Armchair Trader Pick: Tactical Trading Portfolio
- Hugo Boss (ETR:BOSS)
- Sector: Consumer Cyclicals
- Market cap: EUR 3.58bn
- Entry price: 52.5
- Target price: 78.75
- Stop loss: 10%
We are adding fashion retailer Hugo Boss (ETR:BOSS) to our medium term pick list as another stock that looks set to benefit from ongoing opening up of the retail sector. Note however that Hugo Boss is now emphasising its wholesale rather than retail activities, but should still be a beneficiary if overall economic recovery continues.
As reported by the company today, currency adjusted sales growth of 133% in Q2 is promising, however on a two stack basis sales declined 4%, reflecting the harsh realities of Covid-19.
Excellent share price momentum
The share price has already developed decent momentum in the six month picture, up from a 52 week low just under 20, it is now trading at over 50. Yet the stock still has plenty of further upside we reckon.
The company trailed positive numbers in front of investors last month and they have responded accordingly. Sales are up in both the UK and mainland China, which represent strategic markets for Hugo Boss. There may be some juggling to do for the company, with less demand for formal office wear and more of a requirement for casual wear as consumers try to figure out just how much time they will be spending in the office in the months ahead.
Brand image, digital distribution are critical
Hugo Boss’ mission to improve its brand image is critical to weathering the remainder of the pandemic. A focus on sustainability, digital distribution and a clearer distinction between the BOSS and HUGO brands is essential if the company is to succeed.
“The casualisation of its offering also forms a key part of this transformation strategy,” notes Harry Barnick, a senior analyst with Third Bridge. “Over the coming years, we could see formalwear shrink to as little as 30% in terms of total sales. A key challenge is the historic supply chain, which will have to be repositioned to match the new product offering.”
Hugo Boss has been reducing its dependence on its retail channel, both online and offline, in a strategic push back towards the wholesale channel. “This will begin to bear fruit in the coming years as we see the sales split between retail and wholesale narrow,” said Barnick.
According to Third Bridge, operating margins could swell post-Covid if the company successfully manages its headquarters costs, renegotiates leases with landlords and optimises the supply chain, buying smaller but deeper.
Adjusted group sales are expected to grow between 30-35% this fiscal year. Analysts at German brokerage Baader said that the results this morning exceeded expectations. Look for the company to work to fulfil the big ambitions of new CEO Daniel Grieder, formerly at the helm of Tommy Hilfiger, which include doubling sales by 2025. He says he plans to make it one of the top 100 global brands by then and is ear marking a EUR 100m marketing war chest to help make this happen.
Like many another company, Hugo Boss is reliant on the gradual reopening of core markets, like the UK and China. In this it depends on governments not reaching for full lockdown again as a tool to stop the spread of the Delta virus. This looks to be the main risk that might prevent the share price from continuing its growth pattern.
