Hugo Boss AG (BOSS) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depository Receipts Virtual Investor Conference, DB Vic. My name is Zafar Zeiss, part of the Deutsche Bank team. I'm pleased to announce that our next presentation will be from HUGO BOSS from Germany. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box below the slides. Once the Q&A session has ended, don't log out, you'll automatically be transferred to the HUGO BOSS booth, access shareholder materials and continue the chart. On the final note, today's presentations will be recorded. It can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Christian Stoehr, Vice President, Investor Relations; and Lena Biberacher, Investor Relations Manager of HUGO BOSS, which trades in Frankfurt under the symbol BOSS, on the U.S. and the OT market as BOSSY. Over to you.

Hello, welcome also from our side, ladies and gentlemen, and thanks very much for joining today's last presentation. My name is Lena Biberacher. I'm Investor Relations Manager at HUGO BOSS. And with me is Christian Stoehr, who is heading up the Investor Relations activity. Today's presentation will be all about the exciting times at HUGO BOSS, not only as we successfully continued our business recovery after the pandemic, but with the start of Daniel Grieder as new CEO, a new era has begun. Daniel has been in the fashion industry for over 30 years. He has an incredible strong track record illustrating that he knows the consumer inside out, and he has a clear idea of the future direction of HUGO BOSS. So first of all, let's take a closer look at our new strategy called CLAIM 5, which we presented at our Capital Markets Day in August and that will guide us until 2025 and beyond. And secondly, I will shortly recap on the highlights of our third quarter operational and financial performance, showing how our new strategy is already becoming visible. Let me start with our vision, our guiding principle that overarches the whole strategy. And therefore, we want to become the premium tech-driven fashion platform worldwide. In this context, we will significantly change the way in which we interact with consumers in the years to come. CLAIM 5 has a clear financial ambition. As we are fully committed to strongly accelerate top line growth, we're going to claim our position in the consumers' mind and we're going to win market share for our brands, BOSS and HUGO. Ultimately, this will enable us to generate revenues of EUR 4 billion by 2025. And at the same time, it will allow us to become one of the top 100 global brands. Now to deliver on our vision and ambition. Our CLAIM 5 strategy is putting the consumer at the core of everything we do. Over the next 5 years, we will act more consumer focused than ever before. In this context, CLAIM 5 is based on 5 strong pillars: Boost Brands, Product is King, Lead in Digital, Rebalance Omnichannel and Organize for Growth. It also includes a bold commitment to sustainability, together with the strong execution on road map and a clear plan on empowering people and team. So let's take a closer look at each and every claim I just mentioned, starting with Boost Brands. To strongly elevate brand relevance in the years to come, we will refresh BOSS and HUGO from logos of our marketing to brand new designs in retail and digital. As such, consumers will experience BOSS Menswear, BOSS Womenswear and HUGO in a completely new look and feel starting early 2022. Our branding refresh initiative will ensure our brands come across in a modern, contemporary and elegant way to win over the next generation of consumers, and we already started with the implementation. So to give you a first impression how the new BOSS and HUGO world will look like, here we go. [Presentation]

To become the leading power brand, it is our ambition to achieve around EUR 2.6 billion in BOSS Menswear sales. This will be realized by enhancing the overall perception of BOSS as a lifestyle brand, by increasing brand relevance and by strongly focusing on digital. The same applies for BOSS Womenswear business for which we aim at sales of around EUR 400 million by 2025. To give you an example of how we want to achieve this, the launch of our second BOSS and Russell Athletic collection back in September was something you have never seen before. The presentation took place in a baseball stadium as part of Milan Fashion Week and featured numerous celebrities while setting the stage for an extensive activation on social media. Let me tell you the event was a tremendous success, and it even exceeded our own high expectations with nearly 4 billion impressions and over 25 million engagements across all social media channels in only 4 days. It was the largest social first event in our company's history and one of the biggest social media events in the fashion industry ever. Switching to the HUGO brand, we aim at driving around EUR 800 million of sales for HUGO by building brand power, increasing brand awareness and driving geographical expansion, especially in the metropolitan areas. For both brands, we have a clearly distinguished marketing strategy with a strong focus on digital as well as exceptional collaborations. The aim is to create excitement among consumers and unleash the full potential of both BOSS and HUGO. Overall, incremental marketing spend will be more than EUR 100 million between now and 2025 and grow to a level of between 7% and 8% of sales. Our second claim follows on seamlessly from this, Product is King. Our products will be at the center of our new strategy. Our focus will be on creating products to be worn 24/7 across all different wearing occasions. Therefore, unique collaborations like the one with Russell Athletic will not only be decisive for creating strong buzz among younger consumers, but also for further strengthening our position in the crucial casual wear segment. While capitalization in comfort remains key, we will strongly invest in our price value proposition to ensure premium quality as well as high levels of innovation and sustainability across all our wearing occasions. In doing so, the BOSS brand will foster its unique positioning in the premium affordable luxury segment. And to become the first touch point for younger consumers, the HUGO strategy will build on a broad range of commercial and contemporary pieces, reflecting the authentic and unconventional HUGO style. The third claim is Lead in Digital. As we are living in a more and more connected environment, digital is key in ensuring a personalized consumer journey across all touch points. Our 2025 strategy, therefore, includes a strong commitment to further digitalizing our business activities along the entire value chain, from trend detection and digital product development to AI-enabled pricing capabilities and the global rollout of digital showrooms. This also includes our recently established digital campus to improve the consumers' experience by leveraging the power of data. The HUGO BOSS digital campus based in Metzingen and Porto strengthens our online activities as well as analytical, technical and executional capabilities. It extends our digital know-how with immediate effect by combining our own expertise for that of experts on data execution. Overall, we will step up our investments into digital by more than EUR 150 million by 2025. To translate brand power into all consumer touch points, we will rebalance our distribution footprint and strongly accelerate our omnichannel activities in the years to come. In a world where the lines between online and offline are blurring, our goal is to ensure a seamless brand experience across all consumer touch points. In this regard, boosting digital revenues, more than EUR 1 billion by 2025 will be a key element. Importantly, our digital ambition includes a strong commitment to all digital touch points from our own website, hugoboss.com, to online partner businesses, including digital pure players, leading marketplaces as well as bricks and clicks. One of our first priorities will be the global relaunch of hugoboss.com scheduled for early 2022. Following a clear mobile-first approach, our new online flagship will offer various state-of-the-art functionalities, all strongly enhancing the online customer journey. Also when it comes to retail, we will seize opportunities as we aim at growing brick-and-mortar retail revenues to around EUR 2 billion by 2025. In this context, around 80% of our own stores are set to be refurbished during the next 3 years already with overall investments into brick-and-mortar retail targeted to a total around EUR 500 million for the period until 2025. We are convinced that our new store concept will contribute significantly to developing our stores from points of sale to 2 points of experience; More emotional, more welcoming, more digital and importantly, more productive than ever before. To conclude on the channels, we also intend to increase brick-and-mortar wholesale revenues to a level of around EUR 1 billion by 2025. We are fully committed to reclaiming our position in this important channel by focusing and strengthening existing partnerships and regaining market share in key product categories. Over the next 5 years, we are committed to driving growth across all geographies while further balancing our global footprint. Looking at Asia Pacific, revenues are set to grow at a low teens CAGR between 2019 and 2025. Consequently, the region's revenue share will grow to more than 20% within the next 5 years. We are equally committed to fostering our leading position in premium apparel in Europe, where sales are forecast to grow at a low to mid-single-digit rate per annum, reflecting around 55% of our sales. In markets such as Germany, the U.K. and France are all set to strongly contribute to growth by unleashing their full potential in retail, reclaiming wholesale with a strong partner and driving digital growth across all consumer touch points. Last but not least in the Americas, revenues are projected to grow at a mid-single-digit CAGR between 2019 and 2025 as we will strongly push the 24/7 brand image by fully leveraging the casualization trend in the important U.S. market. With this, let's now move on to the underlying theme that touches every aspect of our CLAIM 5 strategy, sustainability. Sustainability has been part of our DNA for years. In our activities, we always want to balance 2 aspects. We want to deliver a measurable impact against our ambitious road map targets. And at the same time, we want to take our consumers along with us on our journey to become more sustainable and touch them on an emotional level. Already today, with the upcoming spring-summer 2022 collections, around 40% of our offered styles will be defined as responsible. Our definition of responsible represents a pretty high standard, especially regarding the use of sustainable materials, not using airfreight or working only in best-in-class factories. Going forward, we will prioritize the aspect of circularity, our strong commitment to limit resource consumption and emissions. Our circularity road map has been developed in order to exploit closed loop recycling and biodegradation opportunities in the long term. Taken together, we see these activities to enable 8 of 10 products to be circled out by 2030. Looking at our plan to reduce CO2 emissions. By 2030, we aim for climate neutrality within our own area of responsibility. And by 2045, we target climate neutrality throughout the entire value chain, also including our suppliers. The relentless execution of our strategy also impacts our financial ambition in the years to come. We have every confidence that we will be able to double sales to EUR 4 billion by 2025, which implies a strong CAGR of 16% taking 2020 at the base year and 6% as compared to pre-pandemic levels of 2019. To successfully deliver on our strategy, and as I already mentioned, we are committed to stepping up investments, all and achieving industry-leading top line growth. At the same time, we are confident of returning to a strong EBIT margin of around 12% by 2025, translating into an EBIT CAGR of 6% between 2019 and 2025. Investments into the business will be compensated by leveraging operating overheads as well as strong efficiency gains to be realized by optimizing the company's global store network. The latter relates to ongoing relocation and rightsizing initiatives, selective store openings and closings as well as rent renegotiations. Driven by the significant top and bottom line growth, we will generate free cash flow of around EUR 2 billion between now and 2025. The majority of free cash flow will either be reinvested into our company or distributed to shareholders through regular dividend payout. In this context, the company's payout ratio until 2025 will be in a range of between 30% and 50% of net income attributable to shareholders. Importantly, and different to the past, we also consider M&A as a viable alternative for capital allocation in the years to come. Hence, our capital allocation framework will be all about a balanced approach to growth investments and shareholder returns. After presenting to you CLAIM 5, let's take a quick look at our Q3 results, which we published 2 weeks ago. In the third quarter of 2021, we have seen strong acceleration in our business recovery as momentum accelerated across our brands, our channels and key regions. Most [ encouragely ], sales and earnings exceeded pre-pandemic levels for the first time. Group sales amounted to EUR 755 million, representing a currency adjusted increase of 40% against 2020 and 7% as compared to the third quarter of 2019. Importantly, it marks the strongest third quarter in the history of HUGO BOSS from a top line perspective. Both BOSS and HUGO posted strong double-digit growth in the third quarter with sales up 38% and 51% against the prior year period. Growth was broad-based across all product categories, reflecting that our product offerings are perfectly designed to serve the diverse needs of customers combining tailored and modern lifestyle with a strong focus on casualization, comfort and innovation to be worn 24/7 across all wearing occasions. Our strong top line development as well as the significant operating expense leverage resulted in an EBIT of EUR 85 million in Q3, well above the prior year level. Compared to 2019, EBIT was consequently up 3%. Driven by the strong increase in EBIT as well as the improvements in trade net working capital, free cash flow amounted to EUR 171 million, up 10% on the prior year level. Compared to 2019, free cash flow generation even more than doubled. All in all, we look back on a very strong quarter with both sales and earnings exceeding pre-pandemic levels, and we are confident about the remainder of the year. From a top line perspective, we forecast group revenues in 2021 to increase by around 40%. EBIT is expected to be between EUR 175 million and EUR 200 million. Trade net working capital in percentage of sales will improve to a level of 19% and 20%. CapEx is expected to be between EUR 100 million and EUR 130 million. The strong results, together with the strategic progress along CLAIMS 5, drive capital market sentiment as well as our share price performance. Looking back at the last 1.5 years, thanks to our healthy balance sheet structure and strict cost management, HUGO BOSS overcame the many challenges associated with the pandemic throughout 2020. We successfully accelerated our business recovery, we recorded strong top and bottom line improvements, and we're proud to say we've exceeded pre-pandemic levels. But this is just the start. It is the start of CLAIM 5 paying off, it is the start of our ambition to become one of the top 100 global brands, and it is the start of our vision to become the premium tech-driven fashion platform worldwide. We have tremendous potential, and we are convinced that our strong brands, diversified business model and highly motivated teams will enable HUGO BOSS to unlock this potential in the years to come. And with this, ladies and gentlemen, we are happy to take your questions.

Yes, perfect. So the first question that we have received is basically on the current global supply chain headwinds and how we are positioning ourselves for this going forward. Now on that, ladies and gentlemen, let me be clear that we are obviously not immune to global supply chain disruptions, considering our global business activities and also our global sourcing infrastructure. This said, we are in a fortunate position to clearly benefit from a well-balanced regional sourcing mix with around half of our merchandise value currently being sourced in Europe. And in addition to that, we're also looking at a comparatively high share of own production, which accounts for almost 20% of our total merchandise value. On top of that, at an early stage, we have also implemented a clear action plan and thereby reacting swiftly to the lockdowns in some important Asian sourcing markets, and we've also reallocated a significant share of outsourcing volume within Asia, as well as from Asia to Europe with both Turkey and Portugal being of particular importance. And last but not least, our action plan also includes leveraging faster transportation modes to mitigate the global shortages in transportation and container capacity and to bypass any possible implications from port congestion. So as you can see, we are very confident of being able to mitigate most of the potential short-term supply chain headwinds from a top line perspective, in particular when it comes to the product availability at the point of sale. So from a purely top line perspective, no to very limited financial implications, very limited top line impact. But as you can imagine, we also expect the global rise in freight and duty costs to continue for some more time. And therefore, obviously, our gross margin development will most likely be impacted by that to some extent. And to put it into more context or be a little bit more precise on that, in the third quarter, we've seen our gross margin being impacted by a good 200 basis points from these global freight and duty costs that have obviously gone up significantly. So on the gross margin, some extent, we have felt it on the top line, not at all or to a very minor extent. We also don't expect any product shortage for the important holiday season that is basically just starting, but the transportation cost will probably be somewhat elevated for some more time. So that's really on the current supply chain headwinds. Another question, I guess, has been on what are our strategic priorities for the upcoming fiscal year 2022, specifically when it comes to emerging markets in China. Now on that, ladies and gentlemen, let me be very clear that, obviously, I cannot give you any more precise outlook or comments on the upcoming fiscal year. We will provide an outlook on 2022 when we release full year results in March next year. And by then, I think we will be more precise. But what I can say, obviously, is that next year will be all about successfully executing our CLAIM 5 strategy. So be it from a channel perspective, be it from a regional perspective, from a brand perspective or really -- even next year is a very important crucial year to make further strong progress when it comes to successfully executing our strategy, and that obviously also includes the emerging markets in China. On the latter, on Mainland China, in particular, I want to highlight that we are significantly underpenetrated when it comes to that market. We consider China to be a market with tremendous opportunities for both brands, BOSS and HUGO. If you look at Mainland China today, we are talking about something around 10%, 11% of our business being generated in that market. If you add a few more percentage points from the Chinese consumer, and we still talk about mid-teens percentage impact from the Chinese consumer, and that is obviously way too small compared to what some of our competitors have. So for us, we really want to leverage the tremendous potential that we're seeing in the Chinese market by growing our footprint in the market. We see definitely space opportunities. We can go into Tier 2, Tier 3, maybe in some cases, Tier 4 cities. So there is space opportunity, but we are obviously very confident that we can continue to generate good like-for-like growth in that market as well. On top of that comes in the space contribution, and that should make China a very fast and strong growing market for us going forward. But other than that, really, as I said, 2022, you have to look at it in the context of our CLAIM 5 strategy, the first full year of strategy execution, but we will put a lot of focus on boosting the brands in particular and also on the Product is King initiative. Our branding refresh will come to life in January next year. And so for the first time, the end consumer will see the new look and feel of our product offering, and we have already sold that offering to our wholesale customers. And I can tell you, this has been very well received by our partners, and we had a double-digit increase in our order book as compared to 2019 levels. So now we're looking forward to seeing then the feedback from our end consumers as well. On top of that, you will hear a lot from us when it comes to our marketing initiatives. In end of January next year, we will kick off the year with our largest marketing campaign, brand campaign in our company history, just to give you one example, and also announced a few new faces that will be working with HUGO BOSS going forward. Now maybe one question that is maybe somewhat related to that is around what do we perceive to be our largest challenges in reaching our 2025 goals. I think I would say there is 2 in a way, right? One is, I guess, ongoing uncertainty with regards to the pandemic. So something that, in particular now in Europe, we are a little bit worried when we look at the number of infections, which is rising again. You may have already heard that some smaller markets in Europe like Austria, Netherlands, but also Russia, for example, have reentered into some type of local lockdowns. So the pandemic is not over yet, unfortunately, and we're still looking at least 5% of our store network being closed -- temporarily closed because of the pandemic. So I guess that is something we have to very carefully monitor and watch going forward. And then on top of that, I think -- I guess, culture is obviously also something that is very important, we have to successfully execute our strategy over the next 5 years. And we have a new management team, as Lena already mentioned at the beginning. And with the new management team, obviously, comes a bit of new corporate culture, new values that we want to live. We want to be bolder in the way how we do business. We want to be faster. We want to speed up processes. We want to reduce complexity, and that requires a lot of support from the employees as well. So that is something that we have to obviously work along and walk -- talk the walk and work along at a strategy. But other than that, I really have to say that we strongly believe in our ability and capabilities to successfully execute the strategy. We have a clear vision where we want to go to. We have a clear financial ambition, a strong management team, and that is not just the Managing Board, but also one level underneath. And we have made a couple of key hires over the last couple of weeks and months to strengthen our organization from a brand perspective, from a sales perspective, from a marketing perspective, all people that we have been able to win from some of our peers or direct competitors. So a lot of competence has been added as well. And again, this -- as well as the current strong momentum that we are facing basically on a global scale makes us, like I said, very confident in the successful execution. So let's see what other questions do we have. There's one question on the dividend policy, which I will hand over to Lena.

Yes. Thank you. As we already said during our presentation, CLAIM 5 is really a growth strategy. And therefore, we are willing to invest until 2025 aimed at winning our consumers' minds. And also strongly, we want to accelerate top line growth. So based on this top line ambition, our new payout ratio will be between 30% and 50% of net income. And what is important is that it's always a balanced approach between investments and also the shareholder return. And yes, in this context, payout ratio will be between 30% and 50%.

Perfect. Then we received a question on our influencer strategy. Also, Lena will be very happy to answer.

Yes. Thanks. As we are completely refreshing BOSS and HUGO, our focus of our marketing spending will ensure that our brand messages are visible and desirable, and we want -- we really want to attract a younger customer. And therefore, we need to touch them on an emotional level, and this requires excellent storytelling. And for storytelling, we can use influencers and celebrities, sport icons, actors across whole different levels. And therefore, we're currently working on finalizing our talent contracts, but what we already can say to you today is that there's a lot in the pipeline for the next year. And therefore, yes, you just have to give us 1 more month, 2 more months, and then we can share some details with you.

Yes. And maybe one thing I want to add to that is just we are really following a social-first approach when it comes to our marketing strategy with a particular emphasis on those channels that we believe have the biggest impact on the Gen Z and the millennials, so we mainly focus on Instagram and TikTok. Again, if you look back at the highly successful events that we had during Milan Fashion Week, it's something Lena also mentioned, then clearly the tremendous success we have in terms of engagement and in terms of reach on Instagram and TikTok. That was because of the strong influencer cast that we had put together for that event, including models like Gigi Hadid, Irina Shayk, TikToker Khaby Lame, and those are really all celebrity/influencers. We have a strong visibility on Instagram and TikTok. So we're really choosing influencers that have the widest reach on those channels. So then I think there's a last question if I recall correctly, which is basically about our current lead times between design and commercial sales. So -- well, we are still operating in an industry that historically has been working with lead times of up to a year between -- from design to shelf in a way. But we also agree that, that will have to change substantially, we are committed to strongly reducing the overall lead times in order to increase the overall flexibility from an operational perspective to also react faster to trends and to the feedback that we're getting from our wholesale partners and consumers. And we believe that to achieve that, to basically reduce the lead times by, say, 50% around about, it will be crucial that we continue to digitize the entire value chain at HUGO BOSS. And that is something, for example, when it comes to product development or product design, we really have to go fully virtual because then on its own, it will help us to basically cut those lead times into half. So I think that is something that we are today basically committed to reduce that from 12, 15 months to basically half of that. And again, I think it will be crucial that digitization will get us there. Lena mentioned one of our key claims over the next 5 years is to be leading in digital. And in that context we have mentioned to you our digital showroom and -- sorry, the digital campus, and one of the key initiatives as part of that digital campus is exactly what I've just mentioned, working on digitizing the value chain and making us faster in reacting to some trends. On that, I think it's also worth flagging that we -- in our industry, one of the very few players, I mentioned that almost 20% on production volumes, which is mainly coming from one large facility in Turkey. I think that is giving us an additional opportunity to speed up things and processes by expanding that facility and leveraging it to the maximum. So that is really something that we are working on with a strong focus.

And with this, we're -- I think at the end of our session. We really want to thank you for your time and your interest, all of your questions. And we want to -- of course, we want to offer you that in case there are any questions left, we're always happy to take them. In the presentation, you will find our contact details. So whenever some questions arise, feel free to reach out to us. And with this, we wish you a nice afternoon. Thank you.

Thanks very much.

Bye-bye.

Bye-bye.