Hugo Boss: Stifel lowers profit forecasts, but still recommends buying

Investing.com – The investment house Stifel has revised its forecasts for Hugo Boss AG. (ETR:) downwards. Declining retail sales and rising operating costs are weighing on the profitability of the German fashion company. Therefore, Stifel lowered the price target for Hugo Boss from EUR 63 to EUR 56.

In a statement available on Monday, Stifel explained that earnings per share (EPS) forecasts for 2024 and 2025 were cut by 4.3% each, and revenue forecasts were lowered by 0.5% and 0.6%, respectively. “We and the market expect second-quarter 2024 results to be impacted by a slowdown in retail sales and pressure on profitability from higher operating expenses,” the report states.

Despite the downward revision, Stifel maintains its buy recommendation for Hugo Boss, seeing significant upside potential for long-term investors. The current share price of EUR 41.33 offers a return potential of 36% to the new price target. However, the stock has also seen a significant price decline of 41.2% over the past twelve months.

The report highlights several challenges, including difficult trading conditions in the UK and declining sales in China. Stifel now forecasts moderate revenue growth of 1.5% in the second quarter of 2024 at constant exchange rates, which is a significant decline from the 6% growth in the first quarter. The EBIT margin, which represents the ratio of earnings before interest and taxes to sales, is expected to drop to 9.8% in the second quarter due to higher operating expenses, a decline of 200 basis points compared to the previous year.

However, Stifel sees potential for improvement in the second half of the year, forecasting revenue growth of 3.3% in the third quarter and 5.6% in the fourth quarter. This development is expected to be supported by easier comparables in Europe and China. Additionally, experts point to a possible increase in gross margin driven by efficiency improvements in procurement and lower material costs. The gross margin represents the portion of sales remaining after deducting direct production costs.

“Hugo Boss shares are currently trading in the value range, as sales growth slows down due to tougher trading conditions in key markets like the UK and China,” Stifel analysts said. They emphasized that the stock is currently under pressure but offers an attractive risk-reward ratio for investors with a longer-term investment horizon, especially if the company can stabilize earnings revisions and achieve sequential improvement in sales and gross margin growth starting in the third quarter of 2024.

Overall, Stifel remains optimistic about Hugo Boss’s medium-term prospects despite current challenges. They point to the company’s potential to reach its sales target of EUR 5 billion by 2026, although this might occur a year later than originally planned.

According to Stifel, investors should exercise patience and bet on the stock regaining value once positive sales and earnings revisions occur. The current valuation level offers significant upside potential compared to previous averages.

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