Hugo Boss rises on signs of recovery

Zurich - Hugo Boss, the embattled German fashion label, rose after showing its first signs of a potential turnaround under new chief executive officer Mark Langer as second-quarter revenue beat estimates.

Sales fell 1% excluding currency effects, the Metzingen, Germany-based company said in a statement on Friday, beating the 4% decline expected by analysts polled by Bloomberg.

Gross profit margins also widened in the quarter by more than 1 percentage point thanks to lower discounting and sharper inventory management, offsetting a cut in its full-year earnings forecast that analysts had anticipated.

The shares advanced as much as 6.7% in early Frankfurt trading.

The performance signalled "signs of life," Citigroup analyst Thomas Chauvet said in a note, as the results were "surprisingly above expectations."

Langer, promoted from finance chief in May to replace Claus Dietrich Lahrs, needs to cut costs and revive weak US sales, which have been marred by discounting.

The company said it will shut some 20 of its 443 freestanding stores in the next 18 months, adding to the closures of shops in China.

Terrorist attacks in Europe have deterred tourists from traveling there, denting sales. Still, Italy’s Marzotto family has increased its stake in Hugo Boss, showing confidence that Langer can turn things around.

'Showing progress'

Full-year earnings before interest, taxes, depreciation and amortisation and other items will decline by 17% to 23%, the company said. That compares with its previous forecast of a low double-digit decline.

Hugo Boss also said currency-adjusted sales will be stable to down 3%, after predicting a low single-digit increase. Gross profit margin should remain stable.

Investors had already priced in a dismal earnings outlook, pushing the stock down 54% in the year through on Thursday. Hugo Boss shares rose 4.1% to 54.37 euros at 9:45 a.m. in Frankfurt.

"The flat gross margin which the company kept is a positive, showing progress in disciplined promotional activity and inventory management," Zuzanna Pusz, an analyst at Berenberg, wrote in a note to clients.

In the US, where sales were down 21%, Hugo Boss has limited distribution of its core Boss brand in other retailers’ stores. The company said it’s "deliberately sacrificing sales in order to avoid brand damage from promotional activity."

Price cuts

While revenue in China was weighed down by weak demand in Hong Kong and Macau, price cuts introduced earlier this year helped the company achieve a double-digit increase in units sold in mainland China. Total sales in local currencies declined 4% to €622.1m, the company said, beating the €608.5m estimate.

John Guy, an analyst at MainFirst Bank, expects Hugo Boss to unveil a more comprehensive restructuring program at an investor day later this year. The company, which markets four brands - Hugo Boss, Boss Orange, Boss Green and Hugo - may cut its portfolio to keep just one or two of them, Guy added.

"Hugo Boss' dilemma is that nobody knows the difference between the brands," Guy said.