Ermenegildo Zegna N.V. (ZGN) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Ermenegildo Zegna Group First Half of 2023 Preliminary Revenues. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Francesca, Director of Investor Relations. Floor is yours. Please go ahead.

Hello, everyone, and thank you, Elliot. Thank you all for joining us as we share our revenues for the second quarter and first half of 2023. I'm here with Gildo Zegna, Group Chairman and CEO; our COO and CFO, Gianluca Tagliabue; and Rodrigo Bazan, the CEO of Thom Browne. Before we begin, I need to point out that we may make certain forward-looking statements during the call. Our actual results may be different from those expressed or implied by the forward-looking statements. All such statements are subject to a number of risks and uncertainties, including those discussed in our SEC filings. I refer to the safe harbor statement, which is included on Page 2 of today's presentation. And of course, this call will be governed by that language. And I'm pleased now to hand over to Gildo Zegna.

Hello to everybody. Thank you, Francesca, and thank you, all, for joining us today from wherever you are in the world. And I'm very pleased to share that we had yet another excellent quarter, continuing the successful performance we have experienced since the beginning of the year as we continue to execute the group strategy. In fact, let me tell you that our growth has been really strong for a number of years now, and we stand at 50% growth on a 2-year stack with a very well balanced and mix of growth drivers by regions and the strong outperformance of DTC, successful design and product collection, coupled with strong retail execution, which leverages our unique CRM skill of driving the strong momentum. We see menswear as a growing segment in the luxury sector and our brand resonance with customers around the world are supporting healthy market share gains, and we are particularly proud of the progress that Zegna has made since the rebranding. Our exposure to womenswear through Thom Browne and now from -- now on also with Tom Ford, will contribute to our strong trends. The group growth progress reflects our unique ability to understand our customer base as we continue to offer them appealing luxury products, size and service. We have experienced healthy double-digit growth in all geographies and direct-to-consumer has been ever accelerating. The U.S. in particular is an area of notable strength and the Chinese consumers are rebounding nicely. We are also happy to welcome the return of Chinese tourists in many regions, including Europe. We have seen a notable increase in customer visiting our stores and in all relevant retail KPI, delivering a significant step up in store productivity. This quarter, we also completed the acquisition of Tom Ford International. We were now in long-term relationship of the sale of their companies for a TOM FORD FASHION business for men's and women's fashion, as well as accessories and underwear, fine jewelry, children wear, textile and home design product. I'm happy with how the integration is going so far and especially the world-class leadership team we are assembling to lead this iconic luxury brand, including the recent appointment of Lelio Gavazza, as the new CEO of TOM FORD FASHION and Peter Hawkings, who has been appointed as the Brand Creative Director in April. We look forward to working with all of them and the partnerships with Guillaume Jesel in the sale of their companies to build on Tom Ford's legacy and to make it one of the top 10 luxury fashion names in the world. Now if you can please turn to Page #4 in order to take you through a few key highlights from this period before handing over to Gianluca to discuss financials in more details. As you can see, the group saw first half revenue EUR 903 million, a 23.9% year-on-year increase. 21.5% of the growth is what we are considering organic growth, which is a newly defined non-GAAP measure the group uses to analyze revenue, independent of the effects of change in scope and currency impact. Of that EUR 903 million, EUR 475 million came in the second quarter, a 35.1% year-on-year increase on an actual ForEx basis and that's an extremely robust 24.5% organic growth. A look at our performance on a 2-year period shows a solid 20% compounded annual growth for both the first half of '23 for both the Zegna brand and the Thom Browne brand. Our performance so far shows that we are on track to meet our medium-term ambition by 2025. We are comfortable that our full year results and our forthcoming first half results should confirm this guidance and our trajectory towards this goal. Now, if you please can turn to Page #5 and in order to give you some business highlights and recent events. As a group, we continue to strengthen our brand by executing our strategy. We translate the great financial performance that we have seen so far this year. Zegna updates. We are very satisfied with Zegna rebranding and the channel speed and strong execution of the One Brand strategy, which is translating in a growing market share, especially in the luxury leisurewear space. Zegna brand caters to a stronger customer base and the brand's appeal is reflected in success of the entire collection, including our iconic products such as the signature, Triple Stitch luxury sneaker and other luxury leisurewear item. After a few years consolidating its footprint and performing stores rightsizing, the Zegna brand is now ready to leverage its new positioning by resuming a gradual expansion of its store network, with 7 new net DTC stores in the first half of the year in select locations, including the Saks, New York concession, stores in East Hampton, Kuwait city, Copenhagen, Jingan, Fuzhou, Lanzhou in China. But the bulk of our growth comes from the substantial increases in our store productivity, making every square foot of store space even more valuable. For Zegna, in particular, we are seeing a nice sequential trajectory in terms of increasing footfall, increasing the number of tickets and earnings spend. The highest sales together with our dynamic management of the store footprint is translating to a nice step up in productivity. And just as a reminder, this is one of the key message we monitor on our journey to deliver our medium-term financial goals as we stated in May '22, that we were looking for at least 50% increase in Zegna sales per square meter. Our deep dive on retail KPI and analysis of consumer demographics through our CRM system enables us to continue to identify strengths and opportunities and we are very satisfied with the current progress. We are particularly happy about the trends we are seeing in new customer acquisition and in the retention and the spanning of these new clients, as well as the loyalty of our consolidated customer portfolio and how the shopping profile of our customer is shaping up following the repositioning of the Zegna brand in the pinnacle of luxury menswear. We believe we are scratching the surface and we see many opportunities ahead, as we still have low-hanging fruits such as, for example, continue to drive fruitful conversion and/or focusing on increase in the UPT. Of course, all of this grounded in great design as we saw at our Milan Men's Fashion Show last month, which brought all of Zegna to the city of Milan in Piazza San Fedele for a summer collection that leans on our commitment to using traceable materials, including our goal to use 100% traceable linens in launching the Lino product by '24, all led by our creative designer, Alessandro Sartori. A few Thom Browne updates. Moving to Thom, it showed its first couture collections at Paris Couture Week in June, receiving an immense amount of positive feedback from across the industry. Another important update is that on July 1, the Thom Browne business in Korea will be directly operated by the company, including 17 stores in the network. And we are also growing the brand's store footprint strategically with 3 net new stores added in the first half of the year, 2 in China and 1 in Japan. The uniqueness of Thom Browne's styles continues to garner the interest of new adult customer, seeking unique product offering and we believe that our pursuit of double revenue on Thom Browne this year is well on track. Now Textile platform. The Textile platform of the group Made in Italy system is a fundamental component to our strategy and continues to be integral to our business, supplying the world's best materials to our own brand as well as all other luxury names, while protecting Italy's world famous luxury product and our own supply chain. Our commitment to Made in Italy met a new milestone in June, when along with the Prada Group, we have acquired 30% stake in Luigi Fedeli e Figlio to expand our Made in Italy platform and strengthen our supply chain access to knitwear and yarns. A few words on TOM FORD FASHION. TOM FORD FASHION has been consolidated as the third segment of our group as of April 29, when the transaction closed. Since then, we have started putting together an incredible leadership team to lead this iconic brand in partnership with the sale of their products. As already mentioned, the new CEO of TOM FORD FASHION, Lelio Gavazza, who brings a wealth of experience in luxury industry will join effective 18th of September and we can't wait to have him on Board. Peter assumed the role of Creative Director in April, and we are very excited about his summer '24 womenswear collection that will debut at Milan Fashion Week in September. Now please turn to Page #6. I think that it's worth mentioning some of our ongoing efforts to build on our century long legacy of sustainable growth. So that in May, the Science Based Target initiative approved our greenhouse gas emission reduction target, which we had submitted last year. We are targeting net zero greenhouse gas emissions across our value chain by 2050 from a 2021 base year. Also in May 17, we have adopted a new animal welfare policy to uphold our commitment to using high-quality materials that are produced in a way that is mindful for the natural environment and its inhabitants. Finally, just days ago, as a family, we celebrated 10th anniversary of the Zegna Founder's Scholarship out of a 25 years commitment that we made, reaffirming our commitment to supporting, with grants of EUR 1 million a year, Italian students who study abroad to contribute to making sure they come back to Italy. And all this project makes me particularly proud to prepare the Italian talent for the future. I will now turn over to Gianluca Tagliabue, our CFO, who will share with you a deeper look in the quarter and the first half revenue. Please, Gianluca?

Thank you, Gildo. Good afternoon, everybody. So first, the Page 7. Before entering into our usual revenue breakdown views, let me explain and go back to the new measure that we introduced, which is organic growth, which will help us looking at the real underlying business trends, especially from a geographic breakdown because just organic growth neutralizes not only the impact of FX, so it's a constant currency metric, but also the change in scope, which is mostly related to the Tom Ford business. Let's remember the change in scope. So on Tom Ford last year, we still had a production and wholesale worldwide distribution license for men's apparel until fall/winter '22. Then started with spring/summer '23 that we moved to a supply agreement for certain Tom Ford products on men's tailoring. And finally, late April this year, we started consolidated on a line-by-line all the business of Tom Ford Fashion men, women, wholesale and retail. So in order to neutralize for all this changing scope, we introduced this organic metric, which I will refer when we look at the numbers. And in annex, you will find the reconciliation tables of organic revenues versus reported variables. So back to the numbers on Page 7. As Gildo mentioned earlier, revenues for the first half of the year are slightly over EUR 900 million, 23.9% year-on-year growth in actual currency; 24.7% in constant; 21.5% in terms of organic growth. We saw a double-digit growth across Zegna and Thom Browne segments. The Zenya One Brand strategy continues to drive market share gains and the Zenya segment grew 23.8% year-on-year in organic growth in the first half. Thom Browne segment grew 13.6% in constant compared to the first half of last year, following further internationalization and the strategic expansion of the brand store footprint. TOM FORD FASHION, for the first time we show this number, reported EUR 64 million, starting from April 29, where again, we started to do a full line-by-line consolidation. And the addition of Tom Ford brings into the picture 121 monobrand stores, 51 of which are directly operated as of the end of June. Now moving to Page 8, we have the view on the second quarter. The revenues came in at EUR 475 million, up 35% from last year; 37.4% in constant currency; and 24.5% on an organic basis. You see here that the discrepancy between organic and reported because we brought in Tom Ford line-by-line. The second quarter revenues for Zegna segment grew 28% and for Thom Browne, 10.8% when compared to the same quarter of last year. Those numbers are both in organic terms. As you -- we will see, each brand has experienced an incredible strong direct-to-consumer performance at mid-30% in the second quarter, specifying our steady performance on the retail side. Here, I call out especially, the particularly strong performance of Zegna DTC in the strategic U.S. market. There was a sequential year-on-year acceleration in second quarter since you will recall that we had close to 19% growth organic in Q1 and now we see a 24.5% organic growth in the second quarter. So the overall number of Q2, it shows the acceleration. Looking at Page 9 on a 2-year horizon, first half '23 versus first half of '21. For each of the 2 brands, we delivered a solid and encouraging 20% CAGR in constant currency for both the brands. Moving to Page 11, here we have the breakdown by segment. Looking at the Zegna segment, we saw double-digit growth, thanks to the strength of Zegna brand. And in particular to, as I said before, a remarkable direct-to-consumer performance. There was also a positive contribution from the Textile product line, which falls into the Zegna brand. In the first half of 2023, Zegna segment saw EUR 652 million in revenues, 17.9% up and an even larger growth for the second quarter as we have seen a growth of 23.4% year-over year, totaling EUR 332 million in the second quarter. Thom Browne also saw steady double-digit growth of 11.9% year-over-year for a total of EUR 208 million during the first half. The segment grew 8% in the second quarter for a total of EUR 95 million. The strong DTC performance of Thom Browne was mitigated by muted development on the wholesale channel, which was slightly down in the second quarter due to soft deliveries to the Korean market, which I remember we transitioned from wholesale to retail starting from July 1. So we were prudent in the shipment in order to then take over from July 1 as a retail business. Thom Browne growth was supported by our direct-to-consumer strategy, which translated in solid comparable stores growth in the first half and then by the expansion of the brand store network, adding 13 net new stores versus the store networks seen during the first half of 2022. Moving to Page 13, this is a breakdown by product line. The Zegna-branded product line outperformed, growing 27% in the first half when compared to last year; 28% organic in constant; with a strong 37% growth in the second quarter of 2023. Growth for Zegna-branded product was largely driven by Made-to-Measure offering, which continues to be a distinctive pillar of our positioning, as well as by the sneakers and luxury leisurewear items. Thom Browne grew 11.8% during the first half, 8.2% during the second quarter, thanks to the outperformance of women's over men and kids' product also saw dynamic growth for Thom Browne. Moving to the Textile. We saw more conservative growth of 6% year-over-year in the first half. The positive momentum seen across all our Textile brand portfolio helped to drive this increase. The third-party brands product line experienced a reset, 67% (sic) [ minus 67% ] during the first half and 71% (sic) [ minus 71% ] during the second quarter because of the end of the Tom Ford distribution license agreement with the fall/winter '22 collection and the shift of Tom Ford from a third-party player to an intercompany supply, which then becomes inter-eliminated, not shown any more in third-party brands. It's, of course, worth reiterating that TOM FORD FASHION is becoming a new product line from April 29. Moving to Page 15. We are pleased to -- We are pleased about our robust double-digit organic growth across all geographies during the first half and also during the second quarter. And when we look at the organic metric neutralizing, so all the revenues related to the Tom Ford in and out, as we have seen: 21.4% in EMEA; 16.3% in North America; 16% in Latin America; and 24% in Asia Pacific during the first half of 2023. In the first half, the growth in the Greater China region was reported at 24% versus last year, 27% organic. Within the One Brand Strategy, we have been creating the conditions to pursue quality growth in China since reopening. We have been rationalizing the store footprint by closing a few Zegna stores, which we still had in the first half of 2021. And we have been eliminating markdowns, in line with the new global policy, which we still had in 2021. Notably, China's consumers are now starting to move. Along with that, they are spending outside of the region and we see them mostly in the rest of Asia and we start to see them, especially in the second quarter, in Europe. We saw especially strong growth in U.S. at 26% reported, equivalent to a 12.5% organic, which again, means neutralizing Tom Ford business, with a second quarter organic growth accelerating to 13.9%. The region, on a reported basis, of course, benefited from TOM FORD FASHION addition and as well as from the solid performance of DTC from Zegna and Thom Browne brand, which each grew in the double digits in the semester. In the EMEA and America (sic) [ Latin America ] regions, we reported respectively 23.8% and 25.6% during the first half. We are witnessing, as I said before, a healthy progression of tourist spending, in particular with American and Chinese consumers outperforming their respective regional plans. Moving to Page 17, the last breakdown is by channel. A remarkable improvement in our store productivity out-boost the double-digit direct-to-consumer growth as seen across all the regions for a total DTC revenues increase of 30% organic for the first half, with an acceleration of DTC to 36% organic growth for the quarter. Looking at our momentum in direct-to-consumer growth, Zegna and Thom Browne revenues were both up by around 30% organic in the first half, with Zegna DTC accelerating to 36% in the second quarter and Thom Browne's accelerating to 34% in the second quarter. Our wholesale channel grew by 6% during the first half and 16% during the second quarter on an organic basis. Again, without the impact of Tom Ford, the growth in the second quarter is 6%. Looking at the store network, as of June, the group now has 633 stores, you see Page 18, of which 363 DTC to 70 monobrand wholesale. And we have seen a growth for both Zegna and Thom Browne in line with their respective strategy, which is for Thom Browne to benefit from a significant white space globally; and for Zegna, pursuing a strategy of selective boutique ambition. Moving to Page 19. Before I turn things back to Gildo, I would like to highlight that the format of our consolidated P&L will change starting from the financials of the first half '23, which we will present in September. The current so far P&L presented costs by nature and it will be replaced by a P&L structure with costs by destination, which will allow us to show, among other things, also the gross margin, which was the request that came from the conversations with all of you. The comparative P&L dated June will be reclassified. So the comparative of 2022 will be reclassified, hence we will not present any longer the old structure. There will be no changes to the balance sheet. We also remind that in the first half and for the full year '23, below the operating profit, we will incur the cost of the warrant redemption occurred in February '23, which we anticipate will be in range of EUR 22 million. And that we will see -- and we see also the volatility coming from the mark-to-market reassessment of the put option liability, stemming primarily from the Thom Browne put option on the receivable 10% stake on sale by Mr. Thom Browne. Finally, we would like to remind you that at the closing of the Tom Ford deal, we said that the TOM FORD FASHION segment will be diluted in terms of adjusted EBIT margin in consideration of the royalties payable to ELC. In addition, Tom Ford segment profitability this year, which for the segment actually means 8 months since April 29, it's not 12 months, will be impacted by the purchase price allocation deal, mainly in relation to part of the value allocated to inventory, part of the value that we paid allocated to the order backlog for fall/winter '23 orders. I will pass on the rest of today remarks to Gildo, who will now speak around the outlook for the remaining.

Thank you. Thank you, Gianluca. You have now heard about our strong performance during the first half of the year, which I'm very proud as it demonstrates the soundness of our strategy as we lead our word and our brand through the growth period. We anticipate that our end-of-year results will show that we are comfortably on our trajectory to meet the 2025 targets and financial goals that we outlined back in May during our Capital Markets Day. Our outlook for 2023 projects growth to align with those goals, which includes annual revenue to exceed EUR 2 billion and for adjusted EBIT margin to reach at least 15% of revenue by 2025. '25 has been defined as a medium term for the group, as it is also worth noting that our previously disclosed financial goals do not reflect the TOM FORD FASHION deal, so that we maintain this outlook, assuming no further deterioration of the war in Ukraine; a continuing normalization of the COVID-19 pandemic in China; and no significant macroeconomic deteriorations, the globalization or any other unforeseen events. Thank you. And we are now ready for questions. Back to the moderator.

[Operator Instructions] Our first question today comes from Chris Huang with UBS.

I have three, if I may. My first one would be on, if you can comment on growth by nationality, if we exclude the impact from Tom Ford and how it evolved compared to Q1 and if there's anything that you would like to flag for the start of July and Q3? I'm particularly interested in knowing the trends by Chinese consumer on a 2-year stack, so versus 2021 and also year-over-year for Americans and Europeans? So that's my first question. Secondly, can you provide some incremental color on the sales breakdown of Tom Ford by region, just so we know the geographical exposure of the brand? And then my last question would be, if you can provide a breakdown of the Q2 growth in terms of volume versus price/mix.

You want to, Gianluca?

I lost the third. So, I will ask you to rephrase the third. So in terms of the -- by nationality, so we don't report specific numbers by cluster, but I can give you a flavor. So I think that the outstanding result, especially if you look at on a 2-year basis, Huang, the U.S. consumers, which we have been seeing particularly strong in the region of doubling the business in the 2 years. In terms of Chinese, first, you need to consider, as I said before, in China in 2021, we still had a meaningful network of C-Zegna brand monobrand stores, which we closed. So when you look at the 2 year, you need to remember that in 2021, we still had a meaningful number of monobrand C-Zegna stores. And of course, this year, the Chinese are also out. So if we look at -- since I will guide you to understand the numbers, if we look at Greater China region in 2021, it was basically Chinese all there, and the second -- and in the first half of this year, parts of Chinese were out. If you look at Greater China region, first half of this year compared to the first half of 2021, we are up despite the fact that some Chinese are out of Greater China region. And despite the fact that in 2021, we had stores of C-Zegna, also some quite important which we [ can't ] place, for instance, in open and that we closed.

Sorry. Yes, I know. I was saying [indiscernible]...

Europeans are an important addition to our growth. So the growth within Europe is strongly supported by successful performance with domestic consumers that are positively welcoming the new direction of the collection especially. And this is an answer, not from a nationality standpoint, but we are gaining significant ground with high-spending consumers across the board, whether it's European, Americans or Chinese. And so this is also a driver of growth, which is not by nationality, but it's by, call it, spending cluster. The second question of Tom Ford, we are not representing the brand by region, but definitely, the most important area for Tom Ford is U.S., despite the fact that they had several -- they have several stores in Asia, but the big part of the business comes from U.S.

Third was about volumes and the composition of the sales growth, correct, that creates the volume and...

Yes. Yes.

And the [ price/mix].

Yes. Correct.

So in this, I answer for Zegna and I give Rodrigo to jump in for Thom Browne. For Zegna, it's a healthy mix of increased number of tickets and an increase of the average ticket value. The average ticket value is driven by the fact that we have elevated the quality of our collection while addressing the demand of our consumers, as I said before, the highest spending. So it's a mix of average ticket and number of ticket, which is volume. We see, as Gildo was mentioning, an area of opportunity, which will become our key points of attention for the next future is, Gildo mentioned before, UPT, so the unit per transaction. We can list it and we believe that will be our low-hanging fruit in the coming 12 months, 18 months. So increase the number of units per transaction, driven by the new collection, we think that this is our next lever for the step up of revenues. I defer to Rodrigo to give a flavor of unit and value.

Thank you, Gianluca. From a Thom Browne point of view, the growth for us is certainly in DTCs, focused on collection on client data. We are very focused on client value management, which are in a very high percentage right now, a very high level of repeat clients and a significant growth also for clients to purchasing above $10,000, significantly above $10,000 a year. So, we have a very nicely balanced business in between new clients, in between clients at first year of significant clients and then very committed clients at the very significant purchases per year. So that's our focus. We are focused on additional clients, but at the same time, growth with current clients. That's a very, very solid growth. Our average ticket remains high, very committed on the first purchase and therefore, after.

Okay. Maybe if I can just add a follow-up if I may, please. It will be on Tom Ford. I just wanted to understand how do you plan to position the brand? And within the luxury space, who do you see as the main competitors for Tom Ford, please?

The positioning surely is top luxury and is glamour luxury, with surely an increment on the women's side and/or on the leather accessory side. Surely, the position is in the direction of a top luxury French brand, I would say, more than anything. That's where we see ourself. Surely, we see ourself more as a retailer than a wholesaler. And today, we still have a mix that is still not the one we wanted to have. And as Gianluca said, we are very strong in America. We have big opportunity to expand in Asia and in Europe.

We can move to the next question.