IR magazine looks at the specific challenges facing the fashion industry
Hugo Boss is changing the seasons. The German luxury brand, famed for its men’s suits, will now be basing its designs around a four-season cycle, with monthly themes in between. Big news? Well, yes: we’re talking about the fashion world, where it is customary to launch two collections a year: spring/summer and fall/winter, which are usually premiered with much fanfare at the biannual fashion weeks in New York, London, Paris and Milan.
The seasonal shift by Hugo Boss is a move to be closer to the consumer rather than the calendar. It comes at the same time as a reduction in lead times – the period it takes an item of clothing to make it from initial sketch to being in store – as well as quicker integration of consumer feedback into the development of the next collection.
Today it takes the company 12 weeks to implement the lessons from the current collection into the new collection, where previously it may have taken up to two years. ‘Every season it is about getting the product right and hitting the consumers’ nerves,’ says Dennis Weber, head of IR at Hugo Boss, who regularly discusses these operational initiatives with investors.
Being on trend goes to the root of the fashion risk at a clothing label. Companies operate in an increasingly fast and fickle retail world, where quarterly sales can rise and fall depending on the latest designs sitting on the store shelves and – perhaps more importantly – featured in the style magazines.
‘Fashion by definition involves constant change,’ says Nils Vinge, an operations veteran turned head of IR at the Swedish mega-brand H&M. He lists the seasonal product makeover as his favorite part of the job. ‘The only thing we know about what we are selling today is that we won’t be able to sell that in a couple of months’ time,’ he adds. ‘Next year we will have a totally different collection, and this is an ongoing process.’
As Vinge suggests, the job of the IRO in the fashion industry involves keeping abreast of each season’s product line. At Hugo Boss, Dennis Weber regularly visits the showrooms, taking to brand directors and learning about the concepts and themes behind the new collections. The Mediterranean Sea, for instance, inspired the cuts and colors of this season’s Boss Orange.
Cinzia Oglio, head of IR at the luxury Italian shoemaker Tod’s, says investors want to know about current trends in the stores and the backlog of preorders for future collections. Investor days and site visits involve meeting the creative and brand directors as well as the CEO and CFO.
‘Creativity and innovation are key factors in the industry and ones difficult to measure,’ notes Chris Hollis, head of IR at French luxury group LVMH. Investors in LVMH want to meet everyone, he says, and the company puts on days where investors get to experience the passion of the people behind the brands. ‘It is also important to understand and educate investors about the manufacturing and retailing cycles of fashion brands.’
Clothes maketh the man
On a day-to-day basis, the ubiquity of a fashion brand is a useful aid for an IRO when it comes to explaining the company story to investors, both old and new. ‘Hugo Boss is a brand that is very well known, so most investors have a relationship with it, be it only as a customer,’ says Weber. ‘They know Hugo Boss and they can understand the business pretty quickly. We never have to explain what Hugo Boss actually is at investor meetings, even if people haven’t seen us for four or five years.’
At H&M the clothes are required to do even more of the talking. The company does not give any guidance on financials or key financial indicators, it doesn’t target investors, and the head of IR says he meets a lot of investors from the US who come to the company after listening to the enthusiasm for the products from wives and daughters. ‘We don’t do any roadshows whatsoever, because we have a very simple, pragmatic philosophy: we sell fashion, not shares,’ Vinge says. ‘That means we can focus on running the operations.’
This low-cost approach to IR is in keeping with H&M’s own brand of competitively priced clothing. With its one man IR ‘team’ the investor relations function at the largest listed company in Sweden is unusually small, especially for a European corporate with 180,000 shareholders. ‘In order to have our fantastic prices we need to have very low costs, so my department so far is just myself,’ says Vinge.
The relatively small IR capacity means that Vinge often has to say no to investors. Access to management is similarly restricted. ‘We are convinced that if we focus on the customers and if they are happy, then we are happy,’ he says. ‘If we are happy then in the long-term our shareholders will get happy.’
In fashioning this customer-orientated approach to IR Vinge is admittedly helped by the presence of H&M’s majority shareholder on the board. The current chairman, Stefan Persson, is the son of the company’s founder. Persson owns 37 percent of the shares and controls almost 70 percent of the vote. On top of this he is the father of the current CEO.
Dominant shareholders like Perrson are a common feature in the fashion industry. During its 85-year history, the majority ownership of Hugo Boss has passed from the founding family to two Italian brothers to Permira, the current private equity owners, who control close to 90 percent of the voting rights.
The Della Valle family, the controlling shareholder of Tod’s, offloaded 3 mn shares at the end of last year following calls by the investment community to increase liquidity of the shares. The free float subsequently increased from 33 percent to 43 percent, according to the company. Other prominent examples include the luxury goods houses LVMH, PPR and Richemont, which between them control international brands like Gucci, Chloé and Yves Saint Laurent, to name just a few.
Moreover, this June another two family-controlled fashion brands are expected to offer minority stakes to the international capital markets: Salvatore Ferragamo in Milan and Prada in Hong Kong.
The decision by Prada, the Italian label, to list in Asia is a reflection of the growing importance of China to the entire fashion industry. ‘China is the most important growth market, not only for Hugo Boss but also for everybody else in the industry, no surprise in that,’ says Weber. ‘Should anything go wrong in China that would have a significant impact on the luxury goods industry as a whole.’
Last year, Mainland China accounted for 7 percent of LVMH revenues, representing growth of 20 percent. The IROs at Tod’s, LVMH, Hugo Boss and H&M each tell a similar story about China, even if for now the growing clout of Asian capital is making more noise at the tills than it is taking up space on these companies’ share registers. ‘Asian investors represent a relatively small portion of our share capital, compared to European and US investors,’ says Hollis.
Not that China is the only growth market. The IROs of LVMH and Hugo Boss both report rising sales in other regions as well. ‘At the moment, we are in a very comfortable situation,’ says Weber. ‘In the first quarter, we have grown at double-digit rates in all distribution channels in all regions across all brands.’
‘People want to find out whether the super-development that we are enjoying at the moment – alongside various other luxury goods companies – is acute catch up after the crisis or whether it is fundamental, sustainable, long-term development.’
According to Weber, one of the challenges for an IRO of a luxury brand is to explain to investors that the company should not be used as a proxy for consumer sentiment in any given market. Hugo Boss targets different consumer segments at a much higher price point than the likes of Adidas, the German sporting and apparel brand, where Weber began his IR career.
As a result of this the dialogue with Hugo Boss investors tend not to focus on the same macro issues that concern Vinge, who frequently fields questions from investors about rising cotton prices, labor costs in Asia, transport costs and inflation. ‘If you look at fast fashion retailers or sporting goods companies,’ Weber explains, ‘rising sourcing costs is something that has an impact on their gross margin, whereas it is of less significance for luxury goods players.’
That being the case, from high end to high street, the IROs at H&M and Hugo Boss both confirm that company financials continue to be their primary topic of conversation with investors. In fashion as in other industries it is what the share performance looks like that will ultimately attract investment, not the latest products on display in the showroom. After all, while seeing the cloths and meeting the designers can add value to an investment decision, as Weber points out, ‘Hardly any investor is that deeply involved in fashion that he could say, Well, this is a collection that will fly.’
This article appeared in the July print edition of IR magazine.
