Hugo Boss: the rational consumer
Another piece of bad news from the luxury clothing maker
Hugo Boss is a case study in stock market irrationality. Reasons to avoid shares in the luxury clothes maker abound: a year ago, it pushed back one of its profitability targets and since then earnings forecasts have been falling; it generates 63 per cent of its sales in the economic disaster zone that is Europe; the shares, at an average of about 18 times forecast earnings this year, are not particularly cheap; and Permira, the largest shareholder with a 39 per cent stake, has been reducing its holding. So what has happened to the shares? Before Tuesday they were up 9 per cent in a year, outperforming the Dow Jones Global Luxury index by 21 percentage points.
But its ability to defy gravity may be limited. The shares fell 5 per cent on Tuesday as the company had more bad news to report. Revenue guidance for 2014 fell from “high single-digits” to 6-8 per cent. Profit guidance dropped a little more. The end of the third quarter was not good, with tourist numbers falling and warm weather leaving stock on shelves – who is going to buy an €80 scarf when it feels like summer?
Put in the context of other luxury companies, though, Hugo Boss has its attractions. Although heavy exposure to Europe is worrying, heavy exposure to China (with its recent disdain for conspicuous consumption) would be even more worrying. Hugo Boss generates just an eighth of its sales from the Asia-Pacific region, and the businesses outside China are doing nicely. A global shift from wholesale to retail also looks smart. Same-store sales growth in the retail business is running at a respectable 4 per cent. Add all that together, and even after the downgrade Hugo Boss is still growing faster than many of its rivals.
That should give some support to the shares. But the European Commission has just cut its economic outlook for the eurozone. Permira sold an 11 per cent stake in September. November downgrades are starting to be a habit. There is no reason, rationally, to expect the shares to have a big jump.