Jean-Pascal Rolandez of The L.T. Funds presented his investment thesis on Hugo Boss (Germany: BOSS) at European Investing Summit 2024.
Thesis summary:
Hugo Ferdinand Boss was born in 1885. His parents jointly owned a lingerie and linen shop in Metzingen where Hugo opened his clothing factory in 1924, starting producing uniforms for the National Socialist Party in 1931 which helped the company grow significantly. After World War II production was focused on uniforms for the French army, the French Red Cross, post office, railroads, and police. In 1969, his great-nephews took over and gradually began its international development. Importantly, in the early 1970s the first BOSS-branded high-quality men’s collection suits were produced, seeding the group’s future, with womenswear introduced in 1998.
Today Hugo Boss (HB) is a leading global fashion and lifestyle company in the premium segment, offering a comprehensive range of high-quality women’s and men’s apparel, shoes, and accessories (Coty is the perfume licensee). The Company pursues a portfolio strategy, with now two globally renowned brands, BOSS and HUGO having two clearly distinguished marketing strategies, with a strong focus on social media. By doing so, HB aims to appeal primarily to a younger audience, above all millennials with BOSS and the Gen Z with HUGO. In addition, HB also offers capsule collections and collaborations with well-known brands (Aston Martin, Porsche, etc.) and personalities (David Beckham, Gigi Hadid, Naomi Campbell, at al).
With more than 20,000 employees, HB generated record sales of EUR 4.2 billion in 2023 distributed across 131 countries, mainly in EMEA (63%, 13% in Germany), 23% in the Americas (15% in the US), and 14% in Asia-Pacific (7% only in China). Moreover, HB has an omnichannel presence divided between retail (54% of sales), wholesale (25%), digital (19%), and licensees sales (2%). HB produces 17% of its garments in its five production sites, located in Europe, but for the largest site in Izmir (Turkey). The remaining 83% are mainly sourced from long-term independent partners located in EMEA (52% of total production, 26% in Turkey) and Asia (46%, of which 13% in Vietnam and 10% in China).
The global luxury fashion market is expected to grow at a 5% CAGR by 2031 (source: Straits Research). This market is driven by increasing demand in APAC countries (7% CAGR by 2031), tourism, and the influence of social media, even though the offline segment is still larger than the online segment. Luxury fashion products are gaining momentum among Millennials and Gen Z. Millennials are the fastest-growing consumers of luxury fashion goods.
Since 2019, an emphasis on the separation of the two brands BOSS and HUGO has been carried out by new management, as well as massive investment in digitalization, have allowed HB sales to grow by 10% annually despite the Covid pandemic (29% CAGR for the last three years).
Jean-Pascal expects a 5% sales and a 7% EBITDA CAGR by 2028, driven by an improved gross margin near pre-Covid level and an increasingly successful women’s range. Over the next five years, HB should generate a cumulated EUR 2.6 billion of free cash flow after capex of EUR 1.5 billion, mainly focused on store network, logistics expansion and digitalisation. Its 16.6% 2023 ROCE is well above its 4.7% WACC.
The shares recently traded at 0.9x 2024-25E sales and 4.6x EV/EBITDA, a 42% discount to peers (PVH and Ralph Lauren). The Marzotto family (Zignago Holding) and Michael Ashley own ~15% each, Deutsche Bank 6%, and Capital Group 5%.
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About the instructor:
Jean-Pascal Rolandez is the manager of The L.T. Funds, a Geneva-based investment firm focused on a buy and hold strategy based on a limited number of European stocks with a 5+ year investment horizon. Jean-Pascal has more than 25 years of equity investment experience and has founded the first investment club at the leading French business school ESSEC. Prior to establishing The L.T. Funds, Jean-Pascal held various executive positions at BNP Paribas for 22 years, including as Paribas’ French equity strategist.