Hugo Boss crimped by small Asia, retail exposure

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ASIA WEAKNESS
But in Europe, where Boss makes about two-thirds of revenue, rising unemployment is expected to translate into lethargic growth that will not gain pace until the second half.

To secure growth, a strong foothold in fast-growing emerging markets such as China is key, analysts said, and Boss is pushing expansion in the region, acknowledging its need to catch up.

"We are taking future growth potential in Asia and in particular in China very seriously, but we won't neglect our home markets," Lahrs told Reuters, adding he was confident of capturing growth in Asia in the medium term.

LIMITED FIREPOWER
But Hugo Boss's firepower is limited given its financial position.

Boss carries net debt of 459 million euros (USD644 million) and its gearing -- the ratio of long-term debt compared with equity capital -- is relatively high at 260 percent based on 2009 estimates, M.M. Warburg analyst Thilo Kleibauer said.

So far, Boss makes 10 percent of its business in Asia and 20 percent in America. Ermenegildo Zegna -- the leading global menswear brand -- already generates more than 88 percent of its business overseas, 40 percent in emerging markets.

Italian fashion house Versace saw sales rising more than 20 percent at its stores in China, Hong Kong and Macau in January and Florence-based maison Salvatore Ferragamo said it expected Asia, and in particular China, to drive growth this year.

US consultancy Bain & Co sees China as "the new real frontier for luxury brands" and fashion retailers are lining up to feed China's hunger for designer goods.

From 2011, Boss plans to open 50 own stores per year -- about 20 of which will be in China -- to boost its share of self-generated retail sales to 60 percent from 30 percent.

NEW STRATEGY
This is part the new strategy introduced by Lahrs, who has worked for Christian Dior and LVMH in the past.

He has closed underperforming stores and some showrooms, renegotiated contracts with suppliers, repositioned Boss's brands, stopped delivering to high-risk customers in Eastern Europe and is pushing own retail stores and overseas expansion.

The company, in which private equity group Permira holds 88 percent of the voting rights, trades at about 15 times projected 2011 earnings, while Polo Ralph Lauren, Richemont and Burberry are at a multiple around 18, according to StarMine.

Analysts blame lower visibility and sweeping management changes following the 2007 takeover by Permira for the discount.

Lahrs took over in August 2008 from Bruno Saelzer who left after falling out with the new owners, taking a vast part of management with him.

The stock's average monthly trading volume has fallen about 12 percent since Lahrs took over and the company's share price underperformed the DJ STOXX European personal and household goods index by about 4 percent over the same period.

"An investor faces a lot more risk and uncertainty now than about three years ago," said Scilla Huang Sun, who manages Julius Baer's Luxury Brands Fund of about 50 million Swiss francs (USD47.71 million). She sold her Boss holdings in 2007 after Permira made its takeover offer.

Hugo Boss is still a strong brand with a diverse product portfolio and a solid business model, but it remains to be seen whether the new management's strategy will pay off, she added.