Market Overview

Why Hugo Boss And Prada Are Having Problems

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  • Prada S.p.A. (HKG: 1913) shares are down 37 percent year-to-date, while shares of Hugo Boss AG (ETR: BOSS) have dipped 20 percent over the same period.
  • Societe Generale’s Thierry Cota maintained a Hold rating on Hugo Boss, while reducing the price target from €100 to €89. Deutsche Bank’s Gilles Erico maintained a Buy rating on Prada, while reducing the price target from HKD 47 to HKD45.
  • Changes in economic and geopolitical scenarios are resulting in weak sales trends, the analysts noted.

High Uncertainty And Risk At Hugo Boss

At its annual investor day, Hugo Boss maintained its targets of high single-digit cc growth and 25 percent 2020 EBITDA margins. The company, however, guided to weak sales trends this year and next year due to mixed trends in the US, which contributes 18 percent of its total sales, and Greater China, which contributes 8 percent of its total sales.

Analyst Thierry Cota believes that the company’s European sales are also likely to be impacted by geopolitical risks and negative sales trends in France. Hugo Boss’s LFL retail sales growth in 2016 could be below the 5 percent needed to achieve the 2020 margin target, Cota added.

Hugo Boss maintained its strategy of focusing on elevating the contribution of luxury sales from 10-12 percent at present to 20 percent of total sales by 2020 and that of womenswear from 11 percent to 15 percent over the same period. The company also aims at focusing on online sales and the China market.

The company’s difficult positioning between fast fashion and luxury remains a concern area at a time when consumer demand tends to be increasingly polarized, the analyst mentioned, while adding that Hugo Boss’ plans to elevate sales faces several hurdles in the form of competition and the sourcing of a significant proportion of products from the emerging markets.

Cota expects Hugo Boss’s implementation strategy to be up against several issues like US overstocking, China late takeovers of franchisees, online late entry and sustained opex-capex spend.

Another Challenging Quarter For Prada

In a separate report, Deutsche Bank analyst Gilles Erico mentioned that the current economic and geopolitical backdrop is not providing any respite and keeping the situation challenging for Prada.

The company is expected to post negative retail LFL of 6 percent in 3Q with reported sales expected to be flat, accounting for positive currency and space contribution, Erico said. He added that in geographical terms Japan is likely to be the only country witnessing strong momentum.

The analyst expects the company’s LFT in Europe to decelerate following very strong summer months. “We are factoring in a further slowdown in Mainland China and a challenging Hong Kong, as well as a deceleration in North America to -8% vs -7% in 1H.”

Prada continues to streamline its Wholesale operations with sales expected to show a double digit decline in 3Q. Erico stated, however, that the impact on profits should show a limited deleveraging due to the currency benefit on gross margin and the company’s cost/supply initiatives.

The EPS and the sales estimates for the FY16 have been cut by 9 percent and 3.4 percent to reflect the expected poor performance in 3Q and the deterioration in the global economic and geopolitical scenario.

“Our Buy case is predicated on the brand ability to recover its above average productivity and drive operating margin and earnings rebound through scale,” the analyst mentioned.

 

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Posted-In: Societe Generale Thierry CotaAnalyst Color Long Ideas Reiteration Analyst Ratings Trading Ideas

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