Hugo Boss: premium apparel manufacturer with 40.4% upside potential

Reason 1. Target market potential

According to Bain & Company and Fondazione Altagamma, a trade association for Italian luxury goods manufacturers, despite challenging macro conditions, the global luxury market grew by 8%–10% (11%–13% in constant currency) in 2023, reaching a record size of €1.5 trillion, once again proving its unprecedented resilience. The industry includes nine segments, with premium automobiles, hotels, and personal luxury goods accounting for over 80% of the total market volume.

Hugo Boss operates in the large and growing personal luxury goods market, which is the "core" of the overall industry and includes five categories: apparel and footwear, accessories and eyewear, watches, jewelry, cosmetics and perfumery. According to Bain, the personal luxury goods market amounted to to about €362 billion for the year, indicating a year-on-year (YoY) growth rate of 4% (8% in constant currency). Statista provides a similar estimate: according to the company, in 2023, the personal luxury goods market increased by 13.3% to $354.8 billion.

Dynamics of the personal luxury goods market; Source: Bain & Company

However, market conditions have been deteriorating quarter by quarter, and the latest data signals a slowdown in Europe and the US. For instance, in North and South America, sales decreased by 8% compared to 2022, as widespread uncertainty impacted consumer spending. Nevertheless, it is important to note that China, one of the largest markets, grew by 9%.

Sales of personal luxury goods are expected to show a low growth rate in 2024, due to the worsening macro environment and high base effect in previous years. However, the industry's long-term potential remains promising. Bain analysts believe that by 2030, the market volume will reach €540–€580 billion, suggesting a growth with a compound annual rate (CAGR) of 6%–9%. According to Statista, the market will grow at a CAGR of 3.4% to $418.9 billion by 2028. The personal luxury goods industry is likely to grow faster than the GDP of the most developed countries, facilitated by factors such as the growth in the ultra-wealthy population segment, economic development in the Asia-Pacific region, and the low demand elasticity for these products.

Expected dynamics of the target market; source: Statista

The personal luxury goods industry is going through rapid consolidation. For instance, in 2021, the LVMH group completed the acquisition of US jewelry brand Tiffany & Co. for $15.8 billion. This deal, one of the sector’s largest ever, allowed LVMH to strengthen its presence in the jewelry segment and expand its geographical footprint in the US market. In the same year, France’s Kering group, which owns brands such as Gucci and Yves Saint Laurent, acquired Swiss watch company, Ulysse Nardin, enhancing Kering’s position in the high-end watch segment and complementing its portfolio of luxury brands. Two years earlier, Swiss company Richemont, which owns Cartier and Van Cleef & Arpels, purchased the Italian jewelry brand Buccellati.

In the early 2000s, the personal luxury goods market was highly fragmented. The seven largest brands, such as Louis Vuitton, Gucci, and Hermès, controlled only 17% of the market. It was a time when many niche brands could coexist successfully with the large players, maintaining unique offerings for their consumer segments. By 2021, the situation had changed drastically: the share of the top seven brands doubled, reaching 33%.

Luxury goods market consolidation; source: Bain & Company

Despite the doubling market share of leading producers, the industry remains highly fragmented: numerous small and medium-sized brands continue to operate successfully, serving specific niches such as eco-friendly products or artisanal items. Additionally, consumer preferences vary significantly across different countries, making it difficult for a few global brands to dominate all markets.

The fragmentation of the personal luxury goods market, on one hand, and the significant increase in the market share of leading brands, on the other hand, reflect the complex and multi-layered structure of the industry. In the context of the current economic situation and changing consumer preferences, M&A activity is likely to continue to be a key tool for achieving growth and strengthening market positions. Major brands will probably aim for further consolidation to better meet the demands and expectations of consumers globally.

We expect Hugo Boss to be a major beneficiary of the favorable market conditions and current trends. On one hand, as market consolidation continues, the firm is capable of expanding its brand portfolio, as it possesses sufficient financial resources. On the other hand, Hugo Boss could become a target for acquisition itself, given its significantly smaller size compared to market giants such as LVMH, Hermès, Kering, and Richemont.

Reason 2. Business transformation

Hugo Boss was founded in 1924 by Hugo Ferdinand Boss in the small town of Metzingen, Germany. Initially, the company specialized in the production of workwear. During the 1930s and World War II, Hugo Boss produced military uniforms for Nazi forces, which later led to numerous controversies and criticisms. After the war ended and the company’s founder died in 1948, the company gradually shifted its focus to men's classic clothing and suits. In the 1970s, Hugo Boss began to expand internationally. In the 1980s, the company launched a women's clothing line and expanded its product range to include accessories and perfumes.

In the early 2000s, Hugo Boss continued to expand its international presence and product range. The company actively developed its sub-brands, including Boss Black, focused on classic and business attire, Boss Orange, offering casual wear, and Boss Green, specialized in sports apparel. Additionally, the company's portfolio included the Baldessarini sub-brand, created in 1993 and positioned as a more exclusive and high-quality line of men's clothing for a more mature and affluent audience. These steps were expected to strengthen Hugo Boss's position in the global fashion market and increase sales.

However, after 2010, the company entered a difficult period of new challenges related to its reputation and positioning. In 2011, Hugo Boss publicly apologized for the first time in its history for its controversial past. Moreover, the company funded Roman Koester’s book "Hugo Boss, 1924–1945," which explored its history during the years. These actions helped to put an end to the discussion that had been damaging the brand's reputation.

In 2019, Hugo Boss found itself at the center of another scandal when it sued a Welsh brewery, Boss Brewing. The fashion house demanded the brewery to change the names of two types of its beer— Boss Boss and Boss Black, due to the use of the word “Boss” in their brands. What first seemed to be a local dispute quickly became a scandal, in which Hugo Boss appeared as a large corporation attempting to harm a small family business over its use of a commonly popular word. Against this backdrop, British comedian Joe Lycett officially changed his name to Hugo Boss in protest against the German fashion brand. The scandal also damaged the firm’s reputation.

Moreover, the 2010s were challenging for the company in terms of operational and financial performance. Although the brand remained highly recognizable, its standing in the fashion industry wavered. Trends such as the dominance of street style and the democratization of office attire were common for those years, making the brand's concept less relevant. Additionally, the large number of sub-brands "diluted" the company's positioning. As a result, over the decade from 2011 to 2021, the company's revenue grew by an average of only 3.1% per year, comparable to the rate of inflation. The company’s operating profit during the same period steadily declined by an average of 6.7% annually. The figure fell from €396 million in 2011 to just €198 million in 2021.

Hugo Boss revenue and operating profit from 2011 to 2021; source: compiled by the author

In 2021, Hugo Boss began a strategic transformation, starting with the appointment of a new CEO, Daniel Grieder. Prior to joining Hugo Boss, Grieder held leadership positions at PVH, owner of brands such as Tommy Hilfiger and Calvin Klein, where he played a key role in their global development and enhanced brand recognition.

Upon joining Hugo Boss, Grieder took on the ambitious task of transforming the brand with the goal of refreshing its image and expanding its target audience. For the first time in its history, the company introduced the position of creative director, occupied by Marco Falchioni, who had previously held a lower position. The new leadership initiated a rebranding by selling Baldessarini and closing all sub-brands, leaving only two lines: Boss and Hugo. Boss offers elegant casual and office wear and focuses on millennials (audience aged 25–40). The Hugo line targets zoomers (up to 25 years old) and offers casual clothing that allows customers to express their individuality.

In August 2021, the company unveiled the CLAIM 5 growth strategy, outlining financial plans for 2025. The strategy is based on objectives such as increasing brand relevance, achieving sustainable revenue growth, and increasing the company's market share. Additionally, the management set a goal to enter the top 100 global brands (according to Interbrand). Under the CLAIM 5 strategy, the company identified the following main directions:

• Boosting Brands. The company updated its Boss and Hugo lines, introducing new logos and slogans, and changing its marketing approach with a focus on digital interaction channels and collaborations with celebrities and external brands most recognizable to its target audience. The firm set a goal to achieve about €2.6 billion in Boss men's clothing sales and to double Boss women's clothing sales to approximately €400 million by 2025. This was expected to be achieved by improving the overall perception of Boss as a lifestyle brand and increasing its relevance, as well as by giving special attention to digital technologies. The company also outlined a plan to increase Hugo sales by about €800 million, by strengthening the brand's power, enhancing its recognition, and stimulating its geographic expansion. The company’s licensing business, covering a wide range of products including perfumes, watches, and eyewear, was expected to generate up to €200 million in revenue by 2025.
• Product is King. By placing the product at the center of its new strategy, Hugo Boss aimed to create clothing that could be worn around the clock and seamlessly fit into any situation. Originally focusing predominantly on formal men's wear, Hugo Boss shifted its priority towards a basic wardrobe in a less formal style, thereby riding the wave of office wear democratization and tapping into the same trend that had previously benefited higher-priced brands like Brunello Cucinelli, Hermès, Loro Piana, and Zegna (we previously presented an investment idea on Zegna stock). It was anticipated that this move would strengthen the company's positioning in the accessible luxury segment.

Expected sales growth by brand presented during the June 2023 investor presentation; source: 2023 Annual Report

• Lead in Digital. The company's strategy includes its commitment to digitizing business across the entire value chain, from trend identification to pricing opportunities using artificial intelligence. This approach also involves the creation of a digital campus to further expand the firm's digital capabilities and enhance consumer service quality through the use of data. Hugo Boss's digital campuses, located in Germany and Portugal, are expected to strengthen the company's online operations as well as its analytical, technical, and operational capabilities.
• Rebalancing Omnichannel. To spread the strength of its brand across all consumer touchpoints, Hugo Boss altered the balance of its distribution presence and significantly accelerated its omnichannel operations. A key element in this regard was increasing revenue from digital sales channels to more than €1 billion by 2025 and raising the e-commerce penetration rate to 25%–30% of total revenue.

Expected revenue growth by sales channel; source: 2023 Annual Report

The company set a goal to increase its retail sales to approximately €2 billion by 2025. Growth was expected to be achieved by increasing store productivity by about 3% per year, as well as further optimizing and refreshing its global boutique network. In this context, about 80% of the company’s own stores were planned to be updated within the next three years. Hugo Boss also expressed an intention to increase wholesale revenues to around €1 billion by 2025.

• Organize for Growth. Hugo Boss announced its intention to stimulate growth across all regions while balancing its global presence. Revenues in the Asia-Pacific region were expected to grow at low double-digit average annual rates until 2025, with its share of total revenue seen to reach 20% (currently, the region accounts for only 14%). Management emphasized that the company would pay special attention to Mainland China, which currently has a minor share of operations compared to other players in the accessible luxury industry. Sales are expected to grow in the range of low- to mid-single digits in Europe, and at a mid-single-digit rate in North and South America.

Expected revenue growth by region; source: 2023 Annual Report

Today, Hugo Boss's strategic transformation is considered as one of the most outstanding examples of rebranding in the industry's history. Within the Hugo line, the company collaborated with young audience favorites such as dancer Maddie Ziegler, rapper Big Matthew, and South Sudanese model Adut Akech. Boss's ambassadors, popular among millennials, include US models Hailey Bieber and Kendall Jenner, Puerto Rican model and TV host Joan Smalls, TikToker Khaby Lame, rapper Future, South Korean singer and actor Lee Min Ho, Italian tennis champion Matteo Berrettini, boxer Anthony Joshua, and actor Chris Hemsworth.

Boss launched an extremely successful collaboration with US sportswear manufacturer Russell Athletic. The showcase of the joint collection of the two brands, held on a baseball field, was one of the highlights of Milan Fashion Week (Spring-Summer 2022) and achieved the highest reach in the event's history. The show garnered 3.9 billion views in four days, 25 million interactions with posts, and 2.2 billion clicks on the Bossmoves hashtag.

As a result of its strategic transformation, Hugo Boss achieved impressive operational and financial results. From 2021 to 2023, the company's revenue grew from €2.79 billion to €4.20 billion, operating profit increased from €228 million to €410.3 million, and operating margin improved from 8.2% to 9.8%.

Under the CLAIM 5 strategy, revenue was expected to reach €4 billion only by 2025, but the company exceeded the target two years ahead of schedule. Consequently, at the investor day in June 2023, Hugo Boss raised its performance targets. Total group sales are now expected to reach €5 billion, resulting in an average annual growth rate of about 10% from 2019 to 2025. The management plans to increase operating margin to 12% or more, which, upon reaching the revenue target, would bring the company at least €600 million in operating profit.

Hugo Boss 2025 guidance; Source: Company Presentation

Reason 3. Capital allocation

In its latest annual financial report, Hugo Boss noted that, given the high operational and financial performance, solid financial position, and management's confidence in the long-term potential of the company, the Executive Board and Supervisory Board intend to propose at the annual general meeting of shareholders, scheduled for May 14, 2024, to pay a dividend of €1.35 per share for the fiscal year 2023. It is 35% higher than the previous year’s payout and implies a forward dividend yield of 2.6%.

Although the dividend yield is not substantial, Hugo Boss is capable of maintaining and even increasing the payouts, as the company’s recommended dividend policy implies a payout ratio of 36% of net income, providing a substantial safety margin. Moreover, under the CLAIM 5 strategy, the company intends to distribute between 30% to 50% of its net profit to shareholders by 2025.

Dividends per share; source: 2023 Annual Report

In addition to dividends, at the 2020 annual shareholders meeting, Hugo Boss obtained authorization to buy back up to 10% of the issued share capital no later than May 26, 2025. As of December 31, 2023, the company had not utilized this authorization. We believe the postponement of the buyback program is due to capital investments related to the implementation of CLAIM 5, under which Hugo Boss plans to update 80% of its stores by 2025. By the end of 2023, the company had already updated 40% of its stores. We expect that, as the refurbishment completes, Hugo Boss may revise its capital allocation approach, increasing distributions to shareholders.

Financial performance

Following the latest reporting period, Hugo Boss delivered strong results, exceeding Wall Street's expectations for revenue and earnings per share. The company's financial performance in 2023 can be summarized as follows:

• Revenue reached €4.20 billion, up from €3.65 billion in the previous year. The Hugo line showed the largest increase, with revenue growing by 30% YoY to reach €380 million. Boss line’s revenue amounted to €1.63 billion, a 27% increase from the previous year.
• Gross profit increased from €2.26 billion to €2.58 billion. Gross margin remained at a comparable level of 61.49% versus 61.79% in the previous year.
• Operating profit rose from €335.4 million to €410.3 million, driven by revenue growth and effective cost management. Operating margin improved from 9.19% to 9.78%.
• Net profit was €258.4 million, compared to €209.5 million in the previous year. Net margin increased from 5.74% to 6.16%.

Dynamics of the company's financial results; source: compiled by author

Company margin dynamics; source: compiled by author

Hugo Boss generates strong cash flow:

• At the end of 2023, cash from operations amounted to €393.6 million versus €357.3 million in 2022. The growth was due to higher net profit.
• Despite the increase in operating cash flow, free cash flow decreased from €205.9 million to €146.3 million, due to capital expenditures growth from €151.4 million to €247.4 million.

Company cash flow; Source: compiled by author

Hugo Boss has a strong balance:

• Total debt is €330.9 million, while cash and cash equivalents account for €118.3 million.
• Net debt is 212.6 million, corresponding to 0.28x EBITDA (Net Debt/EBITDA — 0.28x).

Following the latest reporting period, the company’s management provided forecasts for 2024. Total company revenue is expected to grow by 3%–6% YoY, and operating profit is projected to increase by 5%–15% to reach €430–€475 million. This suggests an improvement in operating margin to 10.3% at the midpoint of the forecast range. Net profit is also expected to increase by 5%–15%, indicating a rise in the business's net margin. Management predicts that net working capital as a percentage of revenue will improve from 20.8% to 20%, which will support an increase in operating cash flow. However, free cash flow is likely to be under pressure as the company plans to boost capital expenditures to €300–€350 million.

2024 guidance; source: 2023 Annual Report

Stock valuation

Our sample for comparable valuation includes major players from the personal luxury industry such as LVMH Moet Hennessy Louis Vuitton, Kering, Richemont, and Hermes; luxury apparel and footwear manufacturers including Brunello Cucinelli, Zegna, and Burberry; as well as companies offering accessible luxury like Capri Holdings, Tapestry, Ralph Lauren, and PVH. Despite double-digit revenue growth, improved margins, stable cash flow, and a strong balance sheet, Hugo Boss is traded at a discount to peers across all major multiples: EV/Sales — 1.08x, EV/EBITDA — 6.04x, FWD EV/EBITDA — 5.50x, P/Cash flow — 13.21x, P/E — 13.49x, and FWD P/E — 11.15x.

Comparable valuation; source: compiled by author

Hugo Boss is covered by a large number of investment banks: 22 analysts regularly publish research reports on the company. As of December 31, 2023, 64% of analysts recommended investors to buy the stock (up from 41% in 2022), 36% recommended to hold (down from 55% in 2022), and none recommended to sell (down from 4% in 2022). Currently, the minimum price target set by DZ Bank is €55 per share, while Warburg Research estimates BOSS at €88 per share. According to the Wall Street consensus estimate, the stock’s fair market value is €72, implying a 40.4% upside potential.

Price targets of investment banks; source: compiled by the author

Key risks

• Despite the previously noted potential for long-term growth in the personal luxury goods industry, there is a likelihood that sustained inflation and a decline in real income will negatively impact the welfare of Hugo Boss customers and the company's sales volumes.
• One of the key advantages of luxury industry companies is brand strength. Brand strength is an intangible asset that entirely depends on consumer perception. A change in this perception could negatively affect Hugo Boss's competitive positioning and lead to a decline in the company's financial performance.

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