BOSSY - Hugo Boss: Good Start To The Turnaround

2023-06-16 06:40:19 ET

Summary

• Hugo Boss' turnaround situation shows strong sales performance in 1Q23, increased EBIT, and guidance upgrade for FY23, indicating positive momentum.
• The brand's success in both wholesale and retail sectors, price increases, and growth in traffic and transaction volume reflect effective branding efforts and customer value proposition.
• The marketing strategy focuses on Boss and Hugo brands, leveraging digital platforms, and engaging in sports and cultural collaborations to drive further growth.

Summary

I remain cautiously optimistic about the turnaround situation at Hugo Boss ( OTCPK:BOSSY ) after its earnings and Capital Market Day [CMD] update. BOSSY's turnaround situation got off to a good start in FY23, with strong sales in all regions and channels in 1Q23. As a result of the robust top-line performance, operating income increased by 63% year over year. Management also increased their FY23 guidance, which I believe may be conservative in light of the strong performance in 1Q23. During the BOSSY CMD update over the past two days, the presentations' upbeat tone and management comments both suggested a degree of conservatism was embedded in the upgraded 2025 targets, reinforcing my impression that the guidance was on the conservative side. When it comes down to it, investors care most about management's ability to execute, and they've been doing a fantastic job of that over the past few years, building momentum despite an increasingly difficult environment, especially in the wholesale channel. I would continue to monitor the situation and stay optimistic on the turnaround.

Good start to the turnaround

If I were a shareholder, I would be very happy with the performance so far. According to management, there has been no regional slowdown or noticeable change in consumer behavior. The fact that the brand is doing well in both the wholesale and retail sectors is, in my opinion, a strong indicator of the brand's continued momentum, and consistency. BOSSY was also able to increase prices by a low single digit percentage this quarter thanks to the favorable pricing climate. BOSSY also saw positive growth in both traffic and transaction volume as a result of the increased spending of its clientele. These, in my opinion, is proof that the branding efforts and total customer value proposition have been successful. I expect the growth momentum to continue as feedback from wholesale partners provides management with confidence on the strength of the sell-out rates. Growth will also be further supported by mid-single-digit % price increase in 2H23 (according to management), which altogether, should be able to push overall FY23 growth to ~10%, in-line with consensus.

Inventory management

When considered in isolation, an increase in stock levels is a warning sign because it portends the possibility of markdowns if the items are unable to sell and the consequent compression of gross margins. However, in my opinion, growth momentum has been strong, and information on sell-out rates is being provided to management via feedback from wholesalers. Accordingly, I interpret the 66% increase in inventories as a means of getting ready for the upcoming seasons (inventory is merchandise) and guaranteeing product availability after the FY22 supply chain disruption. I anticipate a normalized inventory level by the time the company exits 2023, which should begin in 2H23.

Marketing strategy

The business should be able to continue riding on this growth momentum if it continue to properly executes its marketing strategy, which was reiterated during the CMD. I think the top-down approach taken (with an emphasis on Boss and Hugo) is reasonable, as there is no need to market the various color lines separately to consumers. The top-down approach makes sense as most people are already associated with the Hugo and Boss brand. The market impacting will be much easier and cost efficient to continue building on this brand, than to build up a new brand awareness. The BOSSY brand logos, colors, and codes were just introduced in 2022, so the brand is still relatively fresh and vibrant in my opinion. In addition, I believe that the current management strategy will take the brand to new heights, as it places a heavy emphasis on digital platforms and takes inspiration from various cultural aspects, such as sports and music (in my opinion, these are what the gen z and millennials like). Management has stated that sports marketing will continue to be a top priority, and that collaborations like Boss x Aston Martin and Porsche x Boss are excellent examples of how they're putting that priority into action. Maintaining its current rate of growth should allow BOSSY to take advantage of marketing channels and partnership offers that were previously out of reach (no one wants to work with a failing brand).

Conclusion

In conclusion, I remain cautiously optimistic about the turnaround situation at BOSSY. The company's strong sales performance in 1Q23, increased EBIT, and management's conservative guidance upgrade for FY23 indicate positive momentum. The brand's ability to perform well in both the wholesale and retail sectors, along with price increases and growth in traffic and transaction volume, reflect successful branding efforts and customer value proposition. Although there has been an increase in stock levels, I interpret it as a preparation for upcoming seasons and product availability after supply chain disruptions. I expect the marketing strategy, focusing on the Boss and Hugo brands, leveraging digital platforms, and engaging in sports and cultural collaborations, to drive further growth.

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