ZGN - Zegna: Outperformance Seems Priced In (Rating Downgrade)
2024-03-21 10:39:45 ET
Summary
- Zegna Group delivered solid 2023 results with an acceleration in Q4.
- The company is delivering on strategic promises, including increased retail exposure and gaining share in leisurewear and footwear.
- For a rating upgrade, we need further evidence of Tom Ford's profitability. We are also awaiting a margin uplift.
- Zegna currently trades aligned with peers (25x P/E), and with luxury sales normalization, we believe the valuation is full.
Here at the Lab, we have good coverage of the luxury industry, and our previous Ermenegildo Zegna ( ZGN ) rating upgrade proved successful. In 2023, we initiated the company with equal weight status, still recognizing a solid start of the year , and then, post Zegna's Capital Market Day and due to an excessive de-rating, we moved our rating to a Buy with a publication called Paving The Road To Growth (Fig 1). Even considering a sales growth normalization in the luxury sector, we should report that Q4 Zegna Group turnover increased 20% organically, and adding the Tom Ford division, the company's top-line sales increased by 43%. This is the fastest-growing luxury company within our coverage. Looking back to our estimates and following the CMD, we increased our 2024 sales to €2.05 billion and moved Zegna's core operating profit to €260 million. That said, Q4 results were impressive, and the company is moving all the right things within its brand/product portfolio. We have decided to increase Zegna's EPS, but we await further evidence about the company’s ability to drive Tom Ford's profitability. At the same time, although we see Zegna as a quality business, we find it hard to justify the current valuation. For this reason, we moved (once again) our rating to a neutral status....
Zegna: Outperformance Seems Priced In (Rating Downgrade)