August 2, 2018 / 5:55 AM / 12 days ago

Lagging margins take shine off Hugo Boss sales rise

FRANKFURT/PARIS (Reuters) - Lower than expected margins dragged on Germany’s Hugo Boss as it pursues a turnaround with investments in its fashion lines, eclipsing an improved sales performance.

FILE PHOTO: The logo of German fashion house Hugo Boss is seen on a clothing label at their outlet store in Mezingen near Stuttgart, Germany, October 29, 2013. REUTERS/Michael Dalder/File Photo

Shares in the men’s suit maker were down 6.9 percent at 1332 GMT as investors fretted about the decline in margins in the second quarter.

Like others in the luxury sector, Hugo Boss is benefiting from strong appetite from shoppers in Asia even against the backdrop of a U.S.-China trade spat, and the German label’s performance in its home market and across Europe also improved.

But earnings before interest, taxation, depreciation and amortisation (EBITDA) before special items slipped 1 percent from a year ago to 106 million euros (£94 million), just below average analyst forecasts.

Gross profit margins fell to 66.9 percent of sales from 67.7 percent a year earlier, and EBITDA margins dipped too.

“The EBITDA miss is likely to be taken negatively in light of concerns that Hugo Boss’ strong underlying retail performance is not translating to an improvement in margins,” analysts at Berenberg said in a note.

Executives at Hugo Boss, which has been spending on improving the quality of its clothing ranges and areas like online sales, said gross margins should improve in the second half of the year and be stable in 2018, in line with targets.

Wholesale revenues grew at a faster pace than sales at the label’s own stores in the quarter, a pattern that weighed on margins but should not last, the company said, while an unfavourable foreign exchange backdrop is seen dissipating.

“2018 will be a year of accelerated growth (...) and a year of investment in order to make sure that we have a sound foundation to come back in 2019 for sustainable, profitable growth,” Chief Financial Officer Yves Mueller told an analyst conference call. “In 2019 we want to make sure our EBITDA margin is growing faster than net sales.”

Inventory levels, which rose in the first half of 2018 and which Hugo Boss said were partly linked to its online business, should ease by the end of the year, Mueller added.

BLENDING STYLES

As luxury companies jostle to attract younger clients, Hugo Boss is returning to its roots selling men’s suits but also introducing more casual styles as a time when streetwear like hoodies and sneakers are taking catwalks by storm.

The German company has moved on from the profit warnings of 2015 and 2016, but investors are also becoming more impatient with the luxury industry.

The pace of growth in the sector is expected to eventually ease after three years of rebounding demand from all-important Chinese customers, and the U.S.- China trade dispute has added to nerves about a slowdown.

Most brands have reported resilient demand from Chinese shoppers, but even shares in market leaders like Kering fell sharply when sales at its star Gucci brand came in a tad below expectations.

At Hugo Boss, sales rose 6 percent in the second quarter on a currency-adjusted basis, with revenues coming in at a higher-than-expected 653 million euros.

Reporting by Sarah White, Vicki Bryan, Anneli Palmen; Writing by Sarah White; Editing by Keith Weir

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