Hugo Boss AG (BOSS) Earnings Call Transcript & Summary

We transfer to the HUGO BOSS booth, where you can continue to ask questions via chat and access shareholder materials. On a final note, all of today's presentation is recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Frank Böhme, Senior Investor Relations Manager, HUGO BOSS, which trades on the XTRA under the symbol BOSS on the OTCQX Best Market as BOSSY. Welcome back, and over to you, Frank.

Thank you very much for the introduction. A warm welcome to all participants also from my side. Just as a remark for the disclosure language, please see the end of the presentation. Let me start with a broad overview of HUGO BOSS before I will discuss some highlights of our third quarter performance and close with our strategic initiatives in order to return to our former growth trajectory. We are one of the leading global companies in the premium segment of the apparel market, with around 14,600 employees around the world, we develop and sell high-quality fashion as well as accessories in the womenswear and menswear segments under the BOSS and HUGO brands. Around half of our employees work in our 1,100 own retail stores. This includes around 430 free standing stores such as in SoHo, New York, around 170 outlets such as at [indiscernible] in Florida and around 500 owned, operated shop-in-shops such as at Macy's. In fiscal year 2019, we achieved sales of EUR 2.9 billion and an EBIT of EUR 347 million from the distribution of classic yet modern tailoring, elegant evening wear, casualwear, shoes and accessories. This also includes license income that we earn with products such as fragrances, eyewear, watches and children's fashion. 2020 is a year characterized by the pandemic. When COVID-19 started to spread around the globe, our first priority was to ensure the health and well-being of our employees, customers and partners. From a financial perspective, we implemented various initiatives aimed at securing our liquidity and hence, preserving the viability of our company. Our Q3 results and the strong free cash flow generation are a reflection of the successful execution of these measures. So let us have a closer look at our Q3 results before we will discuss our strategic growth drivers. Our business recovery has clearly continued in Q3. Thanks to steady improvements in all regions and sales channels. Albeit at varying rates, we were able to limit the decline in group sales to 24% currency adjusted. Our own online business was the best-performing sales channel. It continued its strong double-digit growth from previous quarters as reflected by revenues up 66% currency adjusted. Growth was once again broad based, with all 3 regions recording strong double-digit improvements in Q3. Similar to the second quarter, the development was driven by strong momentum on both hugoboss.com as well as multi-brand platforms operated in the concession model. The period from July to September, therefore, marks the 12th consecutive quarter with significant double-digit online sales growth for HUGO BOSS. This brings me to our regional bright spot, Mainland China, with currency adjusted revenues up 27%, momentum further accelerated in a 3-month period. Thus enabling Mainland China to successfully continue its recovery that already started back in March. While this development was supported by a repatriation of local demand, we also witnessed strong improvements in conversion rates in brick-and-mortar retail as well as high double-digit online sales growth. In both sales channels, offline and online we recorded robust growth with existing Chinese customers, but also with new customers. And here, in particular, among younger cohorts. The execution of regional events, together with the activation of local brand ambassadors continues to lift our brand awareness and relevance vis-à-vis Chinese consumers. Something I will discuss in more detail later on. In light of the overall sales decline, I'm all the more encouraged that we returned to positive earnings territory in the third quarter. This development was driven, first and foremost, by tight cost control and the successful execution of our various cost savings measures in the wake of the pandemic. Let me shed some light on the different moving parts contributing to the strong rebound in our bottom line. Starting with the gross margin. The decline of 140 basis points is entirely related to the overall promotional retail environment and a later season switch to the fall/winter collection, in particular, in Europe and the U.S. caused by the pandemic. Moving over to the operating expenses, which declined by a strong 15% in Q3. A significant decrease of 18% in selling and distribution expenses mainly reflects further rent and payroll savings in our retail business. Let's also take a quick look at admin expenses, which came in 4% below the prior year level. The achieved savings predominantly relate to lower payroll costs as well as the elimination of nonbusiness-critical corporate expenses such as travel expenses and hiring costs. As a result, our EBIT returned to positive territory, totaling EUR 15 million. Safeguarding the financial stability of our company continued to be a key priority also in the third quarter. In this context, I'm particularly pleased that once more we made great progress in successfully executing our various measures regarding cash flow protection. All 3 pillars that includes our strict cost management, a significant reduction in inventory inflow as well as the postponement of investments contributed positively to the strong acceleration in cash flow generation in Q3. Consequently, free cash flow totaled EUR 155 million in the 3-month period, more than twice as much as in the prior year period. Let us now move on to our strategic growth drivers: first and foremost, China, online and casualization. We are absolutely determined to fully exploit our sales opportunities during the important final quarter of 2020. Starting with Mainland China. With only 7% of group sales coming from Mainland China, there is no doubt that our company remains highly underpenetrated in the strategically important markets, and particularly compared to many of our competitors. And also, we cannot be satisfied with the current size of our business in Mainland China. We have a strong positioning in that market which is a great foundation for exploring our full potential in the years to come. With 135 own retail points of sale in Mainland China, we have full control over pricing and distribution. More than 95% of our business is generated via our own retail channel. This enables us to react quickly and flexibly to any changes in customer demand. Mainland China is one of our most profitable markets already today based on relatively high basket sizes and a favorable cost structure as compared to other markets. Exploiting Mainland China's huge sales opportunities will, therefore, continue to be a top priority for us, and support our group from a top and bottom line perspective. Based on our strong positioning in the market, we will continue to focus on executing regional events with the support of local brand ambassadors. This type of combination has proven to be a great formula for success as it enables us to accelerate our engagement with the local consumer, while at the same time, also driving traffic and conversion off-line and online. A prime example in this context is Chinese Valentine's Day. Following strong social media activation, a big event with our brand ambassador Li Yifeng was hosted at our BOSS Store in Kerry Center, Shanghai. The event has been a big success, not only from a marketing perspective, but also in brick-and-mortar retail, with sales up by more than 30% on that day. In online, sales even quadrupled compared to last year's event. Besides Chinese Valentine's Day, we were also very satisfied with our performance during Chinese Golden Week, where sales have seen a further strong acceleration compared to our overall Q3 performance. We also see the potential for further space expansion. As we are in the process of establishing a robust retail footprint in Mainland China's best properties, we continue to seek new opportunities in order to meet the increasing repatriated local demand. With regards to online in Mainland China, growth is mainly coming from Tmall and JD with both businesses operating in the concession model. Both platforms have seen high double-digit growth throughout 2019 and 2020, and we remain fully committed to continuing our growth journey here. Beyond online, we are also committed to expanding our social commerce activities. In this context and in order to further exploit social commerce going forward, our stores in Mainland China have successfully implemented WeChat Work, thereby enabling our store personnel, additional cross-selling opportunities by connecting more frequently with our customers. Not only in China, but also from a global perspective, our own online business is enjoying strong momentum. We have set ourselves the target of growing online sales to more than EUR 400 million by 2022, and we are well on track to achieving this target. Since we announced our goal back in November 2018, our own online business has seen a CAGR of more than 40%. Importantly, and as we have highlighted many times before, our own online strategy is built on 2 pillars. Our digital flagship, hugoboss.com as well as the concession business, both of which will play a crucial role in achieving our online sales target by 2022. As we speak, the global expansion of our website, hugoboss.com, is in full swing. At the end of 2019, our website was available in a total of 15 markets, including 13 countries in Europe as well as the U.S. and China. To accelerate the rollout of our digital flagship, we not only focused our internal resources on the future expansion of .com, but also sealed a strategic partnership with Global-e, a leading provider of comprehensive cross-border e-commerce solutions. The 2020 fiscal year will see a total of 32 countries being added to our roster of online markets, including Australia, Japan, Canada and Mexico. This brings the total number to 47 online markets by the end of the year. And we are already working on the next rollout waves. In the first quarter of 2021 alone, we will tap at least 10 more countries, including Russia and South Korea. Further rollouts are scheduled for later that year as our ambition remains to have hugoboss.com available in almost each and every country around the globe. Let us now come to our exciting initiatives to drive brand heat and product desirability. From a brand perspective, one of our key objectives remains to drive brand heat and elevate the desirability of BOSS and HUGO in the long run. Going forward, our marketing initiatives will, therefore, focus on 3 pillars. Firstly, highlight events with the primary goal to emotionalize our brands and have the maximum impact on our consumer. Secondly, strong partnerships with influential personalities and key opinion leaders. And thirdly, exclusive collaborations with globally renowned and appealing brands and businesses. One highlight in recent weeks was our Boss Fashion Show in Milan and our very successful brand event that took place in parallel in Shanghai. At the end of September, we revealed our BOSS spring/summer 2021 collection with runaway show at Milan Fashion Week. The show was live streamed on Instagram and for the first time on TikTok. As it continued our brand's decisive move towards casualization, revealing a sportier and younger version of BOSS than ever before. Simultaneously and equally as important, a brand experience took place in Shanghai and was also live streamed across the digital platforms, WeChat and Tmall. The combined Milan, Shanghai event was not only a true international success story, but was also proof positive of our strong capability to celebrate our brands and products on a global level. We continue to make great strides when it comes to strengthening and expanding the roster of brand ambassadors for BOSS and HUGO. In September, BOSS teamed up with German influencer and entrepreneur Caro Daur on an exclusive womenswear capsule. The month of September also saw the launch of the second BOSS menswear capsule co-created by British Boxer and 2-time unified heavyweight champion, Anthony Joshua, bringing together Joshua's unstoppable spirit with modern BOSS style. Finally, HUGO is about to launch its third casualwear capsule inspired and co-created by the brand's global ambassador, Liam Payne. Thus once again, strongly supporting HUGO's positioning in the important contemporary fashion segment. All 3 collaborations will help us in driving brand heat, in particular, among younger customer groups on social media. Speaking of social media. We are all the more encouraged that during 2020, we have witnessed a significant improvement in relevant social media metrics on most important platforms, first and foremost, on Instagram. In the third quarter alone, our brands have seen a strong uplift in engagement rates, which were up by more than 60% as well as a significant increase in average likes per post, which almost quadrupled year-over-year. Without doubt, this is proof positive for the success of our evolved digital marketing approach. In particular, our strong focus on timely, relevant and user-generated content has begun to pay off and helps BOSS and HUGO to increase reach and credibility on Instagram and other relevant social media channels. To conclude on our marketing initiatives, let me spend a minute on our new partnership with iconic American sportswear pioneer, Russell Athletic. As part of the upcoming pre-fall 2021 season, a brand-new capsule collection for BOSS will come to life with a clear focus on casualwear and at leisure wear. Launching in March 2021 with a campaign produced by publisher and creative agency Highsnobiety, this collaboration is one of the strongest moves towards casualwear in the history of BOSS. It represents a huge opportunity to strengthen our BOSS casualwear business on a global level, but particularly in the important U.S. market. Speaking about casualization. Our brand's casualwear business accounts for more than 50% of group's revenues. Over the last several years, more and more casualwear elements have found their way into formal wear and vice versa. Yet the global trend towards a more casual lifestyle has experienced a further strong push together with the pandemic. As the leader in the upper men's premium apparel market already today, we are offering one of the widest ranges of modern outfits to be impeccably dressed 24/7. And it is our clear ambition to not only capture but lead the trend towards a more casual lifestyle. Now ladies and gentlemen, this concludes my prepared remarks for today. And I am now happy to take your questions.

So the first question is, what percentage of your revenue comes from Asia? And is this region representing the highest growth rates. So if I look at 2019 sales numbers, sales from Asia Pacific were around 15% of group sales. And within Asia Pacific, Mainland China was the largest region, accounting for around 7% of group sales. Currently, we have seen that APAC is the region that has recovered the quickest from the pandemic. And Asia Pacific was only down 14% currency adjusted in the third quarter. And we have actually seen that this region now turned positive in October. Next question is, what share of group sales to your target to reach in China midterm? So actually, we have a more target for Asia Pacific overall, which we expect to grow to around 20% of group sales in the midterm, with the majority of this growth certainly coming from Mainland China. Next question is, slow sales and consumer demand are COVID-19 related. However, your third quarter results swing back to profitability. Do you think this signifies a recovery in the market? So first of all, the recovery that we have seen in Q3 is certainly a reflection of a higher store opening rate. So actually, on average, in Q3, 95% of stores had reopened? And given the easing of social distancing measures in Q3, people also felt more comfortable returning to our stores. However, now going into the fourth quarter, we have seen that social distancing measures have become stricter once again in many European markets. And as we speak, slightly more than 50% of our European store base is closed once again. So this is having a stronger impact on our business when your stores are really closed and you don't generate any sales. Of course, we have an online business, which can compensate somewhat. But if your stores are closed, if your brick-and-mortar stores are closed, this is certainly having a negative impact on your overall performance. In the Americas and also in APAC, around 100% of our stores are open, as we speak. Has there been meaningful changes in capabilities to reduce lead times from design to shipment as sales mix shifts towards casualwear? Yes, there have been initiatives, which go hand-in-hand with the digitization of the product development. So what we have in place is a digital raw material library, where certain fabrics and trimmings are digitized. And they are also available immediately to be shipped to our suppliers, but then be turned into a final product. And with this digital development process, so this also includes digital prototypes and then digital selling via big screens. In some cases, we were able to reduce lead times to around 4 to 6 months from 12 months previously. Next question is, any thoughts on the upcoming holiday season this year versus 2019? So this year's holiday season will mainly be determined by what is the store opening rate? So if stores are allowed to reopen, especially in those European markets where they are still closed, then we are all hoping for a good Christmas season. There might also be some shift in demand from November into December, I mean, especially in those markets where our stores have been closed in December. But any outlook for the upcoming holiday season is still uncertain because nobody can foresee whether the majority of our stores in Europe will remain closed or if they are allowed to reopen or if even in a worst-case scenario, also stores and other markets will have to be closed for the Christmas season. How many owned stores are currently closed due to corona? So as I've said before, on a global level, the store opening rate is around 70%, which means that in Europe, this number is slightly below 50%. And in APAC and the Americas, almost every store is opened. With regards to your collaboration with Russell Athletic, what will be the key -- what will be the key drivers for success in the competitive market of leisure? I mean, in the end, the ultimate measure to look at is retail productivity and the sellout performance of the products. So if we see that actually the products we've developed in those collaborations have a higher sellout compared to comparable products. And this was certainly a success. But for us, the collaboration is not only about generating sales, which is certainly part of it, but it's also about storytelling. Storytelling that BOSS is also a strong player in the casual and leisure segment. So associated with the products being in our store, you will also see a push -- a marketing push for the online channel, but also when you look at the windows of our stores, for example, so it will be a 360-degree activation. Thoughts on your digital sales strategy post pandemic. Will this remain a core part of your strategy? Absolutely. So the focus on driving online sales was a key priority prior to corona, but it will also remain a key priority post corona. Because as I've said in my initial remarks, last year, we generated online sales of around EUR 150 million, 1-5-0, out of EUR 2.9 billion in total sales. So we believe that this sales share coming from online is still relatively small. And given the strong growth rates, which we have now seen for 12 consecutive quarters, which were in the good double-digit percentage range, we still have a strong potential to grow our online business. Actually, also from a profitability perspective, our online business benefits from relatively high basket sizes and low return rates. So also from a profitability perspective, there's no reason why we should not further push our online business. If I look at the timing, time is almost up. So thank you very much for your interest. If you have any further questions, you are always welcome to reach out to any member of the Investor Relations team. Thanks again, and have a good day.