Hugo Boss Earnings: Strong Growth and Margin Improvement, but Inventory Increase a Bit Concerning

We are increasing our fair value estimate for narrow-moat Hugo Boss BOSS to EUR 66 per share on expectations for stronger growth and margin progression in 2023 as the company reported a strong second quarter and raised full-year guidance. At current levels shares look fairly valued as we don’t expect double-digit revenue growth to persist over the long term, given slower growth and competitiveness in the premium apparel niche where Hugo Boss operates. Nonetheless, we are impressed by the current strong brand momentum across geographies with 15% currency-adjusted growth in Europe, Middle East, and Africa, 41% in the Asia-Pacific region, and most surprisingly 20% growth in the Americas (16% growth in the U.S.), the region that has been very challenging for most luxury stocks under our coverage this year.

Profitability in the second quarter improved slightly by 40 basis points as gross margin pressures due to currencies, channel mix, and increased product costs were more than offset by operating leverage. A word of caution, inventories were up by 53% on a currency-adjusted basis, well ahead of sales. Management attributed the increase to a reduction in stockouts given prior-year supply chain issues and claimed that inventory is either fresh or core merchandize and should normalize over the year. However, elevated inventory levels may still mean a higher need for discounting in quarters to come.

From a channel perspective digital outperformed in the quarter with 30% growth versus 17% growth in both brick-and-mortar retail and wholesale, while womenswear growth was stronger than menswear.