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

Good morning, everyone. Welcome to the Ermenegildo Zegna Group's First Half 2024 Preliminary Revenue Conference Call. Let me introduce the Ermenegildo Zegna Group's senior management. Chairman and CEO, Mr. Gildo Zegna; Chief Financial Officer and Chief Operating Officer; Mr. Gianluca Tagliabue; Chief of External Revenues, Ms. Paola Durante. Documents for today's call are available on the Group's website, including the presentation that will be discussed during the call and the forward-looking statements that you can find at Page 2 of the presentation. Let me now hand over to Mr. Gildo Zegna.

Good morning and good afternoon to everybody, and thank you for joining today's conference call of Ermenegildo Zegna Group's first half '24 revenue. For me, our call is not only an important moment to look back on what we had achieved, but also a moment to discuss what lies ahead. In H1 '24, the Group reported EUR 960 million of revenue, with a 6% growth reported and 8% at constant currency. Q2 contributed EUR 497 million, plus 5% year-on-year, with an improved underlying organic growth. Indeed, excluding changes in the perimeter and the impact from currency, our organic performance improved from minus 5 in the first quarter to flat in the second quarter. These are results that are considered acceptable, in particular, in the current consumer and sector environment. Now let me update you on the key important projects and on the future. Starting with TOM FORD Fashion. You read that Peter Hawkings is stepping down as Creative Director of the brand. I want to thank Peter and wish him all the best in his next chapter. A new creative director will be announced in the near future. And as we look to the next phase of the brand development, I'm even more excited about the bright future of this business and convinced about the potential of TOM FORD trend. Our goal is to create a much stronger, more global and more diversified luxury business. TOM FORD is a strong brand, and we can also make it the largest fashion business by doubling down on women's, strengthening daywear, and very importantly, by reinforcing leather goods. In the meantime, the team is working seamlessly to execute our plans. We opened a new store in Taormina that is performing ahead of expectation. And we also just opened a store in Rome, one in [indiscernible] Hangzhou Tower in China, and the flagship in Beijing, China World. Thom Browne. As you know, Thom Browne has been a driving force to the Group and it's triple its revenue since 2017, but not only. Since acquiring the brand, we have together understood the strength of operating as a Group, the differences between our brands and how to focus on what each brand can do better. 2024 will remain challenging, and I'm deeply convinced on the unrealized potential of the brand. Thom is a new designer, always true to himself with no compromises. The Haute Couture in Paris was a masterpiece and many fashion experts said so. We have taken strong actions, starting from the deep wholesale organization to a thorough review of the organization. And when you go far, sometimes you might not have a balanced organization. We're working on this. We're working on upskilling the sales team and improve our merchandising offering, particularly in China, and are enforcing the management in key roles. We also began to involve the Thom Browne language to start engaging with a wider audience, not a different one, just wider. And the CEO, Rodrigo Bazan, is working on all these topics, and I think that we will soon see good results. Let's finally move to the Zegna. We continue to enjoy very sound growth in most markets with plus 6% organic growth in H1, with EMEA, Japan and U.S. leading all double digits the performance. The Greater China region instead continues to be impacted by an overall challenging environment. And even though Zegna is outperforming the sector average in the region, I know we can do much better. We are working on the management team, on the people, on stores, and on the overall organization. VILLA ZEGNA is the home of the founder. VILLA is a house in the heart of all the Zegna, that we are now creating around the world to explain the authentic legacy of ourself. VILLA ZEGNA reflects the brand approach of interacting with its customer, offering them immersive experiences, into its story and values to foster emotional connection to the brand. [indiscernible] activation in Shanghai confirms once more that the brand is strong in China and perceived as a leading timeless luxury [indiscernible] brand. In September, we will move VILLA ZEGNA to New York to reveal a different story, the story of Count of Monte Rubello, my grandfather, a pioneer who in 1938 traveled to New York on an ocean liner to meet with the best American tailors making [ Zegna ] fabrics known across the United States. With VILLA ZEGNA, we are storytelling across the globe Zegna's authentic legacy, moving our engagement with clients from relation into experience. The power of the brand's authenticity was also confirmed by the success of our critically acclaim '25 summer fashion show, our Oasi Lino parade. Oasi Lino is a collection made by fully traceable linen fibers. And that Alessandro Sartori Zegna's Artistic Director has been able to create once more an authentic show appreciated not only by the press, but also by the clients and wholesale partners around the world. And lastly, one word on our Filiera, our verticalized process from ship to shop. I attended Ideabiella in Milan, the world's most important textile fair recently. And I can see how meaningful our textile fragment is in terms of innovation and creativity to foster the uniqueness of our brands. Looking ahead, the current global consumer environment is difficult to read. Volatility and uncertainties seems to be rising. We need to work on cost control, and we are already doing so. But we do not want to sacrifice important projects, for all our brands to continue strengthening their authenticity and desirability. My family has been running the company for more than a century, and we're here for at least to stay we've always run it with a long tradition. This will not change. Along with the Group's leadership team, we are working hard to uncover our brand's unexplored growth and to deliver on our ambitions. And now let me turn over to Gianluca to go into the revenue detail. Thank you.

Thank you, Gildo. Good morning, good afternoon, everybody. Let's move to Page 11 of the presentation wherein you find our consolidated revenues for the first half and the second quarter of this year, including the by-segment information. First of all, let me make a general comment. As you know, H1 and Q2 consolidated revenues included TOM FORD fashion business which has been integrated since April 29 of last year, and the acquisitions of the Korean businesses for Thom Browne on July 1 of last year and for Zegna on January 1 of this year, pursuant to which the Group started to directly operate the business for Thom Browne and for Zegna brand in that market. Therefore, when we refer to organic revenue growth, or simply organic, we neutralized from the Group perimeter the effect from TOM FORD fashion change in scope before April 29 of both years and the Korea related changes in scope, and we apply also the constant currency approach. Therefore, in the first semester of this year, Group revenues reached EUR 960 million, as Gildo mentioned, up 6% on a reported basis, up 8% excluding 2 percentage points of negative currency effect. Currencies continued to be a headwind also in Q2, mainly related to renminbi and, to a lesser extent, to the yen. On an organic basis, Group revenues in H1 were down 2.7%, with a sequential improvements by quarters. In Q2, organic growth was flat, to be precise, minus 0.4%, driven by an ongoing solid trend at Zegna brand, and an improved, although still negative, performance at Thom Browne. In Q2 of Zegna segment, which I remember, includes Zegna brand and textile and the minor third-party brand revenues, Zegna segment, as I said, recorded positive organic growth despite the flattish performance of the Textile business. Let's move now to Page 12, revenues by brand. Before going into the details, let me underline that commenting on the following pages, I would largely concentrate the comments on the organic performance dimension. As commented also by Gildo, the Zegna brand showed a robust performance also in Q2 with a plus 5% organic growth. These results have been driven by both channels and an ongoing sound growth in Europe, Middle East, U.S. and Japan. Zegna brand in the semester accounted almost for 60% of the Group revenues. Moving to Thom Browne brand. In Q2, Thom Browne's revenues reached EUR 88 million, down 18% in organic terms, still driven by the channel mix rebalance. This performance showed a prime improvement compared to Q1 when it was minus 35%, also thanks to a less challenging base of comparison. By region, Japan continued to show standing double-digit growth for Thom Browne, while Greater China region remained challenging even if with some small signs of improvement. Commenting on the TOM FORD fashion brand, please remember that organic growth includes revenue generated by the TOM FORD Fashion between April 29 and June 30 in both 2023 and '24. Therefore, it's the first time we see the organic measure for TOM FORD fashion. And we report with a positive mid-single digits organic growth for this period of the year when TOM FORD fashion reached EUR 83 million of revenues in the quarter. As already mentioned, the Textile performance, which reported a slight organic growth, was influenced by a decrease in demand from the non-captive brands. Under the other revenue line, we include mainly revenues generated with third-party brands. This line of business can now be considered marginal since, with the acquisition of 100% of TOM FORD International, we integrated the TOM FORD fashion line in the Group, while before it was accounted within the third-party brand revenues, largely explaining the substantial decline of this revenue line in the reported figures. Moving to Page 13, displays by geography, looking -- starting from Europe, Middle East and Africa. In Q2, EMEA recorded a good plus 3% growth organic wise, with a strong improvement from a negative minus 6.5% organic growth -- organic decline in Q1. This result is driven by an ongoing double-digit growth of Zegna brand in the region and the less demanding base of comparison of Thom Browne in the regional wholesale channel. Moving to Americas. This region recorded a sound plus 5% growth in Q2 on an organic basis, driven by Zegna, ongoing very good results in the DTC in all main markets, despite a more challenging base of comparison, in particular in the U.S. Greater China region revenues declined by 10% organic in Q2, showing a slight improvement versus the minus 13 of Q1. Zegna continued to outperform the Group average in the region, and we also believe continues to outperform the sector. As said, TB, Thom Browne, remains double-digit negative in Greater China, although with small -- some small signs of improvement. Given the current revenue trend in the region, we have taken some cost control actions to protect as much as possible our margins, thus, although we confirm all the key projects to support our brands in the area and globally. For instance, this is what we did with the [indiscernible] in Shanghai, which had very good results, and confirmed that the brand resonates strongly among the uber-luxury consumers also in China. Thom Browne continues to work on its top-of-the-pyramid clientele. Management concentrated on the in-store experience, starting from client adviser, merchandising and CRM approach. In the rest of Asia Pacific, let me underline the ongoing strong performance in Japan for all our brands, with a strong double-digit organic growth in Q2 for both Zegna and Thom Browne. In terms of cluster, I anticipate a question that I know might come out. For the Zegna business, U.S. cluster keeps on growing on a solid double-digit pattern compared to last year also in the second quarter. And the cluster of Zegna clients from Greater China is single-digit negative versus Q2 of last year. I'm sure you already know, it's important to underline that the largest part of the Chinese buys domestically for Zegna. And therefore, the trend of revenues of GCR is not that different from the trend of the cluster itself. Moving to the revenues by channel, Page 14. I would limit the comments here because we will then analyze the performance by channel, specifically by each brand, which I believe will provide you more insights. A couple of quick comments. In Q2, DTC channel grew 10% reported or 2% organic, driving the Group performance, thanks to Zegna brand positive contribution and to the addition on the reported side of TOM FORD. In the semester, DTC accounted for 70% of total Group revenues or 76% of branded revenues, that is excluding textile and the other revenues line that are, by definition, a B2B wholesale business. In Q2, wholesale performance for the three brands was negative 4%, minus 5% organic, thus, with a significant improvement versus the minus 26% organic of Q1. This trend improvement reflects a much lower decline at Thom Browne wholesale and the sound double-digit organic growth at Zegna in the second quarter. Let's move to, at this point, the detail by brand. Page 16, the Zegna brand breakdown channel. In Q2, Zegna DTC revenue grew 4% organic, accounting for 87% of the brand revenues. The DTC channel recorded sound double-digit organic sales in EMEA, Americas and Japan, while GCR remained on the negative side and pulled the average toward 4% organic down. In the quarter, the brand opened two net new stores from 277 to 279. And among this, we remarked an important opening in Taormina, where we cater to our key customers. In the quarter, Zegna wholesale recorded plus 12% organic, with good growth in all markets. This performance has been driven also by anticipated deliveries of the fall/winter '24 collection. Moving now to Page 18 to analyze Thom Browne performance by channel. In Q2, the DTC grew by 13% reported or minus 12% organic, which is excluding the Korean market contribution in both comparable periods. In Q2, the wholesale in organic terms declined by 22% compared to minus 47% organic in Q1. Commenting the wholesale improved performance, let me underline that it has been largely driven by a less demanding base of comparison, as we already commented during the Q1 conference call. The decision to rebalance the channel will continue to drive performance also in the second half of this year. Let's now finish Page 20 with the comments on TOM FORD Fashion. I remind you that looking at the reported performance with TOM FORD fashion, the reported performance can be misleading because it compares 3 months consolidated in Q2 of this year, with slightly more than 2 months consolidated last year. For this reason, TOM FORD fashion organic, which is a better proxy of performance, shows, and this is what we remarked, it shows a positive 4.7% in the 2 months that are comparable, in the 2 years. And in Q2, TOM FORD fashion revenues reached EUR 83 million, with a DTC contribution close to 60% of brand revenues. Both channels showed a positive performance. DTC in the quarter has been driven by Europe, also thanks to increasing travelers demand and some successful openings like Taormina, which has been a new opening also for TOM FORD fashion. Wholesale has been strong, thanks to some different timing in deliveries and a sound demand from U.S. accounts. Now I hand it over back to Paola.

Thank you. We are now ready, finished with the presentation, and ready to take your questions. So operator, can you open up the Q&A session? Thank you.

[Operator Instructions] Our first question comes from Anthony Charchafji with BNP.

It's Anthony Charchafji from BNP Paribas. I have three questions, if I can. So first of all, congrats on the strong organic results, especially in DTC. I have a question on the exit rate, if you can comment the organic performance in June versus the quarter. And maybe if you can give us some color on the July trading so far, especially with the Chinese cluster, if it's still down single digit for Zegna brand. My second question would be on wholesale. So I think during Q1, you guided Zegna will sale rather flat for the full year. It is up 5% reported and 10% organic in H1. So do you confirm the guide? And also, I'm asking because it's to try to understand the shift in deliveries now that you have this monthly drop-based strategy, because I initially thought that the comps were actually tougher now, but maybe I made a mistake on that. And my third question would be on Peter Hawkings. So, yes, it was a press release from the Estee Lauder company. So I'm just wondering if it was a choice they made on their own or if it's you who specifically asked for a change. And also if you give -- can give us some color on the reason and the implication on the existing strategy. It's more a question because if there is a risk of losing existing customers as Peter was working with TOM FORD, the designer for some years with similar brand identity. And maybe a last one, if I may, on the reporting, yes, it's more a reporting question. Yes, I see that you're adjusting the [ Pillitteri ] to manufacturing company in H1. So basically, in 2Q. So it's a shift of revenue from Zegna to TOM FORD fashion. You didn't make it in Q1 and you made it in Q4 '23. So yes, just wondering the implication on that and what we should expect in terms of margin for the Zegna segment. I believe it can be slightly boosted due to that.

Anthony, thank you very much actually for all your interesting questions. I will leave the first two to Gianluca. Can I just answer quickly on Peter because and then also Gianluca can make any comment. But just to say that clearly, just to highlight that the press release was about TOM FORD press release, not an Estee Lauder. So just to make sure that we are on the same page. And then I'll leave Gildo to make any comments. I'll also differently in the world, and to Gildo and Gianluca, on the reporting part, actually, the producer that is now under TOM FORD was previously accounted in Zegna segment, but not to Zegna brand, was into the others revenue line. Okay.

So let me start on the last one on TOM FORD. I think that -- first of all, let me say that along with this team, Peter has contributed to the important initial phase of the development of TOM FORD fashion. And so we thank him for that. And I cannot say more than just confirm that a successor would be announced in the near future. And Lelio Gavazza, the very valid and solid CEO of TOM FORD fashion, continues to be the TOM FORD fashion, and working very closely to the CEO of TOM FORD Guill Jesel. And we are very confident that we will successfully deliver our long-term ambition. I cannot say more, but that's where we are. Thank you.

And Gianluca for the exit rate in July performance.

Anthony, so the exit rate from the quarter and the entry rate into Q3 are not different from the average of Q2. So if we look at -- of course, I'm commenting on DTC because, looking on a monthly basis, wholesale might be misleading. So retail June, retail July for the brands are in line with their respective average for the quarter. So we are not seeing a major shift. We are seeing the same pattern for Zegna Europe, the Middle East, Japan continuing very well. GCR, similar trend, with some nuances within GCR, but the same. The nuance could be, if you want to have a flavor, we are seeing more softness in Hong Kong and Macau, which is for us not really much relevant. On the Thom Browne side, we continue seeing very strong. Japan the same softness that we have seen on Thom Browne in GCR, although we have now new management in place, we see some initial small results for Thom Browne in GCR, although it's early to draw conclusions. TOM FORD, we continue seeing U.S. as a strong and important market. EMEA, fairly good with the openings that we mentioned. And GCR, for TOM FORD is very small, so it's difficult to read. So I'm saying nothing different with the exception of that nuance of softer Hong Kong and Macau. With Zegna, we confirm what we have said. So on the year, we see organic flattish for Zegna. So we are not changing our perspective.

We can maybe add one thing on the wholesale, that we just concluded our wholesale campaign, and we are positive on this, and I think that the sell-out of our goods is also our principal accounts that have been quite good across the board. And so if they came back with a positive period, and then future wholesale is, it depends on what you sell now to project tomorrow. So we have seen even though the wholesale comes less than the past, at least for Zegna, I think we move along the same path, both retail and wholesale, because we share similar merchandise. Some customer may buy it -- Zegna [indiscernible] and some other may buy [indiscernible]. So we let them choose. So I think it's a good collaborations among us, and we are willing to keep going along the same path, provided we control and consistent with our brand, which is the most important thing going forward.

I connect the dots between the two. So when you say flattish organic and the good performance, you have to keep in mind that we are more and more taking over direct presence in some wholesale accounts. I think we mentioned already the plan of going direct in an important wholesale account in North America, which is Harry Rosen in Canada. So we are keeping flat, although the base of clients is shrinking because some clients are moving from wholesale to a concession model.

Thank you, Anthony. We can move to the next question.

The next question comes from Chris Huang with UBS.

It's Chris from UBS, and I have three, please. One on Zegna, one on Thom Browne, one on the profits. Starting with Zegna. Gianluca, you provided some very helpful comments on the Q2 trends by cluster. But just sorry to come back, I think the comment on the Chinese was down single digit in Q2, but how [indiscernible] European locals, please. Secondly, on Thom Browne, can you help us just quantifying how much of a decline we should expect in the coming Q3 and Q4 at the wholesale channel? And should we expect the weakness to be carried into 2025? And my third question on margins. I mean so far in this Q2 earnings season, the trends we have seen from your peers seem to be continuing to slow from Q1 and into Q3 overall. My question would be on if your DTC growth in Q2 is also moderating sequentially, how comfortable are you in terms of delivering what consensus is looking for at the moment for the full year. If I'm not mistaken, consensus is looking at EBIT of around EUR 227 million with margins year-over-year down 40 basis points. And sorry, just a little bit of follow-up on the previous comment you made. You said that the exit rate in July is not materially different from the average for the quarter at DTC for both brands. Does this mean that, in an environment where your comp base is getting easier, what are the underlying trends -- what are the underlying trends showing? Because in theory, your comps are getting easier than people would naturally expect the year-over-year growth rate to accelerate.

H2 underlying trend is the last question. Did we get it right. Chris, sorry, and thank you for all the questions.

Yes, on July, if comp base at DTC is getting easier, should we expect year-over-year growth to pick up versus Q2?

Okay. Perfect. I think they are mostly for Gianluca, all the questions. So starting from the first one on Zegna and Q1, Q2 Chinese.

Chinese performed fairly in line. You'll remember we said mid-single digit. Now we say single digits, not substantially different. Of course, if we say this, means that probably there is 1 or 2 points of difference, and so we wanted to call it out. Remember that all -- the vast majority of the demand is in China and only 10% of Chinese demand are outside of China. So some of the flow of Chinese going to Japan or some other locations, we do not take entirely benefit from. I think you mentioned also European cluster. European cluster in H1 is double-digit up. European, and not European and Middle Eastern, European alone. Middle Eastern is solid, solid double-digit up. And European, we don't see a change of pattern in Q1 and Q2. Then you asked for Thom Browne wholesale. You have seen two different quarters. One was Thom Browne wholesale was minus 47, and we mentioned that was an adjustment vis-a-vis a very tough comparison basis because it was very strong the shipment in Q1 of 2023. Now you have a minus 22%. Looking forward, we cannot speak to a specific number, but definitely, the trend of Q2 is much more reasonable if you want to project the second half. So I would consider second quarter a much more meaningful basis within our goal of reshaping the client base of that brand. In terms of margin, of course, we will be more specific when we present the first half EBIT. I remember, I think that we already mentioned, there will be, of course, an effect of costs, more balanced, more weighted in the first half. For instance, advertising as a -- typically -- last year, we had 40% in first half and 6% in the second half. This year will be the other way around, will be 2/3 in the first half and in the second. And we will have cost controls that will kick in mostly on the second half of this year by trimming down everything that is not essential or discretionary. So the positive impact of cost cutting will be on the second half. So we will be more specific on the -- on September. In terms of consensus, I can state that we are recognizing the revenue consensus. And in terms of EBIT, we'll be more specific as I remind in the call of September.

Okay. Thank you so much, Chris. There was another follow-up -- sorry, yes, the H2 underlying trend that again is, I think, for Gianluca. Sorry. The underlying trend in July went into an easier...

I think you're right when you say easier comp, but we are working here on 3 weeks of July, so we cannot yet take entire benefit, I think. We see more going forward, both the easier comparison and kicking in the effect of some important openings, and I defer them to Gildo to list some of those because there is a strategy around this. So I think that on the second half, more than just the 3 weeks that we are in, we can take benefit of some easier comparison and some openings. And I invite Gildo to recall some of them.

Yes. I think that in the second half, in particular for Zegna, we're having a number of interesting opening around the world. I can mention Monte Carlo will be open in September. The Harry Rosen 9 point of sales of Zegna in Canada, going to become from wholesale to concession. Another important story, we'll be opening in New York, Meatpack district area, which I think is becoming very, very interesting also for wealthy customer. We have an opening in Wuhan [ Shin Complex ] is a new development of Mr. Ji in China. We will have [indiscernible] going back to [indiscernible] in the -- probably in December. And then we have Riyadh, in Saudi, and one concession of [indiscernible]. So I think there is a variety of interesting locations around the world that we'll consolidate our leadership in different parts of the world. Going to TOM FORD, Lelio Gavazza, after having unveiled Taormina, Roma and Hangzhou Tower, the prestigious lake district of PRC. We'll be opening very late in the year at Paragon in Singapore. Harrods is a concession. Madrid at the Four Seasons Hotel, and St. Moritz. So interesting that we test some results there also with the brand, along with the test that we had of Zegna in the first half of this year. And finally, Thom Browne. Thom Browne, Rodrigo Bazan is working for opening Melrose at Los Angeles, Palm Beach, and a few concession also [indiscernible] Nordstrom in Canada and Nordstrom in the United States. So I think that these are part of the brand development strategy to move more retail than wholesale. And as we said before, whenever we can turn wholesale into concession, we do so by keeping the partnership going. So we think that with the new collection coming in soon for winter, I think that we are more now coming in end of August with the first [indiscernible] winter delivery, I think we could see some good traction, after, I would say, a good summer. Because, as you know, we don't run any selling in Zegna. So we run summer all along almost, and I think we'll do so because we have a lot of American and Middle East tourists that visit in Europe in particular, and we want to take full advantage of that with our full price product strategy.

That's very helpful. And excited to see the openings. And sorry, just to be annoying here, because my line was breaking up a little bit. So I heard Gianluca, you made the comment that Chinese in Q2 is 1 to 2 percentage points different from Q1. Is it accelerating or just slightly softening, if you can comment on that, please?

Chris, yes, you heard correctly, but it's -- any time we talk, we talk about Greater China Region. So also the unit of dimension is Greater China Region residents. So if we look at Chinese in this broader sense, you're right, it's 1 or 2 points lower. And it's driven by the softness of Hong Kong and Macau that I mentioned, mostly Hong Kong. Because, of course, in Macau, you don't have so much residents. But it's mostly -- yes, that slight delta is not driven on mainland China, it's driven on Hong Kong residents.

Okay. Thank you, Chris. If you're okay, we can move to another question, or set of questions, if there are.