Zegna: Tom Ford Opportunity To Explore (NYSE:ZGN)

Over the week, Ermenegildo Zegna (NYSE:ZGN) released its H1 financial data. As a reminder, we initiated the group coverage here at the Lab with a buy rating. After a 33% total return (including its DPS), we lowered the company to neutral with a target price of €13.5 per share ($14.4). Our last analysis emphasized how 2023 started positively; however, Zegna’s P/E reached 27.5x and trades at a higher multiple within its peers with a lower dividend yield. Looking back, we believe this was a solid call; the S&P 500 return outperformed Zegna’s stock price appreciation, and the company is still trading above its peers’ group average. Before going back to the valuation, today, we are deep-diving into H1 numbers to provide our followers with our forward-thinking view.

H1 Results

Zegna CEO explained how the company displayed “unique capabilities, contributing to continued and strong revenue growth.” He also added how he positively views the execution of the company’s ZEGNA One strategy, “which is driving remarkable improvements in productivity across our direct-to-consumer stores.” Before going to the numbers, it is also essential to report Tom Ford’s Fashion development. Last April, the group signed an agreement with Estée Lauder (EL) to license Tom Ford’s ready-to-wear line. This brand, founded by the Texan designer, will debut with the new creative direction of Peter Hawkings on the Milan women’s fashion shows. In the period, it contributed to €64 million, and here at the Lab, we anticipated a positive EBIT contribution. This was confirmed by Zegna’s CEO, who said: “Working together with the new Tom Ford fashion leadership team will further develop and position the brand as an icon of ultra-luxury.” In the period, the Tom Ford fashion segment recorded an adjusted core operating profit of €3.7 million, with a margin of 5.7%.

Source: Zegna H1 results presentation

Looking at the aggregate numbers, in H1, the company closed top-line sales with €903 million, up 23.9% on an annual basis. In particular, in the second quarter, Zegna accelerated growth with a plus 24.5% organic growth. All the main geographical areas supported this, particularly emphasizing the US market. We should also report the positive performance in the Greater China area, where the company recorded a +40 %, thanks to strong sales in Hong Kong and Macau. In the period, profit amounted to €52.1 million with a margin of 5.8% Going up to the P&L, despite the increase in investments aimed at financing growth, the adjusted core operating profit amounted to €119.9 million. Thom Browne segment adjusted ebit was €31.5 million for the first half of 2023, broadly in line with the same period in 2022. Despite the revenue increase, the EBIT margin declined to 15.2% compared to 17% in 2022. According to our analysis, this was mainly due to higher costs linked to the expansion of the DTC store network. Therefore, the growth was driven by the excellent performance of Zegna brand products as well as the contribution of the Textile product line.

Here at the Lab, we positively view the Tom Ford Fashion acquisition. We believe this optionality has the upside to drive further revenue growth for the group. In July, Mr. Gavazza was appointed as the group CEO and will likely support a shift towards internationalization and retail. Zegna disclosed limited details on the financials and strategic opportunities. We expect further news in the CMD later in the year. Our team sees the Tom Ford division as margin dilutive in the medium-term horizon. We anticipate a 1-2% drag to Zegna’s core operating margins. This is mainly due to the significant investment which will take place to drive future growth. Including the license fee impact, we forecast 2026 sales at €350 million with a 5% EBIT margin. This represents approximately 14% and 7% of the group’s total turnover and EBIT profit.

Conclusion and Valuation

The company confirmed its 2025 financial targets (exceeding €2 billion in annual turnover and reaching at least 15% adjusted EBIT margin). This outlook excludes Tom Ford’s fashion segment. With H1 results, Zegna is on track to this trajectory, and the upcoming full-year 2023 results should confirm this. The next critical supportive catalyst is a new Capital Markets Day, held in early December 2023 in New York. Going to the valuation, we maintain our neutral rating. For the current fiscal year, we forecast top-line sales at €1.9 billion with a plus +27% year-on-year and an adjusted EBIT of €226 million. Despite these impressive results, the current target price implied a 33x Price Earnings and a 2024 EV/EBIT of 16x (vs. a 25x P/E average). This is well ahead of the sector average. We await more details on how Zegna’s midterm plan will evolve to incorporate the Tom Ford segment. Our neutral rating is then confirmed by our previous estimates.