay off, she added.
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