Hugo Boss Net Flat in Q1

Costs related to store openings and marketing expenses put pressure on earnings.

BERLIN — Retail expansion, combined with higher marketing expenses and costs relating to a new distribution center, put pressure on first-quarter earnings at German men’s wear giant Hugo Boss.

This story first appeared in the May 8, 2014 issue of WWD.  Subscribe Today.

Net income was flat at 81.6 million euros or $111.8 million, and earnings before interest and taxes slipped 2 percent to 108.7 million euros, or $149 million. Earnings before interest, taxes, depreciation and amortization before special items were down 1 percent to 131.3 million euros, or $179.9 million.

Dollar figures are converted from the euro at an average exchange rate for the period to which they refer.

Group sales gained 3 percent in the quarter to reach 612.6 million euros, or $839.6 million. In local currencies, sales rose 6 percent. Europe drove growth, with sales advancing 8 percent both nominally and in currency-adjusted terms. Boss reported particularly good performances in the U.K. and Germany, where currency-adjusted sales rose 17 percent and 13 percent, respectively. Sales growth in Europe helped compensate “for the challenging market environment, above all in North America and China,” chief executive officer Claus-Dietrich Lahrs said.

Sales in the Americas declined 7 percent, and currency adjusted sales were down 2 percent. In a conference call Wednesday, Boss chief financial officer Mark Langer told analysts the market environment in the U.S. was surprisingly weak in the majority of the first quarter, marked by consumer uncertainty, a very promotional market environment and weather conditions that adversely affected in-store traffic. Early deliveries of spring merchandise in the fourth quarter also penalized results. In contrast, sales in Central and South America grew at double-digit rates.

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In the Asia-Pacific region, first-quarter sales were flat, though in local currencies, sales there gained 7 percent. Langer said there has not been a fundamental recovery yet in China, but “we see good signs, especially for Hugo Boss,” with new flagships in Hong Kong and Boss’ traveling “Art of Tailoring” exhibit contributing to increased brand awareness.

Boss’ new strategic focus on Boss Womenswear, now under the creative direction of Jason Wu, already helped generate double-digit growth in the women’s segment in the first quarter. Even though Wu’s first collection won’t hit stores until June, Langer said the Boss runway show during New York Fashion Week in February and resulting press coverage significantly heightened interest in the brand and brought more female consumers into the stores.

By brand, the Boss core label generated 3 percent sales growth, Boss Green climbed by 13 percent and Hugo 10 percent, whereas Boss Orange declined 11 percent. Men’s wear sales were up 2 percent in the quarter, and women’s, which now accounts for 11 percent of total sales, rose 14 percent.

Boss has been steadily evolving its business model to center on own retail, which (including outlets and online) grew 16 percent in the quarter to 322.6 million euros, or $442.1 million. Currency-adjusted comp-store sales gained 6 percent, with Europe again the primary growth driver. Boss opened 13 new doors in the quarter, and took over 12 shops-in-shop, but also closed 28 mostly smaller points of sale.

Wholesale was down 8 percent, reflecting both restrained orders as well as the group’s takeover of spaces previously operated by wholesale partners.

Boss reconfirmed its sales and earnings targets for 2014. These call for high-single-digit sales gains on a currency-adjusted basis, supported by all regions. Its own retail is expected to again achieve double-digit growth, with 50 new doors planned, and wholesale is expected to remain stable. In operative earnings, Boss is forecasting a high-single-digit increase in EBITDA before special items.

There has been some speculation that Boss’ main shareholder, Permira, which holds a 56 percent stake, may be considering further reducing its stake. In May 2013, Permira shaved its holding by about 10 percent, and its lock-up expired earlier this year. Analysts note Boss would be a good fit for a consumer brand or high-end group, even with its premium positioning. One even said it’s “likely Boss will be on the market,” but quickly added, “though not in the short term. Permira would want to wait for a quarter with more positive momentum, and for the share price to be clearly over 100 euros.”