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

Good morning or good afternoon, and welcome to the Ermenegildo Zegna Group's FY 2023 Financial Results Call. My name is Adam, and I will be your operator today. [Operator Instructions] I will now hand the call to Paola Durante to begin. Paola, please go ahead, when you are ready.

Thank you, and good morning, good afternoon to everyone. And thank you again for joining the Ermenegildo Zegna Group's conference call on 2023 full year results. All the materials that we are discussing in the presentation and the press release that was sent previously, you can find it on our group website ermenegildozegnagroup.com. I'm very happy to say that today with us we have the leadership team of the group, including our CEO, Mr. Ermenegildo Zegna; our COO and CFO, Gianluca Tagliabue. And we have also Lelio Gavazza here with us in Milano, CEO of TOM FORD; and Mr. Rodrigo Bazan that has connected, I believe, from Los Angeles, but he is also here with us. Before beginning, I need to point out a little -- a few things that are a little bit boring, but we need to do it. We will make -- during the call, we will make certain forward-looking statements. Our actual results may be materially different from those expressed or implied by these forward-looking statements. Also, I remind you that statements are subject to a number of risks and uncertainties, including those described in our SEC filings. Please refer to the forward-looking statements cautionary included at Page 2 of our presentation. Okay. After this, I'm very happy to hand over to our CEO, Mr. Gildo Zegna.

Good morning, and good afternoon. Thank you, Paola. And thanks to join us in today's conference call on Zenga Group fiscal year 2023 results. Today, as usual, I would like to give you a brief update on our results from last year, discuss the main accomplishments and projects we undertook and finally briefly comment on what we're looking forward to this year. I do believe that '23 was a milestone year for the Ermenegildo Zegna Group. We completed the acquisition of TOM FORD FASHION, which has reached our group with a third brand that is perfectly complementary to our portfolio. On top of this great addition, the group also achieved outstanding results. Group revenue in '23, as we shared back in January, reached EUR 1.9 billion, up 28% and up 19% on an organic basis. Our adjusted EBIT reached EUR 220 million with an adjusted EBIT margin of 11.6% up 100 basis points from 2022. And most importantly, our net profit more than doubled compared to 2022. I think it has been a great achievement. I'm also very proud of the progress we made on our sustainability commitments. Caring for nation and the communities around us is a founding value of the group. And I'm pleased to say that we delivered on the sustainability commitment we set for 2023. Last year, we formalized the adoption of a group diversity, equity and inclusion policy and signed 87% of our employees on topics touching on DE&I. We are on track to reach by '26, 50% of key raw materials certified as traced and lower impact. We continued our investment in renewable energy. 97% of energy used in our European operation now comes from renewables. In 2023, we have installed photovoltaic panels on the rooftop of 2 additional production facility. But this is only the beginning. As I always say, this is the beginning of the journey, and we have still lots of work to do. Nevertheless, I'm proud of how far we have come and for what it has taken to get there. Now I want to take a moment to talk about the heart of our business, the 3 brands in our key area. First, Zegna brand. 2023, we continued to build on our successful Zegna One brand strategy globally. As you know, the Americas and EMEA are ahead of this journey. But we are also starting to reap some rewards in other markets, in particular, China. And one of the market where the journey started later is exactly greater China. We do recognize that '24 will still be challenging there due to geopolitical and macro environment. And as we further evolve and develop our customer base, but we see important positive signs, especially the fact that demand for our highest end product is strong and improving. We're extremely focused on and committed to this region to further reinforce brand awareness of Zegna as the leader in luxury menswear. Talking now about product of Zegna brand. In February, we launched the SECONDSKIN collection globally, a selected number of SKUs, including leather outdoor and the SECONDSKIN Triple Stitch, our icon that made the finest leather out of SECONDSKIN. The drop has performed very well in all regions, including China. Looking at distribution, we're even more committed in reinforcing our D2C channel. We will continue to streamline our wholesale distribution also converting some other brand store in concession. Finally, one very exciting event coming up for the Zegna brand will be the Milan takeover in April, where sorry, we will take over Milan in April with event. During the Salone del Mobile we will launch a new Oasi Zegna at Piazza Duomo and present the Born in Oasi book, which gathered a unique vision of our founder. We are doing that at the moment when all eyes will be on our great home city, Milan, to this day for a lot of reasons. Next is Thom Browne. In the year 2023, which our brand celebrated 20th anniversary Thom Browne revenue reached EUR 380 million, topping a strong 26% compounded average growth rate since the brand became part of the group. A very nice run I would say. But the journey just started and we still have a marathon to do. The brand has huge potential across markets and product to go beyond the EUR 500 million that was my initial target. Finally TOM FORD FASHION, the new jewel in our group crown, we do believe that there is a huge potential for TOM FORD FASHION. This confirmed through every conversation I had with Lelio about the brand covering the world, whether it is landlords, with clients, with luxury experts around the globe. They all agree that the brand has room to develop in particularly women wear and in leather goods segment. The brand;s creative and artistic direction is strong. You've seen that in the reception of Peter Hawkings collection to date. CEO Lelio Gavazza is here today with us. He is forming a skilled team, starting with new heads for Asia and for the Americas. They're also making sure that the brand can leverage our group infrastructure, including our supply chain know-how for both men's and women tailoring for CRM and customer engagement system and develop the TOM FORD FASHION store footprint. We have secured some 8 to 10 stores as of this year, and we'll start with renovating few of them. Before I hand over to Gianluca, let me mention an important project. I'm particularly proud of evolving our Filiera. What is our Filiera? It's a new terminology in Italia that's hard to translate in English. However, it's our fully owned and fully integrated supply chain made of the finest high-end Italian textile platform integrated with unique luxury manufacturing capacity, really unique, unique project in luxury. To reinforce this Filiera, we have recently approved an important new project in Parma. I would call it a breakthrough project, a cutting-edge center for excellence, which will primarily produce men's shoes and leather goods designed by famous architect Milanese Antonio Zarotto who designed our current headquarter in Milan. The facility will sit on a 10 hectare plot of land and function also as an important research and development training center, including our academy. When full and running,the center will employ more than 300 people, and will produce a significant portion of group shoes primarily for Zegna, but it will also serve the other brands. Let me now conclude by saying that although '24 will be a volatile year, we remain extremely confident that our path is well traced. Uncertainties can create amazing opportunities. If you have a clear vision and are able to react immediately and firmly, being ready to take [Technical Difficulty] by executing perfectly around the world. I would like to take the opportunity to share with you some of the actions that we have been working on with our management team. Number one, we're enforcing our team talent with some key additions in important markets. We will continue to invest on our brand, focusing on key priorities, both in terms of marketing and store opening and remodeling. DTC and CRM, 2 very important part of our evolution are our mantra. It will be even more in the forthcoming months. For Zegna, for Thom Browne and for TOM FORD, we have to know better and be closer to our customers. Loyal customers are more loyal in challenging times. And in the meantime, we have to stay tuned to our people in stores. They are our first ambassador. We will continue to streamline our wholesale doors, if anything, even more aggressively than initially planned. Last but not least, we are working on continuing to improve store productivity and sell-through, where we have gained a very important step. Let me conclude by reaffirming that our group is in custodian of authenticities, probably is to protect them since we've been around 114 years. These are our group ambitions alongside those committed to you at the recent Capital Market Day, which confirm today. And this is also thanks to the best in region. We have 3 authentic brands, unique Italian luxury Filiera and focused, accountable and responsive management team, a united family with 114 years of heritage. And last but not least, a clear vision that guides our actions. With that in mind, let me turn over to Gianluca that go into the financial in detail. After that Rodrigo, Lelio and Gianluca and myself, we will take your questions. Thank you very much.

Thank you, Gildo. Good morning, good afternoon, everybody. So let me move to Page 13 of the presentation where you find the group revenues evolution over the past 3 years. Preliminary revenues for full year '23 were already disclosed at the end of January. So there is no news and therefore, I will not spend much time on this page. Just let me underline the full year '23 revenues have been in a very good year for our group with almost 28% reported growth, thanks to a double-digit contribution from Zegna and Thom Browne and from the newly added TOM FORD FASHION segment, which contributed to EUR 235 million revenues. I remind you also that TOM FORD FASHION has been consolidated for around 8 months last year. Let's move to Page 14. Before commenting the numbers, I would like to remind you that since 2023, we have changed the way of reporting our P&L, adopting the by function presentation versus the previous by nature. We believe that this way to represent numbers not only reflects better the way we look at our business, but also can help you understand more our company. For this reason, in the next pages, I will comment the actual numbers underlying their drivers by each P&L line. Let's start from gross profit. In 2023, consolidated gross profit rose by 32% to a EUR 1.2 billion mark with a margin of 64.3%. The 210 basis point improvement from last year has been largely driven by a better channel mix as you know, DTC gross margin is higher than the wholesale one, but also by better, price, price mix and by the scale effect, in particular, in the supply chain side, which helps better absorbing the industrial fixed costs. Channel mix is estimated to justify about half of this gross profit margin step up. An important point to underline related to the TOM FORD FASHION consolidation. You remember that on April 28 of last year, we acquired for roughly an enterprise value of EUR 150 million cash free, debt free and on the basis of normalized working capital. The 85% of international, the only company that manages the TOM FORD FASHION business under a 20 plus 10 license agreement with the Estee Lauder Company. The purchase price allocation so-called afterwards PPA of this transaction has been allocated to the assets acquired, including inventories, customer orders and the license agreement itself, generating some PPA-related charges, both at cost of sales and at the SG&A level. Because of this PPA, in 2023, gross profit we accounted for EUR 15.6 million higher cost of sales related to the step-up of inventory value and the amortization of the value allocated toward this backlog. The majority of this EUR 15.6 million charge is actually related to the inventory. This amount will be largely accounted in 2023 financial with a smaller tail in 2024. In fact, this year, '24, we will account the remaining and last EUR 3 million to EUR 4 million of this kind of charges in the cost of sales. After that this smaller effect in '24, we will not incur additional costs related to PPA on the cost of sales. Moving to SG&A. They reached in 2024 EUR 901 million with a 47% incidence on revenues, about EUR 200 million higher compared to full year '23. Let's dig down on this increase of G&A, and I would like to underline a couple of important factors. The TOM FORD consolidation contributed to more than half some EUR 124 million to this absolute increase. This amount includes also the royalty fees that TOM FORD pays to Estee Lauder. In addition, it includes the second part of the PPA that I mentioned before exercise and this part is related to the amortization of the right of use of the license agreement, which gets amortized over 30 years. In 2023, for the 8-month consolidation, the license amortization was equal to EUR 2.2 million and in '24, the amount will be in the tune of EUR 3 million on a 12-month basis. The second relevant item that is important to underline is the impact on SG&A arising from the acquisition of the Thom Browne South Korean business. I remind you that since July '23, Thom Browne started to manage roughly the 17 stores in that market. And as you know, retail generates higher gross profit, but also on the other side, higher selling expenses compared to the wholesale business. On the other side, it's important to remark that the Zegna segment helped offsetting some of the above-mentioned negative effect by contributing itself with a positive leverage on SG&A. Just a final comment for those that might have not known the group for long, given that this is the first time we report 2021 SG&A expenses. In 2021, SG&A expenses included some EUR 200 million arising from the business combination with the SPAC that led to the listing of Zegna Group at the end of 2021. So that is the reason of this curve, which presented a high number in '21. Let's move to marketing expense. Marketing expense on Page 16 increased to a 6% incidence on revenues in line with the management plan to further invest on its brand equity value. We remember that this 6% incidence is also affected by B2B components within our business, which requires very little or no support at all by marketing, and this is the case of textile and third-party brands that together represent roughly 10% of group revenue. So when we look at 6% incidence, we have to bear in mind that this 10% comes with very limited marketing dollars. Page 17. Here is the report of our consolidated statement of P&L. I believe we have already thoroughly commented line by line, the ones above the operating profit. Let me make here a couple of comments at this point below operating profit on financial income and expenses and on taxes. Starting from the financial items. In full year '23, net financial expenses, including foreign exchange losses. In '23, they were negative for a combined amount of EUR 36 million versus EUR 49 million negative in '22. So this EUR 13 million positive swing from '22 to '23 arises mainly from 3 factors: first, lower liabilities from the Thom Browne put option related to better ForEx, this put option is expressed in dollars and related to higher interest rates, which reduce the net present value of the put itself. And these 2 components more than offset the higher intrinsic fair value of the put deriving from higher expected results of TOM FORD looking forward in the years to come. The second component that generates the positive swing and positive reduction of financial components is the lower hedging costs that we incurred this year. And the third, higher returns from financial assets versus 2022. This effect more than offset the financial cost that emerged with the warrant redemption that occurred in the beginning of 2023, which I recall generated a EUR 22 million charge in our P&L. And as information, the financial expenses, which might help also the analysts to model their projection. The financial expenses related to bank loans and lease liabilities under the IFRS 16 rule were this year in the region of total EUR 30 million. I call out the last point of attention, the EUR 3 million negative related to results from investments accounted at equity value, they refer mainly to TOM FORD results in the 4 months before our acquisition and they are related to the deal-related costs incurred by the target company before closing. Therefore, this line is expected to return positive from 2024. Finally, let's talk about taxes. This year -- last year, in '23, we had a favorable effective tax rate in the region of 20%, which has been influenced by a positive tax ruling and by the recognition of DTA connected to some tax losses previously generated. I can anticipate that looking forward for the group, we have in mind the normalized tax rate that is closer to 30% rather than 20%. Moving to Page 18, the adjusted EBIT metric, which is our key metric in terms of analyzing the performance. As Gildo already commented, in full year '23, our adjusted EBIT reached EUR 220 million with almost a plus 40% increase versus last year, and this was ahead of our own expectation. Adjusted EBIT margin rose to 11.6% notwithstanding the dilution effect coming from the TOM FORD consolidation, which for full year '23, you can roughly estimate slightly higher than 1.5 percentage points about of which -- out of which about half are coming from the previously mentioned PPA effect on cost of sales. The difference between the adjusted EBIT, EUR 220 million and the operating profit, EUR 208 million, that is EUR 12 million is referring to adjustments that in the reported P&L are almost entirely accounted for in the SG&A line. Please, I remember again that all this EUR 12 million adjustment do not include the charges related to the PPA because it's not allowed to have the PPA charges accounted for as an adjusted item. So they are part of our adjusted EBIT. So the adjusted EBIT discounts, the PPA effect good or best on our P&L. Let's look at the results by segment. Moving to Page 21, Zegna segment. As you know, this segment includes both the Zegna brand products and the textile division of third-party brands. This generated EUR 1.3 billion revenues before intergroup revenue elimination that amounts to EUR 33 million, and those are sales of either finished products or textile to TOM FORD and Thom Browne. And it came out with an adjusted EBIT margin of 14.6%, thanks to higher gross profit [ margin ], [ Technical Difficulty] a lower incidence positive leverage on SG&A. Both these effects were supported by the strong 25% organic growth in Zegna brand DTC, which has helped to boost our store productivity, as we said in New York by almost 50% up in 2 years, 2023 versus '21 and was also supported by positive absorption of fixed cost in supply chain and textile operations by the increased volume of business. This important increase in adjusted EBIT margin arises notwithstanding the decision to enhance the marketing expenses for the Zegna brand, which was disclosed in our prior conversations. Page 23, Thom Browne segment. The segment reached EUR 380 million before eliminations with a 15.5% adjusted EBIT margin. This good result is linked to the positive performance in both channels with DTC channel at plus 20% organic on full year '23 and wholesale on a plus 15% organic in full year '23 after a strong year-end in wholesale with Q4 wholesale delivery that reported a plus 40% organic versus Q4 '22. Two words, finally, on the TOM FORD FASHION. Page 25. Results were in line with the expectations impacted at adjusted EBIT level by the already mentioned PPA and by the royalty fees. It is important to us outline, in particular for 2024, that our priority remains to invest in the business and to set the basis for a successful organization led by the CEO, Lelio Gavazza. On the next page, we summarize some key results of our consolidated statement of financial position, balance sheet. So let's look at Page 27 here. I just call out a couple of elements on the line related to noncurrent assets because it is the one that is seeing most of growth. So in that line, the growth comes from the following factors. There is a EUR 96 million right-of-use asset coming from the TOM FORD license agreement. So in the PPA, we allocated at time of closing EUR 99 million of right-of-use assets, which gets amortized over 30 years. At the end of the year, it came down to EUR 96 million. Then there is a goodwill of EUR 24 million related to the Thom Browne South Korea business taken over mid-year. And then there is increase of right-of-use assets related to leases, the IFRS 16, whose growth is mostly driven by the addition of TOM FORD FASHION retail network and related leases within our consolidated revenue. Let's go to Page 28, where we comment on trade working capital. Trade working capital increased in '23 to a level of EUR 449 million, 23.6% of revenues, driven by the normal increase in business, but also by our decision, as you have already seen, in the semiannual numbers of '23 to invest in Zegna and Thom Browne Classics, which are continuity collections across the season. This investment impacted inventories in particular, in the first months of '23. And in fact, if you compare year-end inventory and June inventory '23, they are basically in line. So it means that we have plateaued and now we start normalizing. We have been already started normalizing despite coming from this onetime investment on continuity collection. In addition, you should consider that the incidence of revenues on vis-a-vis trade working capital has been penalized by a mathematical factor given that the addition of working capital coming from TOM FORD, EUR 52 million is compared to only 8 months of revenues of TOM FORD. For the future, our goal is to move gradually towards a 20% incidence of trade working capital and values. Page 29, you see a new non-IFRS metric that we introduced, also listening to your suggestion is the free cash flow metric. And let me comment this nice EUR 72 million free cash flow generation, which we recorded last year, largely driven by our improved operating profit results. Last year, CapEx was equal to EUR 78 million, around 4% of revenues, but I would like to reiterate what we already commented in New York Capital Markets Day and the fact that for '24 and also '25, our CapEx should increase as a percentage of revenues, slightly above the 5% threshold, given that we are investing in store openings and remodeling and also in the breakthrough project mentioned by Gildo of the new factory in Parma. Actually -- this is actually more than a factory. It will be a center of excellence know-how and creativity, where we will somehow celebrate our skilled artisans that every day produce luxury shoes for Zegna and for the group in an amazing environment which will enhance the workforce welfare. Finally, Page 30, and this is the bridge of the net financial indebtedness, which starting from a cash surplus at the end of last year lands basically as a neutral net debt to net cash position with a slight net financial investments of EUR 11 million after an incurred investment in subsidiaries and where the bulk of majority of this amount come from TOM FORD FASHION. With this in mind, let me leave the floor to Gildo for final remarks on outlook and current trading.

Thank you, Gianluca, for the clear presentation. And let me complete the first part of this call with some remarks on quarter 1 trend of this year, anticipating a question that I'm sure you will ask us. As you know, we are going to publish quarter 1 revenue on April 23. So detailed inflows and questions on Q numbers should be discussed in that occasion, not now. But let me give you here some highlights to help you better understand trends and actions, which we believe might not have been completely understood. Quarter 1 '24 revenue result reflects 3 main trends. Number one refers to our decision taken a while ago, but are in force today to further streamline the wholesale distribution, in particular at Thom Browne. We felt that in the current environment, it was the right decision to anticipate some action that we have initially planned over a longer period of time. Secondly, we are seeing some higher-than-expected volatility in Asia, mainly in Greater China and mainly for Thom Browne. For Zegna, the trend in the region largely reflects the 1 brand strategy, and we see signs confirming that we are moving into the right direction, even if the strategy has yet to be fully completed. For Thom Browne, the trend in Greater China has been influenced by the challenging environment, but also by the need to reinforce the retail organization. On the other side, I have to say that I'm very pleased to see all the other markets for Zegna, in particular the United States and some key markets like Japan for Thom Browne, growing sound double-digit DTC growth, confirming the strength of our brands. As a result, Q1 revenue are expected to grow in the region of 10% constant ForEx, while organic performance is expected mid-single-digit negative due to wholesale revenue of Thom Browne expected to be down high double digit of a very challenging comparison base. However, looking at full year 2024 and considering revenue consensus numbers, I feel confident that they are achievable. And I'm sure we are taking the right actions to deliver them. Regarding our mid-term guidance, as already said, I confirm that this guidance is unchanged and confirmed. Thank you.

Thank you, Gildo. And I leave now the operator to open for the Q&A session. Thank you, operator.

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

It's Chris Huang. I have 3 questions, please. My first question is on the Chinese consumers. I know this is an H2 P&L call, but are you able to provide any color on how the China cluster has so far performed in 2024. The reason why I'm asking about this is that we have been seeing -- hearing from some of your peers that trends in March have slowed down after a very solid Chinese New Year. So if you can, in any possibility comment on month-by-month trends, that would be super, super helpful for us. Secondly, on the guidance you provided for Q1, with organic sales growth to be down mid-single digit. Just to understand a little bit more that you provided wholesale for Thom Browne to be down high double digit. What kind of level are we expecting here? Just so we can understand better what is the impact from a challenging environment in Greater China? And how much is from wholesale? Because if I just quickly did the math, if we're assuming mid-single-digit up for Zegna to get to mid-single-digit down for the group organically, it means Thom Browne is down around 30% to 35% organically. That's my second question. And lastly, on EBIT margin. I remember back in December 2023, you provided some new midterm targets by 2028, which if we kind of look at the CAGRs implies EBIT margin to reach the level of high teens in the midterm. So if we compare that level to the 12% you printed in 2023. Can you just share some thoughts on what should we expect in terms of the cadence of margin expansion in the coming years? Are these targets likely to be front-end or back-end loaded?

Okay. Thank you, Chris. Regarding your first and second question, we will ask management to add some color. Actually, such detailed questions has to be then postponed to April 23 when we release the quarter 1 numbers. But for sure, I will ask Gildo and to also our Thom Browne and TOM FORD CEOs to give a little bit of flavor on the Chinese market, which was your first question. Then going into the second one on Rodrigo, I'll ask Gianluca to do a couple of comments, but I think also on this one, Rodrigo can comment a little bit more, and I'll leave then Gianluca for the EBIT CAGR, the third one.

So on the call, let me start, Gildo on Zegna, but I think that we can add color with Thom Browne and TOM FORD. First of all, we have been traveling quite a bit with Lelio and Rodrigo in the past few months. So I think we have a good grasp of the Chinese market overall. And I must say that it's challenging, but I think that it's positive midterm. Surely, we see less traffic than we used to see. So I think that we have to work more, less transactional, more relationship driven with the customer. I think that our outreach platform is very important to reach out the customer wherever he is or she is. And I think that we are having similar outreach percentages that we have in other countries like the United States, which has been really upfront. I must say that our rebranding strategy is coming up more and more every month. We have been successful with the drop strategy of Zegna by which is -- in the second season by which we have 4 to 5 drops of merchandise. [indiscernible] supported by market is supported by visual, supported by event in the store, and we see that every time we do that, we have a reaction of our clients in the store. We have created personalized event for high-end merchandise in some of the top cities by sending headquartered people and we had very, very good results. So I would say that from the day of the Zegna where we had an aspirational customer that is partly lost, we have been gaining new customers that are ahead and we are gaining traction more and more with high-end product. Last but not the least to mention, I think that 1 incredible weapon that we have used around the world and also in China is Made-to-Measure by which we offer a unique assortment of product that is very helpful in reaching out special customer that wants to feel exclusive in what they wear and they're very picky on the charges. So we do remain positive on China. But as I said, it's lower compared to countries like America, in picking up a trend that we'll get there pretty soon. Lelio, do you want to add some color on TOM FORD?

Yes, of course. I ended up traveling last month in China. As you know, China for TOM FORD is still a manageable market because we are mainly focalized in America. And I would say that for us, China in a usual market is a great opportunity for us to start with great opportunity has been underlined in the last few months, in particular the confirmation of the possibility to expand the brand in the market and this confirmation is tangible with the opening of our new flagship store that is going to happen at the end of June in one of the most important shopping malls in Beijing. And on Hollywood with this location, but as well several other opportunities that we have in China Mainland to opening direct-to-consumer boutique of TOM FORD. And I would add that with confirmation of some locations that were a little bit on the question mark in the previous year that has been confirmed by the lender. On top of that, we have an addition of a new President coming from one of the top group of luxury that joined TOM FORD in Shanghai in charge of Asia Pacific and we have a massive marketing activity that we started to deploy in the next few months where we really connect the brand with the Chinese consumer aiming to drive the nationality as one of the most important nationality together with Americans that are already there.

Can I ask Rodrigo to comment on China for Thom Browne?

Sure. Good morning. I am coming from Los Angeles and returning from Hong Kong, Shanghai, Tokyo so. Clearly, it's a different environment in China, you still walk the street and it's busy, very busy incredible market. It's divided by aspirational clients and very committed clients. We're seeing a fantastic trend when it gets to very committed clients such as yourself and the MTM, an event that we did last year, which were going to be repeating later on this year. I come from meeting landlords and visiting our teams. The aspirational client is much more challenging in general for everybody. And we brought in place a new GM at the beginning of the year. We are focusing 100% on the client connection right now and product confidence within all our teams. That's starting to pay results. And we have certain stores that are doing really well and some others are more challenging. Still a highly exciting market, and we need to connect even further with the client and have even more product confidence. From an external point of view, landlords are still really committed to continue to grow with us and waiting for us to have more activities in the country.

Thank you. Thank you. On maybe on wholesale, I'll ask Gianluca to comment a little bit, and then if Rodrigo wants to provide some more color, feel free to jump in.

So as Paola was mentioning, I cannot be specific on numbers and figures. I think, Chris, you are pretty good in triangulating numbers. So I let you to make the math. Anyway, I confirm that Thom Browne wholesale revenues are declining, high double digits. And this is a result of 2 main planned factors. The first one relates to a different timing in deliveries. As we anticipated during the full year revenues conference call in January, we said that Thom Browne wholesale deliveries were strong in Q4 compared to the year before. If you remind, there was a plus 40% organic growth in Q4 vis-a-vis Q4 '22. In addition, Q1 '23 days of comparison, I go by heart, it was close to EUR 70 million over a full year wholesale of EUR 195 million was also particularly challenging. So we have a Q1 that is facing a strong comparison in Q1 last year and is taking the effect of a strong Q4 last year. So this is the first timing effect. Then there is a second that is not timing, but it's a structural channel strategy decision about wholesale selection. Rodrigo mentioned the decision of streamlining the wholesale distribution, especially even more now with some situation of clients facing some credit risks. So I think I ask Rodrigo to comment further about this decision that was taken. We probably have decided to go quicker and accelerate on a journey that was already in the books. So that was -- that is no different than what we had in mind, but we just pushed pedal to the metal on this given the context and I invite Rodrigo to give some flavor around it.

Thank you, Gianluca. Yes, to give more background, I think we need to include the e-business element, which we all have seen the big shifts and ownerships and even changes. We have closed down certain e-businesses, the relationship we have had for the past years. We have also -- we see a significant reduction also on stock being offered on any businesses. Further to that, we made a strategic choice to reduce even further any stock available to those channels. And as Gianluca mentioned, it is as we've been growing our DTC channel for the past 8 years from 4 direct operated stores to 90 operated stores, we felt it was very more important to be confident on reducing any stock that could compete with our own DTC. So this is a choice, obviously, a challenging wholesale market around the globe. But at the same time, wholesale remains a great channel. I'm here in Saks who have wholesale with a fantastic event for VIC and celebrities with an exclusive collection in Los Angeles of accessories and clothing. And also, we continue to believe it's an important channel that we need to make a choice on the volumes that we put in wholesale. So as Gianluca mentioned, we made a strategic choice to further accelerate any reduction that we felt that was necessary to further strengthen our business, which is a short-term pain, but a long-term gain.

Thank you. And maybe there was a third question on the EBITA CAGR trajectory from Chris.

I recall something that we mentioned, but I make it more explicit. For TOM FORD this year is a foundational year. So we are building structure, people, opening stores and as it's normal, the first year of a store is not the second year in terms of performance. So we are not seeing a linear factor of growth of EBIT, we expect it to have an acceleration. We have said that we have a couple of years of over investment in CapEx, which translates into depreciation. We have the fact that TOM FORD will be consolidated 12 months and not 8 months, of course, then we don't have the PPA this year. But still, we see that the growth at our EBIT more intense in years after than 2024.

The next question comes from Anthony Charchafji from BNP Paribas.

It's Anthony Charchafji from BNP. I have 2 questions. And thanks for the good description before. Just one on current trading and the remaining will be on the margin. So just if you can give us a bit your thought on the U.S. market in 2024.

I don't know if it's our problem, but we don't hear you so well.

Can you hear me better?

Much better.

Much better. Okay. Sorry. Yes. So it's -- first question would be on the U.S. trend. I guess that 2024, I mean at a time where the slowdown was already present in 2023 for most of the luxury sector. I mean, for you, it seems that you are quite resilient in the region and that you seem more optimistic than your comment on China. So maybe if you can share your thoughts on the U.S. market currently. My second question would be on the marketing. So I understand that at Thom Browne, that there have been no step-up in marketing in 2023; though, I would say that it's starting from a low base. Should we expect, at some point, marketing step up also at Thom Browne to drive a bit the new addition women's wear and all that? The last question would be on the gross margin. I mean, a very nice improvement in 2023. I understand it was driven by -- specifically by Thom Browne. Can you tell us if there is more upside? And maybe for Zegna, I mean, knowing that there is this B2B business that is maybe 30% or 35% margin. So I mean do you see further growth in 2024 and beyond? Or should we expect something rather flat?

Okay. Perfect. Thank you. So I think we have a first question on U.S. trend, and I'll ask Gildo to comment, and particularly for Zegna. Then we see if we need some more clarity. Marketing, I'll leave to Thom Browne, and then gross margin is Gianluca.

United States, we remain positive for this year as we were last year. We also remain positive that American will visit Europe as they did last summer. And I think that Zegna has been able to penetrate in the perception of the upper scale American in a great way. Just hitting on the iconic basis, I think our icon is really being the shoes of the luxury crowd. Personalization is another very important attraction. But I think that it has been a cultural change of our company and of our people, many addition of top retailer merchandise and marketing people in our organization that has led the transformation from a wholesale culture into a retail culture and this branding going from a perceived of a clothing of a company to a luxury leisurewear and accessory company has really worked out extremely well around the stage. I think that there is no price resistance that's the other thing. We are offering an incredible service in every store. The increase in the productivity is quite sensational. And so I think that we have been appreciated thanks to our strong brand, but thanks to the changes we brought. And we are gaining not only the more confidence from the loyal Zegna customer that were very business-oriented, also to new customers and younger ones. So I think that the major changes has been growth into the perception of the brand by offering new products and superior service. Another important factor that led off to the change of retail -- from a wholesale to a retail culture is that we turned many points of sales from wholesale to retail. And the productivity has spiked up, unbelievable. I can make the example of Nordstrom. We changed our scheme and we changed our numbers immensely, just to mention. And so I think we are proceeding our journey with this determination. And I think that it will go on. So I remain, as I said, positive on the outcome of this big luxury market.

Do you want to comment on TOM FORD and then I'll leave to...

TOM FORD is main American market, where we see that the collection of retail for the summer '24 that we deliver basically in February with the positive reaction from the market on the collection. And with the recent fleet in the States where I returned just last week, we saw that there are a lot of activity to do in terms of renewal of some of our key selected stores in America, open a few more stores. But as well, we have a good feedback on our [indiscernible] new collection where we see possibility of good results with the new production.

Okay. I leave now to Rodrigo for Thom Browne marketing. But if you want to start Rodrigo, just with the -- you are in Los Angeles right now, and you've done this big event with success just a couple of comments on the U.S. market.

Sure, sure. The most important point to highlight that we continue to invest in marketing and communications for the brand. That's a very important point. Something that we are always known for is our fashion show, which is the beginning of everything. When people ask me, what -- do we sell something in the show? Most of what we sell in our stores has passed by shows over the past 20 years and continues to be the case. We have made a conscious effort since last year since the Couture show to make any brand moment on any brand events like the 20th anniversary, a client moment and a client event. We're seeing millions and -- $1 million plus, $1 million plus a multimillion dollar performance with clients on the back of these events. We're extremely focused right now on presenting the show collections, not only in New York to our clients, so one-to-one appointments to the SCs, and significant clients, but also in Paris. We have had fantastic, fantastic feedback and actual bookings from that. We'll continue to do the same thing in the second half of the year, particularly in Asia. Last year, we touched Tokyo, Shanghai, and Seoul. It will repeat a couple of capitals in Asia in the second part of the year with Thom. We've seen a great reaction. When it gets to America, where we're seeing a huge brand awareness growth in the last couple of years, particularly because of the women's business. Right now, as you pointed out, I'm here and success hosting us with a great event in a fantastic new location in Beverly Hills. It's an incredible store and incredible client-focused store. Yesterday, we had a great event hosted by Saks with Thom and clients and VICs and celebrities. And this turns into today a very significant amount of appointments that we have with VICs in order to buy the collection. Of course, with level for Saks, which is largely [indiscernible] and made to order bags, which we're launching globally here, our annual bag searching launch made to order here. And the opportunity to write made-to-order or made-to-order women's or made-to-measure men's. That's what we're seeing a fantastic performance as well. So this is -- you would say it's a business, but it does from a marketing point of view, how to communicate. It's not fake marketing. It's real marketing on the collections on what the brand stands for, and this is happening on a global scale. In all 3 big continents of the world, we are seeing this great reaction to presenting our collections into business that follows that and linking this with the world of aspiration of clients or the world of very committed clients. This shows a huge positive performance of our businesses. So we are penetrating key communities and this has been happening in the United States for the last couple of years where we are presented with the collections in front of significant clients, their performance is outstanding, really committed in special clothing entry gets down right now for accessories and footwear.

Fantastic. Thank you so much. And I leave now gross profit to Gianluca.

Gross profit. So first, I qualify for 2023, our gross increase of margin comes above all from Zegna. So Zegna is the biggest driver of increase of gross margin. Second question was how do we look forward the gross margin? I think we still have opportunity to grow the gross margin, and that is our plan for this year. The drivers are several. One is exactly one technical thing that is disappearance of the PPA on cost of sales. This is something that we had this year for EUR 15 million, and we called that in 2024, we still have, but a very minor, EUR 3 million to EUR 4 million tail of the PPA, purchase price allocation, on cost of sales. Second, apart from this, we have -- apart from this part, we still have upside on the gross margin driven by the fact that we are still in a meaningful way managing the price lever. As Gildo was mentioning, we are going the last mile on retail more and more. North America is the biggest area. We have on Zegna a full 12 months of Korea. The mix, channel mix will be a driver, but the price will also be a driver. So we expect gross margin to be still an area of expansion in terms of margin for 2024.

Thank you. I hope we answered Anthony. We have -- we can go to the next question. And if I ask the next person to keep maybe to one because we would like to leave the floor to all the questions we have on for us tonight.

The next question comes from Oliver Chen from TD Cowen.

Regarding your comments on aspirational, we're definitely seeing pockets of pressure and continued over inventory trends with aspirational across some brands. You're very service-orientated brands with distinctive characteristics and quiet luxury as well. But what's happening with aspirational? That's my question. And what do you see happening forward? And what's in your control and what's out of your control as we think about that customer coming back later?

Thank you,Oliver. I'll ask Gildo to comment on Zegna and aspirational customer, but then I'll leave to Rodrigo maybe to add a couple of more comments.

Since we decided to go up with our brand, the aspirational, I mean, has become less important to us. It is just as simple as that. And I think since Zegna was -- at least what Zegna branding was concerned was the driver now is not any longer, and we replaced with a lot of courage and a little price the top customer that is driving our business and we'll keep trying our business because the products are really unique, are not expensive for the sake of being expensive, so very high quality. I mean thanks to our platform, we created the best in-house product with the best material, very exclusive. I mean all this idea of traceability from linen to wool to super fine wool to cashmere, I mean, it's unique. And they really embraced with this sustainability and high level of service. And so we are able to drive new customers at the same time increase the level of our offer. And so yes, we become more selective in our customer. I think that Zegna belongs with a very other few brands who sell luxury. And we do believe that this trend has not come to an end, and we are right in the middle of the journey, and we have to expedite the journey in particular in China. As I said several times, we are ahead of the pack in United States by any, any means. We are ahead of the pack in Europe and in Middle East. We are doing a good job in Japan. We have some work to do in some other part of Asia, China, Southeast Asia and Korea. But we are working and we are going together, but this is the path. This is the world that we want to get, and we are going to get there.

To give some evidence of this journey, especially in China. We have signs that this evolution from leaving behind the aspirational clients in China is giving signs and we see legitimacy from the top-end client. We are seeing, for instance, the SECONDSKIN Triple Stitch, which is priced higher than EUR 1,200 -- in Europe, EUR 1,000. It's performing very well in China. We are seeing uber luxury products sold very well. We just finished in Shiyan successful prime show of uber luxury products where clients came in and recognized the collection, the high-quality collection that Gildo mentioned. We have in China, the highest number of so-called linear friends that are the ones above the EUR 50,000 spending per year. So of course, it's the area, and that is where we have always disclosed we are reshuffling our client base in China. We started later. But we are confident that the formula, the ingredients, the recipe is working also there. We have signs that the product is recognized, high-end clients are seeing Zegna as a go-to-brand also on the top part. So I think it was -- we had added to the mix.

And Rodrigo, a couple of comments from your side, and then we leave to the following question.

Sure. To put into perspective, from a Thom Browne point of view, I think the fantastic opportunities that we don't target a specific client. We target male and female clients. So we have a wide variety. We target, we have young and older clients. So we love them all, and we have an aspiration and we have a very committed client. So that's the whole range. There's no question mark, that when you're going to market and the real estate is impacted by a 25% to 30% and does not reduce from any other financial markets, the aspirational client will be buying less. What we've seen is that we have a very developed client value management. And when I walk the streets of the capital that I mentioned, you see the brand worn by clients in combination and with the key luxury brands, most of them are French. And can we get that client to regularly buy with us? Absolutely, yes. Absolutely, yes. That's why marketing is very important. That's why explaining very clearly what we do as a brand and the range of products is very important. That's what we mentioned. I have the confidence on the wider selection of product having a connection, a really good understanding of clients. So can you beat the market when it gets to aspiration and knowing that client really well? Yes. And that's what the hard work that we're doing today is trying to build a couple of years ago. So we remain always very positive on the expansion of clients. I think what's happening in the markets, particularly in key markets. It has less growth in general of aspirational clients to clients at the first time into a brand.

Oliver, I think we answered your question. If anything, you can come back to me. And we have the last one before closing the call.

The final question comes from Louise Singlehurst from Goldman Sachs.

I will keep to one, but just to clarify a couple of things on the wholesale channel. And as we think about that rationalization, which absolutely makes sense for the long term. But for Thom Browne, is that expected to go into, obviously, the multiyear as we look beyond 2024? And similarly, with TOM FORD, should we be expecting some rationalization of wholesale over time in there? And then a sneaky, but it's a related question. Presumably, we should start to see an improvement on the gross margin, really helpful getting the gross margin color today in the annuals for 2023. But presumably, we should start to see the channel mix effect benefiting that as we move through into the next couple of years, too.

Thank you, Louise, and I'll let Gianluca to comment a little bit, and then maybe also Lelio on TOM FORD FASHION.

Yes. I go back to what we said in New York. So we have disclosed the growth, the midterm CAGR of 10%. And there was a question, say, how come you do a 10% growth when you chase an increase of store productivity. We disclosed an increase of store footprint through conversion and through brand new openings, and the answer was we see our wholesale business flattish going forward. So our mindset is that the growth does not come from wholesale. So this is to set in perspective. We want to keep wholesale basically where it is now. We are going through and especially for Thom Browne in a cleanup and especially a selection of accounts. Definitely, this will translate into a channel mix positive effect in gross margin. It carries also SG&A together because when we convert we bring some cost attached, possibly some conversions are paying back. Always our rule of thumb is to have at least in a couple of years the store up and running. So you might have the first 12 months muted and then a spike afterwards. That was also the reason of my answer to Chris at the beginning if we see our EBIT growth linear or not. No, we are not seeing this because we are going through some conversions, some openings and so on and so forth. But definitely, the logic is go direct to the consumers. Zegna is also already 85% there. We want to bring the other 2 brands to 70-30, which is not the case today. This comes to selection and conversion. And I leave Lelio and Rodrigo to express the logic of the -- we have exactly yesterday meeting on wholesale, so with that fresh material in your mind.

As TOM FORD is concerned, as we mentioned in the Capital Markets Day in December, our key driver will grow will be retail because it's the only way we connect with our customer [indiscernible]. Of course, 2024 will be a transition year. So it's not going to be a year where we're going to make a lot of things happening in wholesale. But to confirm the strategy, I can tell you that already 2024 there's 2 points of sale that are not say today that will be moved in Concession. We have additional 3 new openings that we typically use the wholesale model in the past. They're going to be open in Concessions directly. And of course, we, in a way, obliged better control or manage some of the point of sales e-retailer or retailer that are not having a good financial situation right now, and we need to better control to avoid a negative impact. Of course, I reiterate the fact that retail will be the driver of growth. And in the next few years, we're going to have some much more attention and expansion to the retail network and, of course, transformation from wholesale to retail.

Perfect. Rodrigo, I don't know if you already talked about...

From a Thom Browne point of view, if we -- wholesale. So if we take that we have a beautiful brand and a beautiful product and we want to connect also the clients. So those 3 elements, wholesale is an important component. Important component because they have a global connection with very important clients. And it doesn't have to be walking through the doors of the department stores. It can be or should be mostly very well known in VIC client. Like we live in today right now, we saw yesterday when having the event at the store with Saks, the product in front of the best clients they have, having very well developed Saks Fifth Suite market and program. I just sold the same thing in Hong Kong with Joyson and Cropper. It's fantastic. And just to make it choice, the biggest impact I see this year or last year is from an e-business point of view. We saw the change of ownerships very quickly of a couple of big players. And much just to clarify, Gianluca's comment we had shut down distribution much before this happened. So that's one of the few choices. But from a wholesale point of view, where we remain positive is that we want to be connected with the best potential client in the world. It's a client expansion opportunity at Thom Browne. Clearly that one. Cost can play a specific role. Are we going to see a significant change in volume? Not necessarily as Gianluca mentioned, but do we have an opportunity to continue to expand on footwear and accessories where we start to have very good results, particularly from Japan. Japan is leading for us the opportunity on accessories as well as footwear. There's been a total commitment and exposure on shop floor we have the first 2 ever spaces on the ground floor with [indiscernible] perform really, really well. So what can wholesale contribute? They can connect us with incredible clients. They can put us in front of -- right next to the most important brands when it gets to accessories and footwear. So we can continue to work intelligently on wholesale and cherry prick where to grow, which categories to grow and how to expand with it and how to do certain business directly and complement it with other business that brings us clients that we wouldn't have in the short term. There's no market [indiscernible] Saks here. So that's our view on wholesale. The volumes, as Gianluca mentioned, we're going to be somewhere on the levels that we expect in 2024, somewhere there as a choice and the breakdown in terms of women's and men's. Women's is a new business. It didn't exist almost 9 years ago. It's a very important part of our business. And when it gets to growth and opportunity, clearly, key wholesale accounts can bring us a very interesting client. As well as MTM, MTO, we have had fantastic success where we targeted very elevated, a very committed client from wholesale accounts or Made-to-Measure, made-to-order. We're talking about $9,000 certain fabrics within the collection full suit, and we're talking about even custom orders that come from very significant clients of some of the best departments in the world that buy over $100,000 of looks of Thom Browne when it relates to customers of shows.

Thank you, Rodrigo. And with this question and answer, I would like to close the call. I thank everybody who have joined. As we said on the 23rd, we will have our Q1 revenue results call. So we will see each other in a couple of weeks or call each other in a couple of weeks. In the meantime, if you have any questions on what has been discussed during the call on fiscal year 2023 results, I'm always available. Thank you. Thank you so much, everybody.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.