By  on November 18, 2010

The tide has turned for Hugo Boss.

After an off year in 2009, when sales and earnings declined, the German brand has made a comeback in 2010, with net income in the third quarter rising 79 percent to 92.2 million euros, or $118.3 million.

Claus-Dietrich Lahrs, who took over the helm of the company in August 2008, is confident business will grow again next year, thanks to an aggressive retail rollout plan and continued expansion in emerging markets. Expanding women’s wear is also a priority.

The overall goal is to grow to 2.5 billion euros, or $3.5 billion at current exchange, in sales over the next five years, up from 1.6 billion euros, or $2.2 billion, now, with retail accounting for 50 percent of revenues. Earnings before interest, taxes, depreciation and amortization is projected to rise to 500 million euros, or $694 million, by 2015, up from 270 million euros, or $374 million, in 2009. Boss generates 70 percent of its sales in Europe, 20 percent in the Americas and 10 percent in Asia, but Lahrs sees the breakdown in five years adding up to 54 percent in Europe, 25 percent in the Americas and 21 percent in Asia-Pacific.

In an interview in New York, Lahrs, the Hugo Boss AG chairman and chief executive officer, revealed that over the next decade, “the worldwide positioning of our brand will depend on our position in China.”

Right now, Germany is the company’s largest market, followed by the U.S. and France, but “China will move up soon,” he predicted. “We have to get prepared now. It is reality, and we’re ready to do more business abroad.”

He said that in China, and anywhere in the world, “we have to send an easy-to-understand message.” And that message is one that is centered around a strong, multidimensional product offering and a two-pronged approach to growth — wholesale as well as retail.

Lahrs said the company has experienced “a nice increase in wholesale” and is also “growing very fast in retail.” He said the company usually chooses to invest in retail in markets where it doesn’t have a profitable wholesale partner.

Hugo Boss, which currently operates 450 stores worldwide, will add 50 to 60 units a year over the next five years, with a focus on the Americas and Asia. On average, 20 stores a year will open in China.

In the U.S., five new company-owned stores will open in 2011, in the Houston Galleria; Palm Beach, Fla.; Dadeland Mall in Miami; Pentagon City in Washington, and Schaumberg, Ill., according to Mark Brashear, chairman and ceo for the Americas. There will also be a flagship added in Copley Place in Boston, which will replace an existing store in that city. Currently, there are 35 U.S. stores in operation, 13 franchise stores and 28 outlets.

Lahrs said that, while the thrust may be on adding new stores, renovations of existing units is “almost as important” to the image of the brand.

The wholesale-retail split is 60-40 in the U.S., higher than the overall split of 70-30. It is expected to hit 50 percent in the States “very soon,” Lahrs said.

For Lahrs, it’s the company’s balance between retail and wholesale that gives it an advantage.

With men’s suits averaging $895 at retail, Hugo Boss has hit the sweet spot for American men during the recession. “We offer premium, quality product at reasonable prices,” he said, also citing the company’s “sophisticated European design,” reliable fit and on-time delivery. Often, he said, companies struggle with juggling their creativity and manufacturing process, but at Hugo Boss, it is “harmonized,” giving retailers the confidence that the product they offer will arrive when they expect it.

Lahrs said the company has experienced strength in all markets. As reported, third-quarter sales gained 12 percent in Europe, 13 percent in the U.S. and 27 percent in the Asia-Pacific region. Wholesale revenues rose 6 percent after adjustment for currency effects. Retail sales, including outlets and online, advanced 36 percent on a currency-adjusted basis, and sales at directly operated stores increased 15 percent on a like-for-like, currency-adjusted basis.

Lahrs said, looking ahead, he “feels strongly about continued growth in the American market with our department store partners and our own stores.” He said a “very strong position in the U.S. market is key to our success.”

The European market was stronger than expected, he added, and the Asian market continues to grow. “Based on our first-half orders, 2011 looks positive,” he said. “Although there will be some challenges in some markets in Europe and the U.S., we feel well positioned to weather them.” The group now projects EBITDA before special items to grow about 20 percent, up from 10 to 12 percent, and net sales to rise 5 percent on a currency-adjusted basis, as opposed to the earlier forecast of 3 to 5 percent.

He said once consumers get a taste for luxury product, they’re loath to go back. “They may change their habits or wait, but once you get used to a better house, car or suit, you won’t give up on it,” he said. “It’s human nature.”

Turning to product, Lahrs said that although “Hugo Boss is a male-driven brand, the single biggest opportunity is women’s.” The company offers women’s product in four of its five collections — Black, Orange, Green and Hugo — and “we’re making it as powerful as it needs to be.” The line caters to professional women who are “looking for feminine ready-to-wear with a sexy look.”

Even so, he stressed, the focus on women’s will not be to the “detriment of men’s wear,” which he also expects to grow.

Lahrs said Hugo Boss has been benefiting from a renewed interest in men’s suits, dress shirts and ties — the company’s “heritage product,” he said. “Our customer is extremely interested in formal men’s wear, but that doesn’t mean sportswear is slowing,” he added. “It’s just rebalancing.”

All told, the company offers 36 collections each year across its different labels. Boss Black is the backbone of the company and represents 70 percent of volume. It offers both tailored clothing and sportswear and is the “core of the brand,” Lahrs said. Boss Orange, which represents 11 to 12 percent of sales, offers premium casualwear and is targeted to a younger customer. Hugo is the company’s most “design-driven product,” he said, and is “edgier” than the other offerings. It accounts for 7 to 8 percent of sales and “we use it to demonstrate the design capacity of Hugo Boss,” he said. Green is a fashionable golfwear line for men and women that is designed to be used both on and off the course. Although still a small percentage of sales, this line “is the single-largest growth brand in the U.S.,” according to Brashear. It is sold in Hugo Boss stores as well as in department stores such as Nordstrom and Saks Fifth Avenue and green grass shops.

The final label is Hugo Boss Selection, a men’s-only offering that Lahrs called the company’s “new weapon. It’s great tailored clothing and sportswear at serious price points.” For example, prices for this line average $1,495. Lahrs said the line is targeted to the U.S., China and Europe in particular, but will be available in other places as well.

“We will not have a worldwide assortment,” he said. “Fashion is dominated by local tastes and fits, and there are different requirements from market to market.”

Lahrs said the company has experienced “very healthy growth across all brands” and encourages competition among its labels internally. “That’s the best way to keep igniting energy within the brands,” he said.

Turning to the back office, the company recently realigned its Canadian operation, eliminating eight positions and putting Brashear and his team in charge of all of North America. “Historically, we’ve been organized in silos with each market acting autonomously,” Brashear explained. “But to reduce redundancies, we streamlined our leadership, took the investment in back of house and redeployed it into point of sale [initiatives] such as shops, marketing, etc.”

Lastly, the Internet is another initiative that is gaining momentum within the company and plans are for e-commerce to contribute 5 percent of total global net sales within five years. Boss now sells online in the U.S., Germany, Spain, France, the U.K., Belgium and Italy, with Asia also on the online agenda.

Brashear said this business helps keep the brand modern, “and it’s important to us and our customers that we are a young, modern brand.”

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