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Isatu Turay 186061

Student Research University of Heilbronn
This report is for educational purposes only
by students attending the Finance Projects Course
at the University of Heilbronn

HUGO BOSS AG

April 10, 2014

Recommendation: BUY
One Year Price Target:

Ticker:
Price:

BOSS
...
15

Industry:
Apparel & Textile Industry

2012
2013

First Quarter
January –
March
1
...
18

Second
Quarter

Third
Quarter

Fourth
Quarter

Year

P/E Ratio

0
...
76

1
...
61

1
...
22

4
...
77

18
21
...
In 2012 it made up for
49% of the sales, sharing 49% with the whole sale distribution channel and 2% with
royalties
...
The expansion in retail and
the upgrading in retail network bring a lot to the brand in terms of proximity to the final
consumer and it is planned to open 50 stores yearly
...
As the company adds more stores to its
own retail network and spends more to promote itself to more free-spending Chinese
customers in Asia, sales growth are predicted to accelerate in 2014
...
In its retail
business Hugo Boss is expecting a double-digit growth whereas the wholesale channel
is expected to stagnate
...
63 – 104
...
23%
69,016,167
7,286
0%
EUR 10
...
51%
46
...
The company is German based and has its headquarters in Metzingen, south of
Stuttgart where it was initially founded in 1923
...

BOSS BLACK is a collection of menswear, womenswear, accessories and kids wear
and is a premium range for business leisure and formal wear
...
The women’s collection of the BOSS core brand
stands for feminine style with a strong focus on fine fabrics and sophisticated details
...


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BOSS GREEN includes the former, excluding kids wear and offers modern sportswear
fashion with functional and technical details and attractive designs for golf
...
It appeals to men and women who prefer the modern,
but laid back lifestyle fashions
...

BOSS BLACK lies in the luxury segment, followed by HUGO, whereas BOSS GREEN
and BOSS ORANGE lie in the premium section of the Hugo Boss market segment
...
In the same year Permira took over Valentino Fashion Goup,
which was Hugo Boss’s biggest shareholder, holding 79% of it the ordinary shares and
22% of the preferred shares of the German company
...


Other sources of revenue
No other sources of revenue for Hugo Boss AG

Purchasing and Distribution
Hugo Boss is expanding their retail distribution and therefore taking account of the
growing consumer demand for mono-brand sales formats and the very attractive return
profile that comes along this distribution channel
...
They have also expanded their online retail activities
...

Their products are mainly manufactured by carefully selected independent suppliers in
Eastern Europe and Asia
...


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Growth Strategy
Hugo Boss has high ambitions and is planning on reaching those through their core
competence, which is the marketing and development of luxury apparel of high quality
...
It is also planned to open 50 new stores
yearly to increase their global presence and awareness which, as a result, should lead
to an increase in earnings
...
These are maximizing brand
effectiveness, growing the Group’s own retail business through opening an increased
number of retail stores, improving and strengthening operational processes
...


Use of Cash Flow
In the past fiscal year free cash flow has increased to EUR 230 million, increasing
approximately by 4% compared to 2012
...
5% ending in 2015,
reaching approximately 1
...
Womenswear being the largest sector, it
generates around 603 billion Dollars, which equals 42% of the overall market
...
The market
is driven by rising income and there is a shift in target as the lifestyle of the consumers
change and luxury goods become more important to the people and more desirable and
attainable
...


Porters Five Forces

Figure 2: Porter’s Five Forces Summary

The power of the customer

Factor
Buyer’s Power

Score
moderate – weak

Because the customers need for individuality
is growing, Hugo Boss is increasingly Supplier’s Power
weak
offering individually tailored products to the
moderate
interested consumer
...
It reaches out to a wide public across
the entire spectrum of the premium and
luxury fashion market
...

Competition within the industry
Hugo Boss’s competition includes related apparel in the so-called ‘affordable luxury’ in
this market segment like the Burberry Group, Christian Dior and LVMH Moet Hennessy
many of which are privately owned
...
Standing out from the competition with minimalistic
design the Group has substantial growth potential, especially in markets as the US and
Asia, as the penetration in those countries is still relatively low
...
The number of
luxury retail shops has doubled in the past five years according to the estimates from
brokerage CLSA Asia-Pacific Markets
...
Regular inspections
are done and if any infringements are uncovered, the review frequency is increased and
in serious cases, where the social standards of the Hugo Boss Group are not complied,
the cooperation will be discontinued
...
Alternative
suppliers are identified as early as possible to secure a good flow of supplies
beforehand
...

The threat of substitutes
There are other well-known luxury brands that have penetrated the American as well as
the Asian market, examples here for are competitors like LVMH or Burberry
...

The barriers to entry
Hugo Boss is extremely well known around the world due to its early entry into
international markets, especially through franchise partners
...
New entrants would therefore have to show a great
deal of drive and strategy to enter the market on a competitive level
...
24 per Share
The intrinsic value is derived from an equally weighted average price from two methods:
DCF and comparable multiples valuations
...
Hugo Bosses Price to Intrinsic Value (DCF Projected) is
ranked higher than 99% of the 337 companies in the global apparel manufacturing
industry
...
The CAPM
discount is roughly 10%, by using following assumptions:




4%risk-free rate
Three year historical, un-levered 1
...

Our DCF analysis provides us with an intrinsic value of EUR 44
...

See Exhibit 1for the Free Cash Flows Statement

Comparable Company Analysis
To provide a comparable company analysis Hugo Boss’s competitors including Louis
Vuitton, Burberry and Coach were used
...
66 to EUR
81
...
Dollar currencies were converted to Euro to allow a more accurate and proper
calculation
...
96 per share
...


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Table 1: Price Target from Multiple Analyses
TTM
P/E
€18
...
03

P/S

PEG

P/B

EV/S

€17
...
74

€19
...
66

EV/
EBITDA
€20
...
96

Table 2: Valuation Summary
DCF

Comparables
Analysis

50/50
Average

OneYear
Target

Current
Price

€44
...
55

€45
...
77

Upside

€39
...
77
...
25 per
share at the required return on equity as determined by the CAPM at 10% per year
...
Due to the
expansion of the Group’s retail business, Asia reported sales growth of 4%, whereas
wholesales revenue decreased by 6%
...
All regions are
expected to some way or another contribute to this the achievement of this objective
...
The opening of 50 new
stores each year will contribute to an increase in earnings and strong cash flow
development, so that a positive financial position is to be expected in the next five
years
...
EBITDA Margin

Margins
The gross margin, the percentage of sales left after subtracting production costs,
increased from 65
...
4%, which partly is a result of lower inventory valuation
and retail sales growth
...
Inventories are clean, which
means fewer promotions are going forward, which will result in a positive impact on the
margin
...
In its retail business Hugo Boss is anticipating double-digit growth,
while sales in the wholesale channel will decline at a mid-single-digit rate due to the
difficult market environment and the takeover of shop-in-shop units for wholesale
partners
...


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Working Capital
In spite of significantly higher expenditures, Hugo Boss has been able to further improve
the key balance sheet metrics
...
In absolute terms, however, it increased by approximately 6%
year on year to EUR 432 million, compared to 2012 where the working capital was at
EUR 408 million
...


Free Cash Flows
The free cash flow is calculated by adding up the operating cash flow and the cash
flows from investing activities
...

The strong free cash flow is supported by lower investments and working capital
discipline and leads to further reduction of net debt in the future
...
In 2011 it had a low of EUR 194
...
3 million
...


Earnings
Fiscal year 2013 reported Earnings per Share of $4
...
EPS improved year on year by
7% to and showed a steady increase in the past years which leads to the assumption
that in fiscal 2014 EPS will be increasing as well, which is in line with management’s
assumption
...
In order to
secure the Group’s liquidity and financial flexibility at any time, financial requirements
are determined based on a three-year financial planning and monthly rolling liquidity
planning broken down by currency with a planning horizon of up to one year, which are
then secured by using lines of credit and liquid funds
...
10, whereas in the year before it was at 0
...
This may indicate that Hugo Boss is
progressively becoming independent on debt, to further grow their business
...


Profitability
The profitability of Hugo Boss has increased in the past years; it has a high profitability
and it is likely to stay that way
...


Altman Z-Score: Financial Health Score
The Z-Score, developed by Edward Altman, is a model of forecasting failure up to two
years prior to distress and measures the bankruptcy risk
...
Hugo Boss scores 9
...

Figure 4: Z-Score Hugo Boss

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M-Score: Earning Quality or Manipulation
The M-Score was created by Professor Beneish and it is used to detect the risk of
earnings manipulation
...
22, this suggests that the company
is likely to manipulate earnings, contrary to a Score greater than -2
...
Hugo Boss has a score of -2
...

Figure 5: M-Score Hugo Boss

F-Score: Earnings Quality
The F-Score is based on the academic work of Joseph Piotroski
...
He suggests that
companies scoring the highest should be bought, whereas those scoring the lowest
should be refrained from being bought
...
The Groups lowest
point in the past was 4
...
Typically consumer confidence increases when the economy expands
and decreases when the economy contracts
...
Because
Hugo Boss is in the high fashion apparel industry a negative impact on the consumer
confidence would lead to declining purchases, because people would cut back on the
high apparel fashion to satisfy other more important needs
...
This expansion will also lead to higher revenue
growth
...


Potential Disruptions in supply
With all its fashion production and distribution system reliant on IT, any systems
downtime can cause major delays to Hugo Boss’ supply chain, which can impact both
profitability and reputation if there is prolonged disruption
...


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Appendix 1

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Appendix 1 continued

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Appendix 2

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Appendix 3

Appendix 4

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Appendix 5

Appendix 6

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