MILAN — Leveraging a strong performance in the first half, a positive start to the third quarter and a successful spring 2023 selling campaign, the Ermenegildo Zegna Group is raising its 2022 guidance.
While staying “vigilant” in the face of the ongoing geopolitical uncertainties, and assuming no further deterioration of the war in Ukraine and a continuing normalization of the COVID-19 pandemic in the Greater China region, chairman and chief executive officer Gildo Zegna said Friday that the group expects revenue growth in the mid-teens, while the prior guidance was in the low teens. Zegna is also looking at a solid improvement in its adjusted operating profit in the second half of the year.
Despite the upbeat outlook, Zegna’s shares were down 3.3 percent in afternoon trading on the New York Stock Exchange to $10.45.
During its capital markets day in May, the group said it was aiming for revenues to exceed 2 billion euros and for adjusted EBIT to reach at least 15 percent of revenue. On Friday Zegna said he was “confident that we will remain on track.”
He trumpeted strong sales in the U.S., Western Europe and the United Arab Emirates, which helped the group report 20.8 percent growth in revenues in the first half.
“We’ve seen incredible traction,” said Zegna, as customers “want to shop for newness, attracted by the iconicity of the products, going through a new shopping experience. Business people are going back to the office renewing their wardrobes.” He added that “Dubai is on fire, it’s unbelievable and doing better than expected.”
In the six months ended June 30, revenues amounted to 729 million euros, compared with 603.3 million euros in the same period last year, achieved despite the impact of COVID-19-related measures in the Greater China region primarily from mid-March through the end of May of this year.
In the second quarter of 2022, sales rose 16 percent to 351.4 million euros.
Zegna also underscored that the company has continued to tighten its markdowns policy and is on the road to eliminate end-of-season sales in 2023.
Questions about potential M&As were expected, since Zegna has said before that he is open to additional acquisitions to strengthen the group’s supply chain or to buy another like-minded brand, even more so after the IPO last December on the New York Stock Exchange.
Responding to a question about whether he would consider buying the Tom Ford brand, which Zegna produces, the executive had no comment. “You have to ask the person who controls the company,” he said of the namesake designer.
He spoke of a 55 percent growth in the group’s luxury textile platform, which he has built over the years, which is showing “exceptional results. Thankfully we have raw materials, and we can be very creative.” Here, too, he had no comment on potential targets, but said he keeps his “ears and eyes open, watching what could be interesting.”
In the first six months of 2022, group profit decreased 34.8 percent to 21 million euros, compared with 32.2 million euros in the same period last year. This was as a result of the 28 million euro increase in the value of the put option liability on the 10 percent Thom Browne stake that the group does not own and the negative foreign exchange impact from a stronger U.S. dollar on the euro. This compares with a profit of 21 million euros reported in the first half of 2021 in relation to the purchase of a 5 percent stake in Thom Browne.
Adjusted operating profit amounted to 82.7 million euros, a margin of 11.3 percent, up 23.7 percent compared with 66.8 million euros last year, benefiting from price increases, the repositioning of the Zegna brand and purchasing and production efficiencies, which offset an increase in costs derived from corporate structure costs, marketing expenses, and other costs related to the IPO.
In the first half, the Zegna brand showed continued growth, as revenues increased 19 percent to 553 million euros, up from 466 million euros last year, a result of the repositioning of the brand. Shoes and luxury leisurewear continued to perform strongly, while tailoring and made to measure have rebounded.
Zegna’s adjusted operating profit rose 31.1 percent to 51.1 million euros, compared with 39 million euros last year.
Thom Browne sales climbed 30 percent, reaching 185.8 million euros, compared with 142.5 million euros last year, boosted by growth across all lines, and particularly womenswear, and to the rollout of e-commerce through Tmall in the Greater China region, which was launched in the second half of 2021.
Thom Browne CEO Rodrigo Bazan said the brand is on the road to double sales in the medium term, despite the uncertainties and while “at least one third of the brand’s stores were closed in the second quarter in China.”
Thom Browne’s adjusted operating profit was up 13.4 percent to 31.5 million euros, compared with 27.8 million euros last year.
Group revenues in the Greater China region amounted to 247.2 million euros in the first half of 2022, down 14 percent compared with the same period last year, dented by the temporary store closures and lower customer traffic due to restrictions in major cities across the region.
Chief financial officer Gianluca Tagliabue said that without Greater China, revenues would have been up 53 percent in the first half.
However, direct-to-consumer revenues in the Greater China region for the month of June 2022 increased compared to June 2021, due to the significant increase in e-commerce sales for both the Zegna and Thom Browne labels, and a rebound in sales at directly operated stores, following the relaxation of COVID-19-related restrictions. In particular, Thom Browne d-to-c revenues rebounded by double digits compared to June 2021 as a result of strong e-commerce sales and the additional contribution from three new net store openings.
Revenues in the rest of the world amounted to 481.8 million euros in the first half, up 53 percent. The second quarter showed an acceleration with a 59 percent rise, up from 48 percent in the first quarter of the year.
This increase was mainly driven by a 91 percent bump in revenues in the U.S., reaching 124.3 million euros; a 43 percent increase in revenues from the EMEA region to reach 260.6 million euros, and a strong performance in Japan and the rest of Asia.
Group retail sales, including e-commerce, totaled 428 million euros, up 13 percent from the first half last year, accounting for 59 percent of total revenues. At the end of June the group counted 519 stores, of which 295 were directly operated, compared with 530 at the end of December last year. Zegna has rebranded 130 stores with the new logo since the launch of the One brand strategy in November 2021 and 80 additional stores will be revamped in the second half.
Wholesale sales rose 37 percent.
Third-party brands’ revenues grew 44 percent thanks to strong deliveries to Tom Ford and Gucci, in particular.
As reported, Zegna has become the official luxury travel wear partner of the Real Madrid soccer team and the group’s CEO said this was “a major step in increasing global awareness of our brand and a key opportunity to reach millions of Real Madrid fans around the world, reflecting the modern Zegna man.” When one reporter pointed out that Thom Browne decks out the rival FC Barcelona team, Zegna laughed. “We like to complete and we learn from one another, we’ll see each other on the soccer field, it’s exciting and there is more news to come,” he added cryptically.
As of June 30, the group reported a cash surplus of 103.1 million euros, compared to 144.8 million euros at the end of December 2021.
Net debt stood at 73.3 million euros, reflecting capital expenditures of 28.5 million euros, mostly channeled on the store network, compared with 24.6 million euros in the same period last year, higher trade working capital of 55.2 million euros and 29.6 million euros of litigation settlements, among others.