Description

You are almost certainly familiar with Hugo Boss (“BOSS”), the German apparel and accessories brand.  The business has stagnated for over half a decade.  In 2015, revenue reached €2.8 BN, but as of 2021, it remained stuck there.  The brand lost relevance with consumers and became the symbol for banker suits of generations past, but we believe there is tremendous untapped brand equity with potential for realization under CEO Daniel Grieder.

It’s important to first understand the cause of the brand’s multi-year decline.  We spoke with numerous former BOSS executives who noted the decline started with Claus-Dietrich Lahrs, BOSS’s CEO from 2008 through 2016, who according to our field contacts pushed for pricing increases and expanded into China, where the brand was positioned very differently from other markets with a high-luxury position similar to Prada and Burberry.  That elevated the perception of the brand globally and helped increase margins.

However, this led to the unintended consequence of the European wholesale channel dropping the brand, refusing to accept the pricing increases BOSS asked for as the product eventually priced above their target customers’ budget levels.  Losing this channel hurt the business as management sought an overly ambitious brand status.

After Mr. Lars, Mark Langer became CEO.  According to our field contacts, Mr. Langer is an engineer by trade, and his plan was to invest heavily in omnichannel infrastructure as it was ignored under his predecessor.  He sought a successful ecommerce business and retail operations that ran with great efficiency.  Mr. Langer believed if all the infrastructure and operations were in good order, the brand would grow. 

However, the consequence of this focus was lost investment in the brand.  As one former executive noted, people don’t care if you have the best infrastructure in the world if your brand isn’t highly sought after.  There was misalignment as Mr. Langer focused more on processes, systems, infrastructure, warehouses, and building the ecommerce business; he wasn’t focused on the brand, and the marketing budget shrank during this period.

Under Mr. Langer, the marketing department was also divided into two separate groups, with one group reporting to the Chief Brand Officer and the other reporting to the CEO, which led to internal confusion and ineffective marketing, which took a back seat during this time.  This led to the brand’s deterioration and stagnating sales, and ultimately the board’s decision to hire Daneil Grieder as its new CEO in June 2021. 

We believe Mr. Grieder is the right person to unlock the brand’s potential by reorganizing and changing the approach to the brand, the marketing, and the wholesale channel.  It’s very important to consider Mr. Grieder’s background and playbook when assessing his probability of success revitalizing BOSS as there is direct overlap with his prior experience.

Mr. Grieder ran Tommy Hilfiger Europe from 2008 through 2013, and from 2013 through 2020 he ran Tommy Hilfiger Global as well as the entirety of PVH’s European business.  Former executives from these companies that we spoke with indicated that Mr. Grieder has a specific playbook that was quite successful in revitalizing the PVH / Tommy Brands and taking market share from BOSS during his tenure there. 

His playbook entails: (1) modernizing the brand, which Mr. Grieder has done at BOSS by forming partnerships with the NBA, younger celebrities, and influencers, particularly for the Hugo brand, and retailoring the product to that audience; (2) reintroducing BOSS’s products to the wholesale channel in Europe, leveraging his relationships there to open up a new distribution channel for BOSS; and (3) leveraging technology and process innovation to accelerate BOSS’s time-to-market with new product development.

Again, our field contacts indicated Mr. Grieder very successfully applied this playbook to Tommy Hilfiger and Calvin Klein Europe, resulting in market share gains and elevated growth during his tenure with these companies.  These contacts also believe the same playbook will translate to revitalizing BOSS and regaining lost share from Mr. Grieder’s prior employer. 

We believe investors are not giving credit to BOSS for this success.  That starts with management’s FY23 guidance of MSD revenue growth and EBIT of €358 MM, which we think is conservative.  Consensus estimates largely follow management’s guidance with projections of 6% growth and €375 MM of EBIT in FY23.  We believe BOSS can continue to grow at low-teen rates of 11%-12% with 50 bps of annual margin improvement through FY24, after growing revenue 18% y/y in Q422 and 31% y/y in FY22. 

These assumptions translate to our 2024E EBIT estimate of €530 MM compared to consensus expectations of €435 MM, a 22% difference.  We believe 11x EBITDA valuation would be reasonable for this financial profile should it prove out.  One reason is historical valuation; BOSS has historically traded at this level when growth and margin prospects were not as high as our base case assumptions. 

The second reason is relative valuation; 11x EBITDA sits inside the range of BOSS’s branded retail peers PVH, RL, ADS GY, and UA, as outlined in the peer analysis below.  11x our projected 2024E EBITDA of €890 MM results in fair value of ~€130/share, almost double the current price of €67/share.

Catalyst

Earnings