Hugo Boss faces sales target delays amid weak demand in China

The company's third-quarter earnings report showed slight gains above market expectations but also highlighted ongoing challenges within the Chinese market.

The company's share price dropped more than 4% to €41.2 in Frankfurt, erasing gains from the previous week.

Year-to-date, Hugo Boss shares are down 39%, making it one of the worst performers in the Euro-Stoxx 600 index and underscoring European luxury branding companies' ongoing growth challenges amid China's economic slowdown.

Modest revenue growth due to soft demand in China

Hugo Boss reported third-quarter revenue of €1.03bn, marking a modest 1% increase year-over-year on a currency-adjusted basis.

Growth was seen in the European and American markets, with sales rising by 1% in the EMEA region and 4% in the Americas.

Notably, the outperformance in EMEA mainly reflects revenue improvements in Germany, compensating for softer sales trends in France and the UK.

However, Asia-Pacific sales fell by 7%, following a 4% decline in the previous quarter.

The company attributed this performance to "ongoing macroeconomic and geopolitical uncertainties" affecting global demand, particularly in China, where subdued consumer interest dampened results.

Profit margin and operating income challenges

Hugo Boss' profit margin declined to 60.2%, dropping 50 basis points from the previous year.

Although sourcing efficiencies helped offset increased freight costs, the overall promotional environment and weaker regional sales contributed to the decrease in profit margin.

Earnings before interest and tax (EBIT) declined by 7% to €95m. However, cost management efforts enabled Hugo Boss to surpass analysts' expectations of €90m.

Despite the reduction, Hugo Boss anticipates further efficiency improvements in sourcing, citing "more favourable product costs, which compensate for increased global freight rates, adverse channel and regional mix effects, as well as an overall promotional environment".

CLAIM 5 Strategy target in question

Launched in 2021, Hugo Boss' CLAIM 5 strategy targets a boost in market relevance, digital innovation, and sustainability to accelerate growth and strengthen its brands by 2025, aiming to double sales to €4bn.

In June, Hugo Boss raised this target to €5bn, with a projected profit of €600m and cumulative free cash flow of around €2.5bn between 2021 and 2025.

However, the company has now cautioned that meeting these revenue and profit growth targets by 2025 may be unfeasible due to the ongoing weak demand in China, according to Chief Financial Officer Yves Mueller.

The company remains focused on reaching its targets but is uncertain about the exact timeline.

Outlook for 2024

In its 2024 outlook, Hugo Boss expects group sales to increase by between 1% and 4%, reaching between €4.2bn and €4.35bn, as currency impacts may pose a slight negative effect on revenues.

The German-based company continues to forecast earnings in the range of €350m to €430m.

Chief Executive Officer Daniel Grieder commented: "In the third quarter, HUGO BOSS achieved solid top-line improvements despite ongoing weak consumer sentiment.

"This is a clear testament to the power of BOSS and HUGO, which we have built in recent years by consistently executing our CLAIM 5 strategy."