Hugo Boss: Unlevered Menswear Cash Flow For Sale
The premium menswear retailer, Hugo Boss, has been under pressure in the markets lately. Sentiment has weakened as demand for its high-end tailoring has slackened, and at the same time the company’s margins have come under pressure.
Still, this is Hugo Boss, a famous and longstanding name that has in the past seen some major bumps in the road and still survived. Future prospects may be a lot brighter than the downwards drift in the share price might indicate.
Like many other companies, the firm felt the pressure during the 2008 financial crisis and the recession that followed. The kind of well-heeled managers and executives who bought their suits simply weren’t feeling confident about the future. The private equity house, Permira, bought majority ownership.
Permira’s entrance – and exit
Permira boasts that it transformed Hugo Boss, making into one of the ten most highly rated fashion brands in the world. There was more emphasis on womenswear especially the highly lucrative accessories (handbags) market. Permira encouraged more brand differentiation, with the Hugo, Boss Orange and Boss Green labels.
At the same time, Permira helped the firm to expand in Asia and the Americas, and an increasing share of revenues came from growth in these markets. It’s pressure in those very markets that is now causing problems at Hugo Boss. The slowdown in China has hit the luxury goods spend of well-off Chinese consumers. Like other premium brands such as Burberry, that have come to rely on sales in the region, Hugo Boss is suffering.
Previously, the company could charge more for clothing and accessories in its Chinese stores. However, in response to the difficulties in the Chinese market, it has recently cut the prices in its Asian outlets.
When Permira bought its stake, in 2007, the company had 287 stores. In 2014, shortly before Permira decided to exit, it had 1,040. That’s either an extremely impressive growth rate, or unsustainable over-expansion, depending on your point of view.
Chief executive steps down
In February 2016, Hugo Boss lost its chief executive. Claus-Dietrich Lahrs stepped down in the face of falling profits, caused not only by slowing Chinese sales but also by problems in its American and Russian markets.
Luxury brand recruitment is never easy and Hugo Boss will be embarking on an executive search at a difficult time for the company. However, for high flyers currently working for a luxury brand, recruitment to a company that could offer a turnround story may be attractive. If they are successful, they’ll be in great demand afterwards.
Some commentators are pointing out that the slide in the share price is overdone, and that if Hugo Boss returns to its roots as a company operating in the premium segment, rather than the super-luxury market, it could also return to profit. Certainly, there were board members who were sceptical at the time about the entry into luxury markets, and felt that the division of the label into separate brands might bring problems if there was a downturn.
It will be interesting to see whether the company decides that its new chief executive should be sourced from the pool of talent accessible via luxury brand recruitment, or whether it will turn to an executive with solid premium clothing sector experience.