Summary
- Ermenegildo Zegna grows at double digits with a 2022 turnover of almost €1.5 billion.
- Positive implication from Zegna's textiles division. Supporting results from the Thom Browne segment.
- Medium financial targets were confirmed and so did our valuation.
During 2022, our internal team decided to increase the fashion luxury sector to overweight. This sector call was mainly driven by the fact that Fashion houses were inelastic about their product offerings relative to their clientele. More specifically, here at the Lab, we emphasized how Ermenegildo Zegna ( ZGN ) was a solid buy thanks to 1) an IPO discount versus its peers (and our fashion universe coverage), 2) higher economies of scale and scope given Zegna's vertical integration, 3) better performances of a family-owned business in uncertain times (with more cost controls), and 4) Thom Browne's underline growth. Looking at our yearly performance, we hope you get on board with us. Since then, the company is up by 22% (including dividends) versus a negative S&P 500 return.
Looking at the company's P&L, Zegna was up by 15% in top-line sales and there is also a cautious optimism for 2023 thanks to the expected China recovery. Gildo Zegna, the group CEO, highlighted how 2022 was a revolutionary year with their first Capital Markets Day hosted in May at Oasi Zegna. This event was the largest environmental philanthropy fashion project in the world and was the perfect setting to show Zegna's strategy on sustainability. In November, Gildo Zegna recalled, the company announced a long-term licensing agreement with the Tom Ford brand which was purchased by Estée Lauder. While, a few days ago, Thom Browne entered with a minority stake in Norda Run (running sneaker) to operate in Korea, a key market for the fashion high-end.
Regarding our investment thesis, we report that the Thom Browne segment is continuing to deliver. Q4 top-line sales were up by 11.5% on a yearly basis at €76 million. This acceleration was already well expected by our team (total revenue reached €331 million and the segment performance signed a plus 25.3% year-over-year). Eleven new stores were opened and Thom Browne's segment reached 63 stores at year-end. Despite COVID-19 restrictions in China, a positive performance was also recorded in e-commerce and wholesale demand.
To add some color to our buy rating, today, we are providing some interesting numbers on Italian textiles. Zegna's textile turnover was up 7.1% compared to the previous year-end quarter, reaching €38 million. Year-end revenues were €137 million with a plus 33.8%. Zegna is gaining market share compared to the Italian aggregate textile turnover which was up by 28% (already exceeding pre-COVID-19 levels). In Italy, there is a fashion exhibition called Pitti, and 105 companies (including Zegna) are exhibiting their collections for spring-summer 2024.
After the great pandemic escape, global buyers are back and are also confirming their love for the Italian-quality textile. After being very well appreciated during the pandemic outbreaks thanks to their comfort and versatility, Italian textile continues to be very present in the stylists' collections.
Conclusion and Valuation
Zegna foresees a slightly better improvement in the company's operating profit and continues to leave unchanged its medium-term targets at €2 billion and 15% in sales and adj. EBIT margin. In addition, despite working capital requirements for new stores, the company forecasts an increase in cash surplus. Therefore, we decide to maintain our buy target , confirming a 20% discount versus its closest peers.
For further details see:
Zegna: We Reiterate Our Buy