Hugo Boss Benefits from U.S. Demand and Tight Stock Management

FRANKFURT, Germany — German fashion house Hugo Boss said tight stock management and fewer discounts drove up profits and that shoppers in the United States helped offset a still-challenging market in mainland China.

The company's second-quarter rise in sales and profit are further evidence of a rebound in the luxury sector after rivals LVMH and Kering reported accelerating sales growth and higher profits this month.

In the past year China's luxury market, which had been the industry's main growth driver, has been hit by a slower economy and the government's crackdown on the country's tradition of gift-giving to facilitate transactions and deals.

Hugo Boss's Chief Financial Officer Mark Langer said the number of people visiting malls in some smaller cities in China had fallen by as much as 20 percent, and that the group had to bring the quality of its mainland stores up to those in Hong Kong.

The fashion house said that in the United States, its biggest market, and Europe, it benefited from tourists from Asia and Latin America spending money on its suits and shirts.

It reported second-quarter sales up 11 percent on a currency-adjusted basis to 532 million euros ($705 million) and earnings before interest, tax, depreciation, amortisation and special items (EBITDA) of 102 million euros for the quarter, up 31 percent.

While the sales came in slightly below the average forecast, core profit beat the Thomson Reuters I/B/E/S consensus of 94.8 million euros.

The group's gross profit margin - a key measure of profitability in the clothing and apparel industry - rose 3.4 percentage points to 65.8 percent in the quarter, above analysts' expectations.

The margin gain is down to the fact it kept stock levels tight, with inventory levels dropping 9 percent, it said. That meant it could cut back on the amount of discounts it had to offer to clear shelves.

TAKING CONTROL

In addition, Hugo Boss is selling more clothes through its own stores, rather than wholesale partners, a trend accelerated by it taking over control of selling space from department store partners such as El Corte Ingles in Spain and Woehrl in Germany.

On Wednesday, it announced its first major deal of this kind in the United States, with an agreement to take control of 37 shop-in-shops in Saks department stores.

"We don't see any more immediate concession takeovers (in Europe and the United States)," Langer told analysts. "But we know wholesale partners are watching the process closely to see if they would like to evaluate such a business model."

He added he did not expect the deal to be derailed by the bid for Saks from Canada's Hudson's Bay.

Sales in the United States, its biggest market, rose 7 percent in the first half, compared with 5 percent for China.

After sales in greater China grew just 1 percent in the first quarter, they recovered to rise 9 percent in the second quarter, driven mostly by Hong Kong, Hugo Boss said.

The company confirmed full-year expectations for core earnings and sales to rise by around 7-9 percent.

Langer said the first half of the year had been tougher than expected but that the firm was confident it would reach its full-year targets.

However, Commerzbank analyst Andreas Riemann said: "Despite a better second quarter, we still regard the 2013 guidance and consensus as ambitious."