BERLIN — Coming off a so-so 2019, Hugo Boss is now bracing for the impact of the coronavirus, especially in China.
“We know that these circumstances will have a serious impact on our 2020 results and particularly in the first quarter,” chief executive officer Mark Langer said. “But we are convinced that the negative impact of the coronavirus on our operating profits can be kept in the low double-digit millions.”
The German company set up a special team to try and mitigate the impacts. More than half of Hugo Boss’ 150 stores in China have been closed since the end of January and the company reported 80 percent less footfall in those stores still open.
Hugo Boss sources about 20 percent of its products in China and although logistics and supply chains have not been impacted yet, various events, marketing campaigns and store renovations are on hold until later in the year. Apparel meant for Chinese stores is being diverted to North America and Europe, Langer said, and negotiations are ongoing to try and reduce retail rents in the short term.
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Despite all this, he concluded, the company remains “firmly convinced” of the potential in the region and expects the situation to normalize by midyear.
In 2019, currency-adjusted sales were up 2 percent to around 2.88 billion euros. However, earnings before interest and taxes fell 4 percent to 333 million euros. Net income also dropped, from 236.2 million euros in 2018 to 205.2 million euros in 2019, lower than expected by market analysts.
This was despite a particularly strong last quarter, during which time EBIT rose 9 percent and currency-adjusted sales increased 4 percent to 825 million euros. In 2018, this was 783 million euros. The end-of-year increase was driven by accelerated sales — an 8 percent rise — in Europe, especially in France and Great Britain.
Some of this was due to circumstances beyond the company’s control, such as the U.S.-China trade war and political unrest in Hong Kong, where sales fell by half. But it can also be seen as an indicator Langer’s strategy to improve the company’s top line is proving to be an expensive process.
Due to the coronavirus, Hugo Boss has already faced hurdles in Mainland China this year, and the slow-and-steady approach may further agitate activist shareholders.
Chief financial officer Yves Mueller confirmed that the fall in EBIT was due to ongoing investments, which rose 24 percent in 2019 to hit 192 million euros. However, as Mueller also noted, free cash flow improved and the company was able to pay shareholders a higher dividend.
Langer argued that the successful last quarter of 2019 showed the plan is working. “We have a solid base and in order to secure long-term sustainable growth, I am firmly convinced that, even at this time of insecurity, we should continue to focus on our strategic initiatives,” he said.
The future is likely to be more challenging, though, and some of the company’s current targets will be difficult to achieve, said Piral Dadhania, an analyst at RBC Europe. “We…suspect Boss management will want to address them in order to better align market expectations with the retail landscape reality,” he wrote.
During a press conference, Langer made conservative predictions for the coming year, laying out guidance for up to 2 percent growth and EBIT of between 320 million and 350 million euros in 2020.
“All of the strategic growth drivers — online, retail sales productivity, Hugo and Asia — made above-average contributions to sales growth in the past year,” the company said in a statement.
Online shopping services are now available in 15 countries and grew 35 percent to 151 million euros, expanding into other territories like Ireland and Scandinavia in 2019. Digital sales now make up 8 percent of Hugo Boss’ turnover, Langer noted, while retail sales productivity in brick-and-mortar stores rose 4 percent.
Sales in Asia Pacific rose 5 percent to 438 million euros, driven mostly by consumers in Mainland China, where currency adjusted sales were up 3 percent in 2019, totaling 239 million euros.
Europe continues to be Hugo Boss’ most important market, with growth of 4 percent and sales totaling 1.8 billion euros.
The North American market remains problematic for the company: Sales fell 7 percent over the year, to 560 million euros. Fewer tourists traveling to the U.S. and discounting weighed on business, Langer explained.
Sales of casualwear continued to outpace the company’s more traditional formalwear, particularly within the younger, trend-based Hugo brand, which grew 5 percent. Casual and ath-leisurewear accounted for 64 percent of Hugo Boss’ sourcing volumes in 2019, compared to 62 percent in 2018.
At the press conference on the results, the company also introduced Heiko Schaefer as new chief operating officer. Schaefer, previously at Tom Tailor and Adidas, is seen as something of a troubleshooter and is expected to help drive transformation of Hugo Boss’ sourcing and product development.