Ermenegildo Zegna Group Reports Strong H1 Profit
Chairman and CEO Gildo Zegna dubbed the performance "impressive" as he forecasts future growth leveraging the Zegna and Thom Browne brands, in addition to the new course of Tom Ford Fashion.
MILAN — A strong set of first-half financial results at the Ermenegildo Zegna Group, including a net profit that more than doubled, led chairman and chief executive officer Gildo Zegna to confirm the company's medium-term targets.
During a conference call with analysts on Wednesday, Zegna said the group's brands “continued to resonate around the world,” and that given the “impressive” performance of the first half, he expects revenues to exceed 2 billion euros and adjusted operating profit to reach at least 15 percent of revenues by 2025. This was a forecast made in May last year during the group's first Capital Markets Day and it excludes the Tom Ford Fashion segment, as it was held before The Estée Lauder Cos. acquired the American designer's company in November in a deal valued at $2.8 billion. Under Lauder, Ford's men's and women's ready-to-wear, accessories and underwear, fine jewelry, childrenswear, textile and home design products are licensed to Zegna Group, in charge of the end-to-end Tom Ford Fashion business.
The executive declined to provide additional details on strategies for Tom
Ford Fashion, ahead of the first show by Peter Hawkings on Sept. 21 in Milan, but said he was “very excited about the future,” and that more information will be divulged on the group's second Capital Markets Day, planned for Dec. 5 at the New York Stock Exchange. The group was publicly listed in New York in December 2021.
In the first six months of the year, group profit amounted to 52.1 million euros compared with 21 million euros in the same period last year. Revenues totaled 903.1 million euros, up 24 percent compared with 729 million euros in 2022.
Adjusted operating profit totaled 119.9 million euros, up 45 percent compared with 82.7 million euros in the first six months of 2022, a margin of 13.3 compared with 11.3 in the same period last year. The increase was lifted by the Zegna rebranding, which drove an increase in store productivity, more than offsetting costs to support the growth of the business, costs to expand the Thom Browne store network and the effects of integrating the Tom Ford Fashion business.
During the call, Zegna singled out the “outstanding performance” of the brands in the U.S. and the Europe, Middle East and Africa region.
The Zegna rebranding “is driving remarkable improvements in productivity across our direct-to-consumer stores,” he noted, as the group commits to continue investing in marketing and advertising, as well as the expansion of distribution across all brands.
“As we progress in the second half of the year, we continue to be extremely attentive on executing our plan, with a major focus on working alongside the new leadership team at Tom Ford Fashion to further develop and position the brand as an icon in ultra-luxury while also supporting the further expansion of the Thom Browne footprint,” continued Zegna. As reported, Lelio Gavazza was appointed to the newly created position of chief executive officer of Tom Ford Fashion, effective Sept. 18.
“I am proud of our exceptional leadership team, and we are confident in the steps we have taken to position our diversified portfolio of brands in the more resilient ultra-luxury segment and to strengthen the group's own retail network and achieve a more balanced geographical presence,” continued Zegna, expressing confidence in the untapped potential for the brands.
In the period, sales of the Zegna brand rose 17.9 percent to 651.7 million euros and Thom Browne revenues were up 11.9 percent to 208 million euros. The Tom Ford Fashion segment reported sales of 64 million euros.
Adjusted operating profit for the Zegna segment was 100.5 million euros, up 47.8 percent, reflecting the brand's higher revenues, the pricing repositioning in line with its rebranding, an overall improvement in store productivity, and higher absorption of industrial fixed costs in the supply chain, and despite increases in personnel costs and higher advertising and marketing expenses.
Adjusted operating profit for Thom Browne totaled 31.5 million euros, in line with the same period in 2022. Despite recording higher revenues, this margin was restrained by costs related to the directto-consumer store network expansion, with 13 store openings in the 12 months since the end of June last year. In addition, advertising and marketing costs rose also connected to the debut of the Thom Browne couture collection in Paris last
July. Rodrigo Bazan, CEO of Thom Browne, said he has seen growing brand awareness in North America, Europe, China, Japan and South Korea. The brand is celebrating its 20th anniversary.
The Tom Ford Fashion segment recorded an adjusted operating profit of
3.7 million euros.
Zegna was upbeat about the performance of the “very dynamic” American market, where sales more than doubled compared with 2021, as well as that of Europe and the Middle East. He cited the “incredible resilience, more than expected” of the American customers, “regardless of the economy,” and said that the group's brands are “becoming very, very popular,” attracting new customers. Last week, a presentation of the campaign for the Zegna and The Elder Statesman partnership took place in Los Angeles, he observed, which also attracts new customers to the core. Chief financial and operating officer Gianluca Tagliabue said there was “no change” in demand in July and August from the U.S. and the Middle East.
Zegna cited brisk business with his namesake brand's Made to Measure, which is performing better than in 2021. “There is no price resistance whatsoever,” he said, seeing “the highest outreach in the U.S. — if you are able to stimulate them, they come back.”
Tagliabue said the Chinese cluster was “flattish” year-to-date, but the “softer appetite” seen in the third quarter was offset by an “uneven” performance, with Hong Kong, Macao and Shanghai showing stronger business than second or thirdtier cities. Zegna, who had traveled to China two weeks ago and was leaving later in the afternoon for South East Asia, concurred with Tagliabue, but said he remained positive in his mid to long-term view in the region.
In the period, gross profit amounted to 579.8 million, up 29.2 percent mainly driven by a higher proportion of direct-toconsumer sales. A price repositioning, the reduction of end-of-season sales as part of the Zegna rebranding, which started with the fall 2022 collection, the higher incidence of Essentials products and the higher absorption of industrial fixed costs also drove the increase in gross profit.
The group has been investing in its direct-to-consumer channel, opening 13 stores for Thom Browne and Zegna units in cities such as St. Moritz and Copenhagen, and renewing boutiques in Beverly Hills and Florence. Zegna said the group was “well ahead of plans in terms of store productivity,” slated to increase by 50 percent by 2025.
Tagliabue sees further opportunities in price adjustments, “to elevate the level and the average ticket per transaction.”
Cost of sales amounted to 323.2 million, up 15.4 percent due to the impact of Tom Ford fashion.
Selling, general and administrative expenses for the first half of 2023 amounted to 415.8 million, compared with 332.9 million euros in the first half of 2022, up 24.9 percent year-over-year. Expenses related to the Tom Ford International acquisition, variable rents and higher personnel costs to reinforce the group's corporate governance and Thom Browne store expansions were the main drivers of the increase.
Marketing expenses for the first half of 2023 were up 37.4 percent to 47.5 million euros, reflecting the continuation of the group's strategy to increase marketing expenses.
Asked about designing the off-field outfits for the Real Madrid soccer team, Zegna said this is “a good example of how to expand brand awareness. It's hard to say by how much it increases sales,” while it is relevant to focus on the “number of potential new customers. If you asked me if I would do it again, I would. The effect is there.” He has also seen “a lot of interest” in Oasi Zegna, where top customers are invited, and which contributes to the storytelling and creating an experience.
As of June 30, net debt stood at 17 million euros, compared to a cash surplus of 122.2 million at the end of December last year and 103.1 million euros of debt at the end of June 2022, mainly reflecting the impact of the Tom Ford acquisition and capital expenditures to develop the group's store network.