Business World

Saturday 17 March 2018

Share watch: German fashion leader tries to show who's Boss

'Click to enlarge'
'Click to enlarge'

John Lynch

The great American poet Don Marquis quite liked the word 'boss'. He believed it was a "comforting thought in time of trouble when it is not our trouble".

A boss, in other words, is someone who can happily be left with the task of sorting out the most difficult problems without the rest of us having to bother our pretty little heads.

Life, of course, is not exactly like that. In spite of Don Marquis' version of a 'boss', I always reckoned that the brand name Hugo Boss was a marketing master stroke. Indeed, for a long time I believed it was such a good name that it had to be made up.

Not so, the original Hugo Boss started off with a handful of sewing machines in the small German town of Metzingen over 90 years ago. Though the business has often been up and down since then, it is still a market leader in luxury premium global apparel, though not without its current problems.

The group is still based in Metzingen, near Stuttgart, and now has almost 14,000 employees. Most people are familiar with the 'gear' it produces, clothing from classic to modern apparel, evening wear, sportswear, and accessories like shoes, leather goods, perfume and watches, but is best known for its suits and jackets. Boss collections are sold in 125 countries, with Europe the largest market followed by the Americas and the Asia Pacific region.

Like most German companies, its success during the Third Reich led to embarrassing problems after World War II. However, by the 1960s it was becoming internationally successful and by the 1990s was on the takeover trail globally.

Today, the company generates revenues not only from its own retail stores, but also from wholesalers, e-commerce, franchisees and royalties, while promoting its two major brands, Hugo and Boss.

The company's own retail operations contribute 60pc to revenues and include not only stores in exclusive locations but also factory outlets. It plans increasing sales through its outlets to better control prices.

The wholesale operation includes specialist retailers, non-owned outlets and to a lesser extent franchisees.

The Boss business model has changed over the last 10 years. During that time, the company has realigned its business model to its retail business.

It has expanded its owned-stores network to 1,100 worldwide - 600 in Europe, including one on Dublin's Grafton Street and approximately 250 in the Americas and Asia Pacific. The retail operation contributes sales of €1.1bn - treble that of 2006. In that time, the wholesale business has remained static at €1bn.

Unfortunately, the model has recently become unstuck. Falling demand has led to two profit warnings and a plunging share price. As a result, CEO Claus Dietrich Lahrs resigned after eight years at the helm and other senior management has followed his lead. The shares have lost half their value in the past year. They now trade at €54, a long way from its record high of €144 in early 2015 and its market value is under €4bn. Surprisingly, the company plans to maintain its current dividend despite earnings per share dropping by 60pc in the last three years.

The growth record for many years is under threat. First quarter sales this year declined with net profits halved to €39m. As a result, the company plans to cut costs by €50m. While Boss has a low capital intensity, it plans a slower pace of expansion, cutting its investment target from €250m to €160m.

It also intends to close some unprofitable outlets and re-negotiate rents. The weakening sales and margins in the US and China is not helping the German fashion house. The appetite for luxury in China has been dented by the government's crackdown on conspicuous consumption and in the US, the high level of discounting detracts from its luxury brand image.

As Boss faces a number of challenges and margin pressures, its share price at this moment is too rich.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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