Hugo Boss: Encouraging Sales Growth And Strong Digital Strategy

seekingalpha03-19

Hugo Boss has seen strong sales growth, particularly in its Menswear and Womenswear segments, as well as in its brick-and-mortar retail and digital channels.The company's liquidity position has ...

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Robert WayInvestment Thesis: I continue to take a bullish view on Hugo Boss and believe the stock could have further upside going forward, based on strong sales growth and a strong digital strategy. In a previous article back in March 2023, I made the argument that Hugo Boss (OTCPK:BOSSY) could see further upside going forward, as a result of strong sales growth in spite of inflationary pressures. At the time, the stock was trading at a price of $12.38. Since then, the stock has descended slightly to a price of $12.29 at the time of writing - albeit having seen upside to just under $17 over the course of the year: TradingViewThe purpose of this article is to assess whether Hugo Boss has the ability to see upside from here taking recent performance into consideration. Performance When looking at the 2023 annual report for Hugo Boss as released on March 7, 2024, we can see that when looking at when looking at the BOSS Menswear segment - which accounts for the majority of the company's sales - we saw currency-adjusted growth of 16% in sales year-on-year. In addition, while the Womenswear segment only accounted for a small portion of overall sales, currency-adjusted growth came in at 24%. Hugo Boss Annual Report 2023Additionally, when looking at distribution channels for Hugo Boss, we can see that brick-and-mortar retail accounted for the majority of sales growth, with currency-adjusted growth of 15%. Additionally, the Digital segment saw substantial growth of 26% on a currency-adjusted basis, and accounted for 19% of overall sales. Hugo Boss Annual Report 2023I had remarked in my last article that the quick ratio (calculated as current assets less inventories all over current liabilities) for Hugo Boss had seen a decline, primarily due to higher inventories. A quick ratio below 1 indicates that the company does not possess sufficient liquid assets to meet its current liabilities. However, we see that in spite of a continued increase in inventories - the quick ratio has risen back to 0.67 from 0.52 last year - primarily due to an increase in current assets.       2021 2022 2023   Current assets 1,277,966 1,591,787 1,791,073   Inventories 605,554 973,560 1,066,044   Current liabilities 977,843 1,193,413 1,090,144   Quick ratio 0.69 0.52 0.67   Click to enlarge Source: Figures sourced from Hugo Boss Annual Report 2023 (in EUR thousands except the quick ratio). Quick ratio calculated by author. Additionally, when looking at more long-term metrics, we can see that the proportion of non-current liabilities to total assets has increased by just over 5% over the course of the year:       2022 2023   Non-current liabilities 797,756 1,070,746   Total assets 3,126,602 3,471,667   Non-current liabilities to total assets (%) 25.52% 30.84%   Click to enlarge Figures sourced from Hugo Boss Annual Report 2023 (in EUR thousands). Non-current liabilities to total assets calculated by author. When looking at a breakdown of the company's statement of financial position, we can see that both an increase in shareholders' equity and financial liabilities have been recorded over the period. Hugo Boss 2023 Annual ReportWith respect to financial liabilities, we can see that this has increased primarily due to an increase in liabilities due to banks including lease liabilities, along with a decrease in cash and cash equivalents. Hugo Boss 2023 Annual ReportOverall, sales growth for the year has been encouraging and we see that the company's short-term liquidity position has seen a slight improvement. With that being said, we have also seen an increase in non-current liabilities over the same period. In terms of areas of concern, Hugo Boss noted that pressure on consumer resilience itself has been increasing - owing to a slower than expected recovery in China as well as normalizing demand in the U.S. and Europe. In this regard, sluggish consumer demand more generally could potentially impact sales growth negatively if demand for luxury goods sees a decline. Valuation and Looking Forward In terms of valuation, here is a range for the EV/EBITDA ratio, EBITDA per share, and stock price since September 2020:     Date EV/EBITDA EBITDA per share   15/09/20 2.921 1.798   15/03/21 12.01 0.71   15/09/21 13.01 0.849   15/03/22 4.955 1.885   15/09/22 4.676 2.187   15/03/23 6.233 1.983   15/09/23 7.522 2.1   15/03/24 5.27 2.175           Median 5.7515 1.934   Click to enlarge Source: Historical figures sourced from ycharts.com. Median EV/EBITDA and EBITDA per share ratios calculated by author. When looking at the above, we can see that the current EV/EBITDA ratio of 5.270x is lower than the median of 5.7515x over the given period. In this regard, I take the view that if the stock were to tend back towards the median EV/EBITDA ratio of 5.7515x and EBITDA per share were to remain at the current level of $2.175, then $12.50 would represent fair value for the stock (5.7515*2.175). From this standpoint, I take the view that Hugo Boss is trading at fair value at this time. In terms of how my thoughts on valuation have evolved since my last article, given that the stock was trading at a similar price back in March 2023 - but the company has seen substantial sales growth since then - I take the view that Hugo Boss has strong capacity to increase earnings going forward and in this event, the stock could have the potential to rebound to prior highs of $15-17 as we saw last year. With that being said, I also take the view that Hugo Boss also has the capacity to further bolster sales and earnings going forward. In particular, the company's growth of 20% digital traffic in 2023 as compared to the previous year was quite impressive, and digital has now become a more important source of overall sales - accounting for 20% of group sales in 2023. In addition, Hugo Boss is on track to refresh 80% of its stores by 2025 by rolling out its \"latest store concept\" - having already met a target of 40% for 2023. This refined store experience includes the use of digital technology to allow customers to customise their purchases in advance, as well as a range of other digital and physical enhancements to make the shopping experience more seamless for customers. In my view, if we see that Hugo Boss continues to remain on track to meet its 80% store refreshment target by 2025 and digital sales continue to grow - then the company is in a good position to grow net sales and earnings from here. The company is also reportedly the most followed clothing brand on Instagram as compared to its peers, while being the most viewed brand on TikTok. In this regard, I am optimistic that the company has the capacity to continue boosting its brand relevance and ultimately drive further sales growth. Specifically, Hugo Boss is expecting sales growth of 3% to 6% for 2024, with an expected growth in operating profit of 5% to 15%. In my view, if we continue to see strong growth across the Digital distribution channel - then this has the capacity to bolster overall sales growth given the company's incorporation of digital sales strategies across its brick-and-mortar stores. From this standpoint, I am optimistic that Hugo Boss has the capacity to ultimately achieve these metrics. Risks In terms of the potential risks to Hugo Boss at this time, we can see that the company assesses operational risks as accounting for nearly 50% of the share of total risk: Hugo Boss Annual Report 2023Specifically, Hugo Boss has been attempting to pursue a goal of a regionally balanced strategic sourcing mix, in order to guard against the risk of excessive dependence on individual suppliers whereby a disruption could present a significant bottleneck to production. Hugo Boss reports that for the year 2023, the largest external supplier and the largest single production site accounted for 4% of total sourcing volume - down from 5% each in 2022. However, with 51% of procurement and production volume based in Asia - this necessitates strong global supply chains to ensure continued production. However, it is unclear as to the extent to which supply chain bottlenecks could stand to be impacted by the Red Sea crisis. With the Suez Canal and Red Sea channel facilitating the movement of over $1 trillion of merchandise per year - supply chain bottlenecks could pose an issue if this impacts the ability of Hugo Boss to ship product from its Asian production sites to the West. Conclusion To conclude, Hugo Boss has seen significant sales growth in spite of a challenging environment. The company still faces some headwinds, such as growth in non-current liabilities as well as potential supply chain risks. While I take the view that the stock is trading at fair value, I am also of the opinion that the company has the capacity to further bolster earnings if we continue given the sales performance we have seen to date. In this regard, I continue to take a bullish view on Hugo Boss.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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