UPDATE 2-Hugo Boss expects European rebound as year-end nears

Thu Oct 31, 2013 10:50am EDT

* Q3 sales 658 mln eur vs poll avg 677 mln

* Q3 adj EBITDA meets view at 173 mln eur

* Sees forex-adj sales, earnings up 6-8 pct in 2013

* Analysts see 2013 goal as ambitious

* Shares rise 1.6 pct, outperform MDax

FRANKFURT, Oct 31 (Reuters) - Fashion house Hugo Boss said it expected strong sales and earnings growth in the last part of 2013, supported by a recovery in Europe and moves to expand its own network of stores selling smart suits and dresses.

The German group needs a strong finish to 2013 to meet full-year targets after sales in China, previously the growth engine for luxury firms, stuttered in 2013 and Europe's economic weakness continued into the first part of the year.

"We forecast Europe to sustain the positive momentum seen since the end of July," Chief Financial Officer Mark Langer told analysts after the group reported third-quarter sales hit by currency effects but profits in line with expectations.

Europe accounts for 60 percent of its sales, so Hugo Boss is well placed to benefit from a recovery, though analysts are still sceptical that it would be enough to reach 2013 goals.

For the third quarter, the group reported core profit in line with expectations at 173 million euros ($238 million) and said its gross profit margin - a key measure of profitability in the clothing industry - reached 63.5 percent, compared with 60.1 percent at the same time last year.

Currency effects took a bite out of third-quarter sales, however, which rose just 2 percent to 658 million euros, against expectations for 677 million. Stripping out the effects of translating sales made in the Americas and Asia into euros, sales would have risen 5 percent, the group said.

Hugo Boss's gross profit margin has been rising steadily from 53.79 percent in 2008, when Chief Executive Claus-Dietrich Lahrs took over, thanks to it opening its own retail stores and taking control of its selling space in department stores like Saks in the United States, El Corte Ingles in Spain and KaDeWe in Germany. Such moves mean tighter stock control and keep discounts down.

Lahrs is also trying to make the brand, whose suits are seen as 'affordable luxury', more upmarket by scrapping cheaper suits and dropping some wholesale partners. For example, Australian high-end department store David Jones said this week it would start selling Hugo Boss clothes, taking the place of retailer Myer.

TAKING CONTROL

Shares in Hugo Boss, which reached an all-time high of 97.20 euros in September, were up 1.6 percent at 1401 GMT, outperforming a flat index for German medium-sized firms . Its shares have more than doubled in value since it was taken over by Permira in 2007.

Citi analyst Thomas Chavet described the in-line profit and the increase in margin as "clear positives in light of the broad-based luxury demand slowdown and disappointing sector earnings observed in the third quarter so far".

Other luxury goods players like Richemont, Louis Vuitton and Kering's Gucci have reported results hit by lower Asian demand.

"There is no silver bullet that will change traffic numbers in mainland China in the fourth quarter, so we expect a continuing challenging environment," Langer added. Boss has closed 20 stores in Asia this year.

Hugo Boss said currency-adjusted sales and earnings would rise by 6-8 percent for the year as a whole and by less than that on a reported basis.

Before Thursday's results, analysts were forecasting 2013 sales up 6 percent, unadjusted for currencies, to 2.48 billion euros and earnings before interest, tax, depreciation, amortisation and special items (EBITDA) of 566 million.

"We believe guidance and consensus are ambitious as a sharp acceleration in growth is needed in the fourth quarter," Commerzbank analyst Andreas Riemann said.

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