Hugo Boss AG (BOSS) Earnings Call Transcript & Summary

Hello and welcome to the Deutsche Bank Deposit Receipts Virtual Investor Conference, DbVIC. My name is Zaf Aziz from the Deutsche Bank team. I'm pleased to announce that our next presentation will be conducted by HUGO BOSS [indiscernible] . 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 look to be transferred to the Hugo Boss booth, where you can find further information on the company. On a final note, all presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Lena Biberacher, Investor Relations Manager of HUGO BOSS, which trades on the extra market of the symbol BOSS and in the U.S. on the OTC markets as BOSSY. Over to you, Lena.

Thank you, Zafar, and welcome, everyone, to today's virtual investor conference. I'm very happy to be here and to present and represent HUGO BOSS to you today. So in the next couple of minutes -- firstly, I want to show you our CLAIM 5 strategy. So that means I'll give you a short overview of what we are currently executing. Secondly, we will take a closer look at our Q3 results, which we just released last week, Thursday. Now I'm very happy to be here because currently, we are a very specific and special and exciting time for us here at HUGO BOSS because as you might recall, in 2021, Daniel Grieder joined HUGO BOSS as new CEO. And he introduced a new strategy, which is called CLAIM 5, and this strategy is built on 5 strategic pillars. The ultimate aim of these pillars is to rejuvenate the brands: BOSS and HUGO, to really put customer at core for everything we do and to ultimately gain market shares. Now if we take a look back, we're in execution mode of this strategy for 2 years. And yes, looking back, we can say -- we can proudly say that we are back on a growth trajectory. As you see, we will achieve the EUR 4 billion mark for the first time in the history of HUGO BOSS already by end of this year. And if you might recall, we initially guided EUR 4 billion sales by 2025 with the introduction of the CLAIM 5 strategy. So that means that we raised our targets this June to EUR 5 billion. Before speaking more about our new guidance for 2025, let me give you 2 examples proving that this CLAIM 5, they're really working on the right initiatives. Firstly, in 2022, we clearly outperformed our key competitors. And I can tell you that also in 2023, we continued this outperformance. Consequently, we gained significant market shares as both brands, BOSS and HUGO are resonating particularly well with consumers. Thus, we have taken in market share from both global but also local premium brands. As mentioned already, this ultimately enabled us to upgrade our guidance. In June this year, we said and we reached our guidance that from prior year guiding EUR 4 billion in sales, we are now targeting EUR 5 billion. We're going to target EUR 600 million as EBIT and an EBIT margin of 12%. So taking a closer look at our increased revenue target. Based on superior brand momentum, we increased the target by 25% from EUR 4 billion to EUR 5 billion. This represents a CAGR of 10% versus 19%, 4 percentage points above our initial forecast. So if you take a look at the incremental EUR 1 billion sales, they will be balanced between space, volume and price. If we take a look at our CLAIM 5 strategy. What is the beauty about? And I can tell you, it's clearly that we are working on broad-based growth. What does that mean? It means that it's not a strategy focusing only at one brand, focusing only on one region or one channel. Now we see that we have opportunities, business potential in every brand, in every region and in every channel. So by 2025, around 70% will be -- will consist of BOSS men's wear, 10% BOSS women's wear and 20% HUGO. Taking a look at the channels. We aim for EUR 2.5 billion in brick-and-mortar retail, which means 50% we target in brick-and-mortar wholesale around 1.3%, thereby around 25% and 20% -- the remaining 20%, they are our digital share. Also when it comes to regions, around or more than 55% going to be EMEA, around 20% going to be the Americas and around 20% Asia Pacific. So now, let's dive deeper into our strategy. And I want to highlight 3 of our 5 pillars because they are consumer-facing and they enabled us, in particular, to drive this growth trajectory in the last 2 years. First of all, BOSS brands. So let me remind you that we really have a clear 2 brand strategy. That means we have BOSS and we have HUGO. And we revitalized our brand portfolio strategy, meaning that currently we only have those 2 brands. But generally speaking, we could had further brands if the time allows. But for the time being, very happy with these 2 brands, and they are clearly distinguished, meaning, be it from a marketing perspective, be it from the targeted consumer we're looking at being from the product assortment. So these are really 2 separate brands. Taking a look at BOSS. So BOSS addresses a customer in the premium segment. And we really want to offer the perfect outfit for every occasion from business to leisure, but casual wear and comfort being key attributes. So with this, I want to clearly highlight that we are more than just the suit-only company that maybe some people thought of when they heard BOSS. Now we're really a 24/7 lifestyle company and everyone can be a BOSS. With BOSS, as I already said, EUR 3.5 billion for BOSS men's wear our target for 2025 and EUR 500 million for women's wear. Now Switching to HUGO. Hugo targets a customer who is considering the way of dressing really as an expression of their personality. So this is really more fashionable pieces. This is really trendy. This is more loud. This is really about this unconventional style. And with HUGO, we are targeting the EUR 1 billion mark in 2025. Just lately, I want to give you 2 examples that we published our new campaigns both for BOSS and for HUGO, and they really resonated extremely well. We made to excite fans around the world and we really drove brand awareness and sustainability with those 2 campaigns. Also, just in September, we hosted our Milan Fashion show for BOSS. And also there, we received stunning results on social media. Yes, really outperforming competitors when it comes to fuse of the live stream, for example. So taking all of this together, we were spot first place in the brand heat ranking, which we conduct regularly with an external agency. And this makes us extremely proud because this is a clear proof positive that both brands, BOSS and HUGO, they are really on top of consumers' minds. Now taking a look at the second pillar. Product is key. I'm highlighting this because BOSS and HUGO, they always stand for a superior price value proposition. And we clearly invested into our products because we want to stick to that promise also going forward. If we now take a deeper look into those 2 brands, they have different brand lines, but they're under the roof of the brand. So there's no risk of brand dilution or that we might confuse the consumer as there are too many brands all time. These are just brand lines and they are reflecting different wearing occasions. So for example, if we take a closer look at BOSS. We have BOSS came on the one side, really offering you the pinnacle -- this is the pinnacle of our product pyramid. So really offering you high-end tailoring, then this is blended into BOSS black, which offers you maybe the suit, if you go to the office in the morning, but we also offered you pieces, denim pieces, casual pieces within BOSS Orange, which enables you to have the perfect outfit if you, I don't know, make a trip to the mountains on the weekends. And we also have BOSS Green, which means we give you the perfect outfit for your active lifestyle on the way to the gym. Now when we look at HUGO, we only have 2 brand lines. But they are really distinctive because on the one side, we have HUGO wrap with a strong focus on street tailoring and fashion forward pieces. On the other side, we recently introduced HUGO Blue, which means that we really want to commercialize styles with our denim expertise. Now moving over to the third pillar. This is drive omni-channel. And as I already mentioned in the beginning, we have a strategy in place that is not just focusing on one channel. Rather, we say we follow an omni-channel approach. And why this important for us is a premium brand. We really need to move with the consumer aspect as to be here. So today, consumers are not just shopping within our retail shops or just online or just within the wholesale segment. No, we really need to combine and also blend those channels. Because ultimately, consumers are shopping, for example, they go to the retail store to get the best experience. But maybe then they don't want to carry the product and so they order products online after they stepped by the store. So we really want to have the right presence and we want to offer and make it easier to consumers to really shop our products across all different channels. Just to remind you, we have the ambition that by 2025, our retail business will be at around 50% of group sales. The wholesale is going to be 25% and digital will be around more than 20%. Now taking a closer look at our brick-and-mortar retail store network. We initiated and we introduced a new store concept, really putting the consumer at core. And that also means that, for example, in store, you have different digital opportunities to also see our marketing initiatives to also see the latest campaigns to see what is going on, on social media, that is inspiring you. So as a customer, you really should have a good time when you're entering our store. So to make our point of sales to true point of experience, we said we're going to roll out our new store contract. And we have set out the target that by 2025, around 80% of our store network should be refreshed. We currently stand or by the year-end, we are going to stand at around 40%. Also, we're going to slightly increase the number of full-price stores from around 470 to around 500. Now as we already laid out or rolled out the latest store concept, it is a positive sign that we also are able to increase store productivity. While we set the ambition of EUR 13,000 per square meter, we're currently at EUR 11,900. So that means we're targeting a 3 percentage increase per annum. Now with this, I want to switch our perspective and take a closer look at our Q3 results, which we just published last week and which are another proof positive of our relentless strategy execution and also our success. So in the third quarter, HUGO BOSS recorded strong top and bottom line improvements, thus building on the robust brand momentum and also gaining further market shares globally. As in previous quarters, growth was fueled by several brand product and omni-channel initiatives as part of the ongoing rigorous execution of our CLAIM 5 strategy. Consequently, growth was once more broad based with both brands, all regions and all consumer touch points contributing to the strong top line performance. Overall, we increased our group sales by 15% and 10% in reported terms to more than EUR 1 billion sales. This results in a strong double-digit improvement compared to pre-pandemic. Now if we take a closer look at where the growth is coming from, we see that top line growth is again broad based, as I mentioned, across brands, regions and consumer touch points, supported by the latest campaigns including the fashion events, we continued to record double-digit sales growth for BOSS mens's wear with 12% BOSS women's wear with 24% and HUGO with 25%. Also, all channels contributed to the strong top line performance. Starting with brick-and-mortar retail, which grew 8%, this supported -- was supported by further store productivity improvements. Now brick-and-mortar wholesale grew 21%, reflecting both robust order intake, but also an increase in the replenishment business during the season. Lastly, our digital business recorded strong growth of 25% with all digital touch points are being up double digits. This includes our own hugoboss.com website. Lastly, taking a look at the regions. We recorded double-digit revenue improvement. And in particular, the Americas was plus 22%, momentum further accelerated. This was driven by the important U.S. market, which was up 20%. Also in EMEA, which was up 12%, momentum remained robust with all key markets contributing to growth. Lastly, in Asia Pacific, the performance was driven by double-digit sales improvement in China and Southeast Asia and Pacific. Also Japan, for example, has been particularly strong, being up almost 60%. Now if we on to the bottom line, in Q3, we recorded significant bottom line improvements as to strong top line performance enabled us to generate further operating leverage despite ongoing investments into the business as part of the execution of our CLAIM 5 strategy. And altogether, EBIT increased by 12% to EUR 103 million driven by the strong top line performance, and this translates into an EBIT margin of 10.0%, being up 20 basis points year-over-year. Now with the third quarter already reported, we can proudly say that we're going to reach our 2023 guidance, and we're here with confirming our outlook for the full year 2023. Also mentioning that despite an increasingly challenging market environment with macro and geopolitical tensions. We confirm our top and bottom line outlook for the full year and also now we already revised this guidance upwards twice this year. Our confidence is underpinned by the robust financial performance in the third quarter, our ongoing brand momentum as well as several brands, product and omni-channel initiatives planned for the remainder of the year. Consequently, we forecast group sales in fiscal year 2023 to increase between 12% and 15% in group currency to a level between EUR 4.1 billion and EUR 4.2 billion. EBIT is expected to increase between 20% and 25% to a level between EUR 400 million and EUR 420 million. So with this, 2023 will not only be a record year for HUGO BOSS, but also mark another important milestone towards achieving our 2025 ambition with revenues of EUR 5 billion and an EBIT of at least EUR 600 million. This represents an EBIT margin of at least 12%. And this will ultimately enable us to become one of the top 100 global brands. And with this, ladies and gentlemen, I'm very happy here to take your questions.

So if we take the first question, what do you attribute from the CLAIM 5 strategy that is overperforming? As I said, our strategy in general is broad-based. So we're really seeing business opportunities in different markets, in channels, but also our brands. Just keeping in mind that, for example, today, women's wear, the BOSS women's wear business just makes 10% of our overall sales. So clearly here, we see potential. But also when it comes to the U.S., currently, the U.S. is only as big as the U.K. So you see here that we have tremendous business opportunities. And as we are rigorously executing our strategy, we made strong progress along all of the different claims. So it's hard to really call out one thing that is outperforming the others. For me, it's rather the mix of all, but it -- at the end, it all comes down that really our brands are resonating well, that brands are more desirable and also that people are -- yes, have a better awareness of the brands. So taking the next questions, can you speak to regional growth differences? Are you seeing a slowing of retail spending in any of your geographies? That is a very good question because at the very end of my presentation, I mentioned that the environment is getting, yes, increasingly challenging. And that means that, in particular, other competitors they flagged that consumer spending is maybe decreasing in consumer sentiment. It's not where we all would wish it would be. So this makes it harder for, yes, all brands. But if I take a look at our different regions and if you take a look at our Q3 results, we really have this broad-based growth and also we really had an outperformance in the U.S. I know that people are sometimes a bit a portion when it comes to the U.S. currently. But for us, we were clearly underpenetrated in the past. So this offers a lot of opportunities to grow without being overexposed to one of the markets. So summing up, I do not see a slowdown, a material slowdown in any of the regions. However, I think we need to keep in mind, the overall increasingly challenging environment that we are operating in. And also, please keep in mind that when it comes to EMEA, our European business that we anticipate some kind of normalization simply due to the fact that the extremely high growth rates that we reported in the last couple of quarters are not sustainable in the long term. In particular, we are a quite established brand in this market. Next question is, where are you with the sustainability within the company and product? And I'm very happy that this question comes up because sustainability is really an integral part of our corporate strategy. If you take a look at the CLAIM 5 graph that I showed you. You see that sustainability and we climate be sustainable throughout as part of our basis. And that means, for example, that we have different targets, be it in the environmental area, be it in the social area that will ultimately enable us to drive growth sustainably, but to make this more tangible. For example, we are working on innovative materials to ultimately replace polyester to fight microplastic and find a good solution replacement for polyester. For example, we made some kind of investments and we are currently working together with the company on a yarn called HeiQ AeoniQ. So this yarn is a circular yarn and that is able to replace polyester while at the same time meeting the same characteristics. So this is just a tiny, tiny example how we are also investing in innovative materials to drive change going forward. But clearly, let me highlight sustainability is an integral part and this is also rewarded externally. So for example, we are included for the sixth consecutive time in the Dow Jones Sustainability Index and only a couple of other players in our industry, they managed to be included there. So this makes us really proud that from a holistic point of view, also were rewarded externally and I can tell you that also our Managing Board is incentivized with sustainability because the score in the Dow Jones Sustainability Index is part of the compensation scheme. So just to give you the clear idea that also when it comes to our organizational setup and the processes that we have in place, we really take the matter of sustainability series. Now the next question is digital continues to grow faster than brick-and-mortar. How do you envisage the split that's settling on the medium to long term? So when it comes to our digital business, we need to take one look into our history because for quite some time, we really focused only on brick-and-mortar retail and maybe wholesale. But we never were very advanced when it comes to the digital business. So we had to really rush we need to hurry up and we really catched up to the competitors. Meaning that currently, our digital business is developing nicely. And -- but you still should see this as some kind of catch-up, right? So over the long term, it's not about one channel outperforming the other. As I highlighted, it is really about this omni-channel approach. So for us, we need the digital. We need brick-and-mortar retail, but we also need brick-and-mortar wholesale. So going forward, we are very comfortable that digital will, to some extent, outgrow retail, but simply due to the fact that within retail, we were already had a quite good distribution and presence in the past. But when it comes to digital, we still have a lot of opportunities to also optimize, for example, our online shop to also foster the use of data to address customers more precisely. So there are a lot of -- yes, things that we still are able to improve to also drive the digital performance going forward. Now the next question is, what do you attribute your growth in 2023 in light of challenging economic environment? And I think I already made this quite clear that, yes, we see that the environment is getting more challenging. But for us, we really feel comfortable with the guidance that we were giving. So that means 12% -- sales growth between 12% and 15% in group currency, thereby, we're going to reach EUR 4.1 billion -- the range between EUR 4.1 billion and EUR 4.2 billion in sales. So where does my -- what is reassuring me? I can tell you that we have several initiatives from a product perspective from also marketing perspective in the pipeline for 2023. So we're going to be quite active, and we will constantly invest into our business. We're going to invest into marketing to really be on top of consumers' minds. So that will help us if the environment is getting more challenging, to still be the one favorite brand of the consumers. So if people decide to spend less, they still decide to go for BOSS HUGO. And the last question is, how can AI be used within the apparel business if we already have any IR initiatives? And just today, I spoke to a colleague who is really pushing AI within HUGO BOSS. And since this summer, we are working on different initiatives. But as you said, there are tremendous opportunities be it from a marketing side, be it also to be more efficient, but also when it comes to creativity when it comes to picture and video creation. So this, as a fashion company will definitely give us new opportunities. And we are currently assessing how we can really tackle those challenges -- not challenges, but chances that will ultimately help us both on the top and also on the bottom line. And with this, there are no further questions, and we are also running out of time. But I want to thank you all for your interest, and please reach out to us at any time if you have any follow-up questions, we are very happy to answer them. Thank you very much and goodbye.