Hugo Boss Ag S/Adr

Good morning, ladies and gentlemen. Welcome to our second quarter 2024 financial results presentation. Hosting our conference call today is Yves Müller, CFO and COO of Hugo Boss. Now, before I hand over to Yves, allow me to remind you that all revenue-related growth rates will be discussed on a currency-adjusted basis, unless otherwise specified. Also, and just like in the past, I would like to ask you to limit your questions during the Q&A session to a maximum of two. And with that, let's get started, and over to you, Yves.

Thank you, Christian, and a warm welcome from Metlim, ladies and gentlemen. We are delighted that you are taking part in our conference call today. Over the next 30 minutes, I will present a detailed overview of our second quarter and half-year performance, focusing on the most recent operational and financial developments. Just as importantly, I will also walk you through our updated top and bottom line expectations for fiscal year 2024. As you are all aware of, and as the current reporting season has demonstrated, our industry is navigating through a period of persistent macroeconomic and geopolitical uncertainties, a period during which spending on luxury and premium apparel has been impacted by subdued consumer demand. And while this has resulted in normalization of industry growth for several quarters in a row, the slowdown was particularly evident in the second quarter as the global retail environment has seen a further pullback in many key markets around the globe. As a company with almost two-thirds direct-to-consumer business, we were ultimately not able to completely escape these industry developments. Following an overall solid start to the year with sales up 6% in the first quarter, our top-line momentum has therefore decelerated somewhat. However, with a sales decline of 1% in the second quarter, we were able to limit the external impact on our business to quite some extent, thus continuing our relative outperformance of the market. This is testament to the continued brand momentum of Boss and Hugo, which I will come to in a moment. The weak consumer backdrop inevitably also impacted our bottom line performance with EBIT down 42% to 70 million euros in the three months period. This development also reflects higher operating expenses, which more than offset an otherwise robust gross margin expansion in the second quarter. Now, before diving into the details of our top and bottom line performance and our future approach to navigate the current market uncertainty, Allow me to clarify a few things first. Despite the current macro context, we are witnessing no signs of a structural slowdown in brand momentum. Quite the contrary. Following a period of successful and relentless strategy execution, we remain absolutely convinced of the strengths of our two brands, Boss and Hugo. Three years ago, in August 2021, we presented Claim 5 for the very first time to all of you. The strategy that has always been geared towards putting our two iconic brands back into the spotlight, revitalizing Boss and Hugo, and winning over a new, younger, and more diverse audience. By investing in our brands and products, digital capabilities, global touchpoints, and our operational and organizational backbone, we have successfully boosted brand relevance and accelerated top-line growth. In doing so, Claim 5 enabled us to deliver a true kickstart and a strong comeback after the pandemic, driving above trend and high-quality top-line growth for now 12 consecutive quarters. This also holds true for the second quarter. Despite the aforementioned 1% sales decline, our top line once more outperformed the broader industry development. This is proof positive that Claim 5 is and remains the right strategy for our company even in times when the overall market conditions are deteriorating. By sticking to our game plan and consistently executing our strategic priorities, we are confident we can and will unleash the full potential of our brands. Over the past three years, Claim5 has fueled significant growth for our company. Having achieved our initial sales target of €4 billion already last year, and continuing to strongly exceed 2019's revenue levels by more than 50% are clear testaments to the power of claim five and our successful strategy execution. It is precisely for this reason why we will stick to our strategic actions, leveraging our numerous growth opportunities in the quarters to come. You may be wondering what this means for future investments. Let me therefore be clear that we remain committed to investing in strategically relevant areas of our business. This first and foremost includes our brands and products, as well as never compromise on brand relevance and price value proposition. At the same time, we will remove any spending in non-strategic areas of our business for the time being to cope for the more challenging market environment, something I will talk about in more detail in just a few minutes. The increased relevance and improved visibility of our two brands is nowhere more evident on social media. Our comprehensive investments into star-studded brand campaigns, fashion events, and high-profile collaborations led to Boss and Hugo dominating key platforms such as Instagram and TikTok. Since introducing Claim 5, we have added more than 10 million new followers on social while recording an impressive 120 million impressions and around 3 billion in This demonstrates our ability in successfully turning millennials and the Gen Z into true fans of Boss and Hugo. Converting our growing fan base into loyal customers is at least as important. Year over year, we managed to grow our global member base by around 30% to almost 10 million registered customers. Retaining their loyalty to our brands in the long run is of particular importance which is why we are taking custom engagement to the next level. In this context, in Q2, we have successfully launched Hugo Boss XP, our new membership program centered around our well-established Hugo Boss app. Over the coming quarters, we will roll out this program worldwide as we are committed to further expanding our member base and binding even more customers to our brands and products. Thanks to the relentless execution of our strategic actions, Today, we are operating out of a position of strength. Our brands are significantly more desirable, our product offering reflects our 24-7 lifestyle image, our touch points are much more appealing, and our customer base is bigger and more loyal than ever before. And while all of this may not free us from today's macroeconomic challenges, it makes our business model more resilient. As a result, we were able to increase our sales by 3%, in the first half of the year, despite the overall external framework. Growth continued to be broad-based with both our brands, as well as most regions and most channels contributing. This includes sales for both menswear being up 2%, while both womenswear improved 4%, Hugo even grew 6% in the first half of 2024, supported by the successful launch of Hugo Blue. Looking at the second quarter in more detail, the overall sector slowdown weighed in particular on sentiment in some of our key retail markets. In EMEA, sales decreased 2% in Q2. While retail traffic in the UK remained weak, with no improvement as compared to the first quarter, sales in continental Europe experienced a slowdown during the three-month period. This affected our performance in key markets such as Germany and France. At the same time, we were able to maintain our double-digit growth trajectory in the emerging markets. Also in the Americas, we continued our growth journey in the second quarter with sales up 5%. This primarily reflects further sales improvements in the important U.S. market driven by our brand's successful 24-7 lifestyle positioning, which drove momentum in the department store business. In Latin America, momentum remained equally resilient with sales continuing their double-digit growth in the second quarter, while Canada remained on the prior year level. To conclude on the regions, sales in Asia Pacific decreased 4% in the second quarter, reflecting sales decline in China as muted consumer confidence weighed on domestic retail consumption. At the same time, Southeast Asia and Pacific recorded another robust performance in the second quarter, with revenues up high single digit supported by a particularly strong performance in Japan. To finish off on our Q2 top line performance, let's take a quick look at our distribution channels. With sales up 5%, I'm pleased to report that our momentum in brick and mortar wholesale continued. This is even more remarkable considering the current market conditions demonstrating that we keep gaining market shares also on this channel as we continue to be a brand of choice for our global partners. In brick-and-mortar retail, however, sales remained 2% below the prior level, with traffic declines partly compensated by higher conversion rates. As already mentioned, this mainly reflects the challenging retail environment in the UK and China. When excluding these two markets, brick-and-mortar retail sales have been up 1% in the second quarter. Last but not least, our digital business was down 4% in Q2. Importantly, our digital flagship HugoBoss.com continued its growth trajectory also in the second quarter, up 3% versus the prior year. This has proved positive that our many initiatives to accelerate the Omnichannel experience are paying off. With the performance in the second quarter and first half year in mind, Let's now take a look at how we will take things from here on. And let me start by saying that we anticipate the global macro headlines to remain present for the time being and uncertainties regarding consumer sentiment to remain elevated. And while we remain steadfast in our commitment to continue driving above-trend growth in the future, we are taking a rather conservative view on the consumer for the remainder of the year, irrespective of our long-term growth potential. Consequently, we now expect group sales in 2024 to increase by 1% to 4% in group currency with a slight negative currency impact. This in turn means that we do not necessarily factor in an improvement in top line growth in the second half of 2024, although, objectively speaking, Group revenues in our brick-and-mortar retail business in particular should be benefiting from a more favorable comparison base in H2. Likewise, we should not ignore that our order intake for winter 2024 and spring 2025 looks encouraging as do many of our upcoming brand and product initiatives we have in the pipeline for H2. The signing of our long-standing strategic partnership with David Beckham is one of these strategic investments that will further boost our BOSS menswear business. Alongside recurring ambassadors Naomi Campbell and Giselle Bündchen, David will also star in our upcoming global 360-degree BOSS brand campaign, launching in just a few weeks from now. On top of that, BOSS will return to the stages of Milan Fashion Week in September, but will also continue creating a BOSS with high-profile collaborations, including those with the NFL for Boss and Red Bull for Hugo. Last but not least with the change, we have launched a new sneaker icon for Boss only a few days ago, taking another stride forward in our footwear range. It is crafted with high QA on it, enabling us to gradually increase the share of this Filolosic filament yarn in our overall product range. This, ladies and gentlemen, concludes my remarks on our top-line performance and expectations for the second half year. Let's now move over to our bottom-line development. For several years, as part of Claim 5, we have been strengthening our operational and organizational platform. And you may remember that already in March, we told you that we would begin leveraging this platform, focusing on driving effectiveness and efficiency across our organizations. Going forward, this approach is meant to support our future gross margin development while also improving the overall productivity within our cost base. By looking at our gross margin development, there is clear evidence that these measures have already started taking effect. We are successfully leveraging our operations platform to enhance the productivity of our global sourcing activities. This includes achieving greater economies of scale optimizing vendor allocation and freight modes, and reducing the reliance on air freight. Coupled with more federal product costs, these efforts translated into robust gross margin improvements, up 50 basis points in the second quarter and up 30 basis points in the first half to a level of 62.1%. And let me be very explicit in saying that we anticipate our strong focus on leveraging sourcing efficiencies to provide solutions even greater support for gross margins in the second half of the year. We therefore expect our gross margin development to accelerate further, forecasting a gross margin above 62% for the full year 2024, thus aligning with our mid-term range of 62% to 64%. This also reflects our confidence that we will be able to continue compensating for adverse channel mix and currency effects higher freight rates, as well as ongoing uncertainty related to the promotional environment. Moving over to the operating expenses, which grew 7% in the first half of the year. This development primarily reflects higher brick-and-mortar retail expenses, up 12% in the second quarter and in the first half, driven by inflation and expansion-related cost increases. Marketing investments, on the other hand, grew only 1% in the first half year, including a timing shift from the first into the second quarter in light of major brand events. Importantly, at 7.8% of group sales, marketing investment in H1 remained within our target range of 7% to 8% as outlined in Plan 5. And while administration's expenses were up 8% in Q2, they only increased 3% in the first six months, as first benefits from improving organizational efficiency, partly compensated for digital investments and overall cost inflation. Now, taking into account that the macro environment is likely to remain challenging for the time being, we are accelerating our cost discipline from here on. In doing so, we will protect our bottom line development in 2024 and beyond. In particular, by removing spending and non-strategic areas of our business and further simplifying our organizational structure, we are committed to noticeably mitigate the cost increase going forward. The majority of our cost-saving initiatives will focus on sales, marketing, and administration. In sales and distribution, we are optimizing staffing in our own stores and shops based on current traffic trends. At the same time, we are reducing all non-business critical service costs while also driving CapEx efficiency by optimizing investments per square meters. This in turn means that when it comes to store renovations, we are now clearly prioritizing our best and halo stores while taking a much more conservative approach to renovating locations in Tier 2 cities. In marketing, we are enhancing effectiveness by investing in an even more targeted manner in prioritizing brand initiatives with maximum returns. Finally, in our global admin functions, we have already adopted a much more restrictive hiring approach in addition to strongly removing spending in areas such as travel, consultancies, and hospitality. On top of this, we are pausing non-business critical projects for the time being as we prioritize pre-strategic game changes such as the global rollout of Hugo Boss HXP or our important digital twin initiative. Overall, we expect these measures to notably mitigate the increase in our fixed cost base already in the second half of the year, with operating expenses anticipated to increase between 1% and 3% in H2. Our measures will therefore provide a considerable table to our bottom line development in 2024 and beyond. Given our competence to further improve gross margins and our determination in implementing measures to swiftly improve operation and organizational efficiencies, our bottom-line performance is expected to accelerate in the second half of this year. Consequently, we are now targeting a full-year EBIT of between 350 and 430 million euros, taking into account the overall market uncertainty. Before opening the floor to your questions, let's also review our most important balance sheet items, starting with inventories. Tight inventory management is and remains a key priority within Claim 5, as we remain committed to further optimizing inventory levels. On that, I'm pleased to report that in the second quarter, we were able to bring down inventories by 7% currency adjusted versus the prior year period, highlighting that inventory management is well under control. Consequently, as a percentage of group sales, inventories came in at 24.9% and thus below the prior level, while also improving compared to the end of fiscal year 2023. Moving over to trade networking capital, for which we continue to expect the moving average of the last four quarters, approaching 20% of group sales by year end, down from 21.2% at year end of June. This projection reflects in particular our ongoing progress in optimizing our inventory position. On capital expenditure, we now anticipate investments to come in at around 300 million euros, and thus at the lower end of our initial guidance range, reflecting our increased focus on capex efficiency to support profitability in 2024 and beyond. Finally, we continue to expect free cash flow to accelerate strongly in 2024, having recorded meaningful progress in the first six months already. Supported by our initiatives to further optimize inventories and to drive CapEx efficiency, this should enable us to generate a free cash flow of around 500 million euros in the fiscal year 2024. Ladies and gentlemen, let me conclude with some final remarks. There is no doubt that with Claim 5, we implemented the right strategy at the right time. Over the past three years and amidst an increasingly challenging market environment, Superboss has consistently invested in high-return, value-creating opportunities across its brands, products, and consumer touchpoints. Our strategic capital allocation, prioritizing long-term growth over short-term margin gains, underscores our unwavering commitment to maximizing shareholder value in the long run. Our investments have enabled us reinforcing brand strength and achieving a buff trend top-line growth. During a period marked by a significant slowdown in industry growth, both Boss and Hugo have expanded market shares, showcasing the resilience and appeal of our revitalized brands. While remaining vigilant in the current context, we approach the second half of the year with confidence and determination. Our updated full-year guidance reflects our strong belief and our strategic direction and key initiatives, including our accelerated approach to enhancing efficiencies and safeguarding profitability. These measures, coupled with our ongoing strategic investments, position Hugo Boss to emerge even stronger once the market conditions normalize. And with this, we are now very happy to take your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to use only handsets while asking a question. In the interest of time, please limit yourself to two questions only. Anyone who has a question may press star and one at this time. The first question comes from Friedrich Wild from Jeffreys. Please go ahead.