Hugo Boss AG
Q3 2021 Earnings Call Transcript

Published: 6 Nov 2021

[Operator:]

Dear ladies and gentlemen, welcome to the HUGO BOSS Third Quarter 2021 results conference call. At our customers’ request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions via the telephone lines. May I now hand you over to Christian Stöhr, Vice President of Investor Relations who will lead you to this conference. Please go ahead sir.

[Christian Stohr:]

Yes. Thank you very much and good morning, ladies and gentlemen. Welcome to our third quarter 2021 financial results presentation. Today’s conference call will be hosted by Yves Müller, CFO of HUGO BOSS. Before we get started, allow me to reiterate that all revenue-related growth rates will be discussed on a currency-adjusted basis, unless otherwise specified. And let me also remind you that during the Q&A session, we kindly ask you to limit your questions to a maximum of two. So, let’s get started and over to you, Yves.

[Yves Müller:]

Thank you Christian, and also from my side a warm welcome to all of you. My presentation today will primarily focusing on three overarching topics

[Operator:]

The first question is coming from Elena Mariani at Morgan Stanley. Your line is now open.

[Elena Mariani:]

Hi. Good morning, Christian and good morning, Yves. Thanks for taking my two questions. My first one is on your guidance. I mean, on few things that you have just mentioned. So, the market has perceived your fiscal year EBIT guidance as a bit conservative. You have clarified that you intend to grow your OpEx and invest more starting from the fourth quarter. So, can you be a little bit more precise there? So, what's the level of OpEx inflation that we should expect going into year-end? And as part of this question also, can you tell us a little bit more how we should expect gross margin to evolve? Typically, the fourth quarter has a relatively high gross margin level, should we expect this to happen? Or are you already investing also in the product, which is one of the reasons why your gross margin, over the medium-term is also going to move a little bit down? And then, my second question is a little bit on your strategic priorities going into fiscal year 2022. So, you've laid out quite a few of them. You've talked about a new store format, your focus on digital, you've hired several new managers. But you have also a lot going on in terms of rebranding, having BOSS Orange and Camel and other sub-brands reemerging, as well. So, how should we think about fiscal year 2022 out of all the initiatives that you have laid out in August? What is going to come through over the next twelve months? Thank you.

[Yves Müller:]

So, good morning, Elena. Thank you very much for your questions. So, first of all, perhaps talking about Q4. And the perspectives that you are taking that we have a conservative approach for Q4. So, perhaps one first comment regarding current trading. So, what I can clearly say in the month of October, we have even seen some acceleration in top-line, so, which we view as very positive in terms of all business performance. So we clearly enjoy a very good momentum. So on the other side, we have to say that for the remaining months of November, December, we still see some uncertainties as I laid to you in my presentation. So, from the top-line perspective, you see especially in Europe, that the new infection rates rising and we have some uncertainties around what the local authorities will be doing. How will they will be restricting the public life and so on. We have seen lockdowns in some Eastern European countries, including Russia. So we are a little bit cautious when it comes to this for the remaining of the month and be aware that Q4 is very important because of the holiday season, the Christmas, a lot of commercial events that takes place in Q4. And on top of this, if you take the gross margin, what we should expect is that these headwinds that we are having from a freight and duty cost perspective that our supply chain it will be fine from a top-line perspective. But that we will see some effects in the gross margin and some headwinds there. The same magnitude that we have experienced actually in Q3 for Q4 and we are of course very closely monitoring this how this will develop and how – if these rate cost somehow we will be - high. We have to observe this and for the time being Q4 will be clearly a kind of headwind regarding gross margin. On OpEx, I think and this must be clearly visible. We will invest in CLAIM 5 as a growth strategy. We want to double the business from EUR 2 billion in 2020 to 2025 to EUR 4 billion. And with this growth strategy, we have to invest and we are going to invest brands, we will increase our marketing spending. We will increase our digital spending and that’s the reason why we come to our guidance as we laid it out for the remaining of the years. But we will clearly step up our investments in Q4. And when you are talking about our strategic investments in 2022, I can just assure you that we are clearly pushing the pedal to the metal at full steam. So, if you take the different claims Boosting the Brands, we will come in the end of January, when the new products with a new branding with a new points of differences already visible for the end-consumer we will align this with a big marketing campaign for both brands, BOSS and HUGO at the end of January. So we will start already in the beginning of the year 2022. We are heavily working on this and I think this is going to be a big firework and will clearly boost our both brands BOSS and HUGO right in the beginning of the season. The second big thing, what we are doing, about Product is King, we are clearly aligning our products, especially the Spring Summer collection has already the branding refresh, and the new lines, Camel, Green, Orange, they are all in full swing. They have been sold to the wholesale partners with greater order intakes as I laid it out. So this will be, as well the new products are hitting the floor in January. They will be both visible for wholesale and for retail. And then, in early 2022, we will do relaunch our hugoboss.com website in order to improve the customer journey. We want to improve the traffic. We want to improve our conversion rates on our big digital flagship. So we are in the Digital Campus. We are working on this. Everything the project is in line. And so, we will launch our new website already in early 2022. And another big step in Q1 will be the new store concept where we have our new anchor store in London Oxford Street close to Selfridges, Corner Duke Street which will be opened in the first quarter of 2022, where we will be rolling out and start the beginning of our new store concept which we are all very excited about. So you can see really, I clearly have to say the execution of our CLAIM 5 strategy is really in full swing. I think the Q3 results are a clear proof positive that we are going into the right direction. And we clearly there is much more to come, especially in the beginning of the year 2022.

[Elena Mariani:]

Thank you. I mean, it sounds like a lot. Just a very small clarification. So, when you say that you're going to invest more in the fourth quarter. So, in Q3, in terms of OpEx was up 2% versus 2019. So, should we expect Q4 to be up, for example, high-single-digit versus 2019? Could this be a good approximation? Thank you.

[Yves Müller:]

Yes. I think you can, like we were saying, I mean, you could see it already in Q3 our marketing expenses were up plus 6% versus 2019 numbers. So you can expect the range that you were indicating, I think you are more or less there.

[Elena Mariani:]

Thank you very much

[Operator:]

The next question is coming from Jürgen Kolb at Kepler Cheuvreux. Your line is now open.

[Jürgen Kolb:]

Thank you very much. Two questions also from my side, real quick. And first of all, I was wondering if you could maybe give us some indications about China in more details, especially, how did the sales performance in Q3 trend in your own shops and in the partner shops and your own online business, especially Q3 and maybe also what are you seeing as an early start in Q3? And the Second one is on the pricing strategy for Spring Summer 2022 but also as a – maybe an early comment on Fall Winter 2022. What's your strategy in terms of pricing for next 2022 overall? Thank you.

[Yves Müller:]

Yes, good morning Jürgen. Thank you very much for your two questions. So, taking about China, and the Q3 numbers, so, what you could see in China that at the end of July and actually in August, the net sales performance was little bit muted because of new COVID restrictions and actually stay at home orders for – so the traffic clearly was lower in these kind of period – I would say of six weeks and the people were actually traveling less. On the other side, what I can say is that, we clearly have gained momentum at the end of the quarter. So, in September, we were at positive versus 2019 in the high-teens already. And I can assure you, like I said, my general comment to Elena’s question that our net sales even accelerated in October. So, we see this as a positive sign. But as I laid out, we don’t know, a lot of uncertainties around COVID-19. You don’t know what’s actually happening in November, December. So, we are cautiously optimistic. But if I look at my current numbers, you can clearly see kind of acceleration in both channels in brick-and-mortar business and in online business. And with regard to our pricing strategy, when it comes to 2022, of course we are observing the increase in raw material prices and the increase in freight. For the time being, we have not taken the decision to adjust our prices, but we clearly observe this very closely and we will take a decision in the beginning of the year 2022 most likely if this is kind of a persisting trend of cost inflation in our industry.

[Jürgen Kolb:]

Very good. Super. Thank you very much. Best of luck.

[Yves Müller:]

Thank you very much Jürgen.

[Operator:]

The next question is coming from Antoine Belge at Exxon BNP Paribas. Your line is now open.

[Antoine Belge:]

Yes. Hi, good morning. It’s Antoine Belge from BNP Paribas. Two questions. First of all, with regards to your comments about the gross margin. Will you be possible to quantify a little more precisely what was specifically the impact of these initiatives at the supply chain level in Q3? And do you expect them to be pretty much the same in Q4? And, as a result of that, what would be the sort of new guidance for gross margin for the full year? I think, in the past, you indicated it would be for 2021 as a whole in between 2019 and 2020. Is it fair to assume that now, we will be maybe closer to the 2020 level? And the other question is regarding the U.S. market, which seems to be on fire for yourselves. Two questions within this. One would be that some consumer goods companies are a bit cautious about what's happening in the U.S. The other thing that – that is a bit link cyclical and so what's your view on a possible hard landing of the U.S. market? And then maybe more specifically HUGO Boss, especially in terms of maybe increasing the quality of the distribution there beyond the sort of the more specific and initiative products especially the collaborations with the NBA and Russell Athletic? Thank you.

[Yves Müller:]

Yes, Bonjour, Antoine. Thank you very much for your questions. So, first of all, talking about our gross margin. I think your observation is right, because that the freight and duty cost increased because of the supply chain disruptions will be a kind of headwind on the gross margin. So, overall as a consequence, we expect that the Q4 gross margin will be on the similar range than the Q3 gross margin overall. So this is the perspective that we are having. And what we are seeing, all other things somehow equal. We still have to see it of course regarding a discount. But this is the range that we are seeing. So, overall, a little bit lower than we had originally anticipated, because of t his freight and especially this freight cost increase, And regarding the U.S. market, I clearly can say that our net sales momentum is clearly accelerating even in the month of October. So, we have a very good business especially coming from the local demand. And actually on November, especially for the U.S. markets, they are opening now the tourist markets. So, actually, there we expect that the sales can even – might even increase because of the international tourism now being back in the U.S. But talking about U.S. itself, I think clearly for us, it’s a kind of HUGO BOSS recovery, because it’s a kind of sales managed turnaround. HUGO BOSS was I would say 12, 18 months ago positioned as a suit-only company. I think we have changed this dramatically with the new management team and these new collaborations we have with Russell Athletics, and NBA they are clearly helping us in positioning BOSS as a clearly 24/7 lifestyle brand and this is visible. We have younger cohorts coming into our customer base, which is helping us. They are rebuying and Antoine, it’s really a kind of HUGO BOSS business which is running into the right direction and we are very happy about this. And we are very confident that this will somehow continue.

[Antoine Belge:]

Thank you very much. Just in terms of maybe, within the overall 160 basis points comparison in Q3, maybe a quantification of the impacts specifically, is it all freight cost or whether other factors that played out maybe you have pluses or minuses in that overall evolution?

[Yves Müller:]

Yes. So, as we talk about Q3, the hit of the freight and duty cost were around 160 basis points.

[Antoine Belge:]

Thank you very much.

[Yves Müller:]

Thank you.

[Antoine Belge:]

160.

[Operator:]

The next question is coming from Manjari Dhar at RBC. Your line is now open. Your line is open.

[Yves Müller:]

Well maybe, Mr. Operator, maybe we can move on to the next person then. I guess, this is Michael Kuhn from Deutsche Bank and Manjari may be she can dial back in again and then reask her question.

[Operator:]

So, Mr. Kuhn, your line is now open.

[Michael Kuhn:]

Yes, good morning. Just one follow-up from my side. You spoke quite extensively already about the risks into the fourth quarter. And from the very recent developments as far until just and some areas, what impact did you experienced from your business and I think even more interesting with the rising incidence rates in several European countries, did you see any impacts on frequencies in the stores already or is it still too early to see those effects. Thank you.

[Yves Müller:]

Michael, I think still too early to comment this. The lockdowns we are now experiencing in Russia, for example, is only timely manner. So, we close it down for 10 days. On the other side, for example, lockdowns like in Australia after those lockdowns have been released you see actually a quite decent performance after the lockdown is over. But it always depends how long the lockdown really takes. So, overall, it depends market-by-market and it's clearly too early to call it out. And actually I make my comment on October numbers already. So, I think we have to observe this week-by-week. But it’s clearly too early to call it out.

[Michael Kuhn:]

Okay. So no impact on the frequency from the rising incidences?

[Yves Müller:]

No.

[Michael Kuhn:]

Great. Thank you.

[Operator:]

The next question is coming from Philipp Frey at Warburg Research. Your line is now open.

[Philipp Frey:]

Hello gentlemen. First of all, one quick housekeeping. Did I get it right that particularly, performance Pony and other things impacted the increase in our admin expenses in the third quarter? And then, looking out into 2022, all these supply chain bottlenecks, what’s your view actually on the ordering behavior of retailer in general? Have you any fear that there is over-ordering occurring or do you think that you are actually gaining market share, because you own one of the few guys who's committing to volume? Any views on that one please?

[Yves Müller:]

Good morning, Philipp. This is Yves speaking. So, regarding admin expenses, so, I can clearly confirm that this is related to payroll cost to the short-term bonus and the long-term bonus. So, these expenses have been accrued and as you might know, the long-term program is actually related to our share price performance, as well. If the share price was constantly increasing, we have to adjust our accruals there as well and this was the major driver actually of a kind of outperformance versus our initial expectations that were driving the administration expenses. And regarding the outlook, I think what we have experienced, I think the wholesale partners that are buying and who were buying on Spring Summer collection, that was clearly not out of the situation of supply chain issues. I think, and somehow confidently say that was based on our branding refresh and our great product improvements that we are doing in our collections. So we have – this is a very good order intake for the Spring Summer collection and supply. We haven’t seen any observations that those partners were overbuying because of supply chain issues. At the end, we want to be more relevant to the end consumer with good products. We want to increase our market share in the majority of the key - of the markets.

[Philipp Frey:]

Thanks a lot and hope the good momentum continues.

[Yves Müller:]

Yes. Thank you, Philipp.

[Philipp Frey:]

Bye, Yves.

[Operator:]

The next question is coming from Rogerio Fujimori at Stifel Europe. Your line is now open.

[Rogerio Fujimori:]

Hi, Yves and Christian. Thanks for taking my two questions. The first one is the retail space contribution, which I think was 5% in Q3 and year-to-date. Should we expect a similar level of retail space in Q4 and 2022 based on your store opening pipeline and planned acquisition of the franchisee? And then related to that in Americas, I think on Page 23, we can see that America since Q3 we saw 301 on the retail points of sales versus 269 at the end of June. So, the number of freestanding stores were unchanged. So what happened in Q3 in terms of shop-in-shops and outlets in Americas? Or what was the contribution from space perhaps to retail growth in Americas in Q3? Thank you.

[Yves Müller:]

So, actually, good morning, Rogerio. I didn’t get your first question, because you were very fast in asking. I just noted that you were aiming at some retail space issue. So, perhaps can you repeat your question?

[Rogerio Fujimori:]

Just the retail space contribution that we should expect in Q4 and 2022?

[Yves Müller:]

So, from – actually from a retail space perspective in Q4, you should not expect major differences in contrast to Q3, because especially in Q4, because it is the most important quarter from a kind of regional – from a kind of commercial moments. You don't do any renovations actually in Q4. You try to limit this because of the most important season. So, from space you should expect that this is somehow rather stable. And with regard to the U.S. business, I think you were asking about retail space there, as well. So, here, we were – we had in our numbers that was made these we added some more shop-in-shops, I would say, we added 14 shop-in-shops overall in comparison to 2019 because of the good business with Macy’s. So, that was a kind of retail space effect that we have. But that was in terms of square footage, it’s not a major driver of our good performance actually in Q3 for the U.S. markets. Macy's, for example, we added 17 shop-in-shops, reflecting our strong business with that partner. In terms of our strong Q3 performance in the U.S., however, this was no major driver.

[Rogerio Fujimori:]

Great. Thank you.

[Operator:]

The next question is coming from Thierry Cota at Societe Generale. Your line is now open.

[Thierry Cota:]

Yes. Good morning, Yves and Christian. Two questions for me. First, can you comment on promotionality at the end of Q3 and potentially in Q4 maybe with all the bottlenecks that we see across the industry promotionality has come down if I am not wrong. The gross margin in Q3 was potentially better than what we could have shared at the beginning of the summer. So, if could just comment on that? And secondly, just a follow-up. On the October acceleration I was wondering whether this is over one year, or also over two-years? And maybe just on the retail comments you clearly just made, I was wondering about the difference between the number stores, the mainland stores that has been opened meaning very little and actually the rise in the overall points of sales. I suppose that this is what you said, the shop-in-shops in Americas. I was wondering if there were any other factors, shop-in-shops elsewhere and/or potentially outlets? Thank you.

[Operator:]

It seems to be a small technical issue with the line. We will go into a quick break and come back.

[Yves Müller:]

Sorry, sorry, we are back.

[Operator:]

Okay. Okay, great.

[Yves Müller:]

[.:]

So, your observation from the overall market can be confirmed. And regarding your question regarding the current trading in October, yes, we look clearly at a two year stack basis as the best comparison base for the time being, because these were the pre-pandemic levels. And so, the comment I was making regarding the acceleration of top-line performance referred as well to the two years stack basis. In retail, if you look at the number of stores, so we are pointing out our freestanding stores which are more or less stable closings because we are still in the middle of optimizing our store portfolio as we laid it out during our CLAIM 5 strategy. We clearly want to optimize our store portfolio and invest into those locations which are very promising and good for the brand. So, the freestanding store are more or less stable and the increase that we have seen in terms of our number of stores are primarily related to shop-in-shops, which I actually Macy's and Hudson’s Bay in Canada compared to prior year.

[Thierry Cota:]

Okay. So, basically, the comment is that space, as you said previously, is not going to have much of an impact either on Q3 or going forward?

[Yves Müller:]

Yes, correct

[Thierry Cota:]

Okay. Great. Thank you. Thank you very much.

[Yves Müller:]

Thank you, Thierry. Okay, great. Ladies and gentlemen, I guess that was the last question for today. Manjari, if you redialed you can always give me a call afterwards and we can care for your question. But this completes today’s conference call. And the same goes out to all of you any questions, please do reach out to the Investor Relations team. And with that, thank you for your participation and good bye.