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Hugo Boss drops 2015 profit target on China slowdown

The logo of German fashion house Hugo Boss is seen on a clothing label at their outlet store in Mezingen near Stuttgart October 29, 2013. RE
The logo of German fashion house Hugo Boss is seen on a clothing label at their outlet store in Mezingen near Stuttgart October 29, 2013. RE

By Victoria Bryan

FRANKFURT (Reuters) - German fashion house Hugo Boss has abandoned its 2015 profit target, joining the ranks of luxury goods companies warning of slowing sales growth in China.

China has been the engine of the luxury goods industry in recent years, but a weakening in economic growth there, coupled with a crackdown on bribery, has tempered demand this year.

French spirits group Remy Cointreau also reported a slowdown in Chinese demand on Tuesday, following similarly cautious comments from upmarket fashion groups such as LVMH and Burberry .

"A particular concern is China," Hugo Boss chief executive Claus-Dietrich Lahrs told investors at an event in Hong Kong, adding there was little sign of the country returning to the double-digit percentage sales growth of recent years.

Analysts estimate luxury industry sales will rise around 4 percent in China this year, Lahrs said.

Hugo Boss shares were down 3.5 percent to 95.65 euros by 1000 GMT, the biggest drop on the index for mid-sized German shares <.MDAXI> and hitting a near four-week low.

The company, best known for its men's suits, said it was keeping a target to reach sales of 3 billion euros ($4.1 billion) in 2015, but that it would no longer be able to reach a 25 percent EBITDA margin - earnings before interest, tax, depreciation and amortization as a percentage of sales.

That means it will miss a 2015 EBITDA target of 750 million euros.

"We are clearly committed to a 25 pct EBITDA margin target but this will happen after 2015, and not in 2015," Lahrs said, adding global economic growth rates had turned out weaker than expected compared with when the group set its targets in 2011.

Many analysts had been skeptical of the 2015 targets, forecasting on average sales of 2.9 billion euros and an EBITDA margin of 23.7 percent, according to ThomsonReuters Starmine.

The group reported a margin of 22.6 percent in 2012.

While Hugo Boss did not give a new timeframe for the margin target, Berenberg analyst Anna Patrice said she thought it would be delayed by only a couple of years.

"And if there is a considerable pick up in Europe, then the company will be close to 25 percent already in 2015," she said.

As well as weaker demand in China, Huge Boss has also been grappling to refurbish a network of old stores in the country taken over from franchise partners.

OWN STORES

To compensate for weak markets and take control of the way its clothes are sold, Hugo Boss has been moving from selling its products through wholesale partners such as department stores to setting up its own shops - another industry-wide trend.

This strategy, which involves opening around 50 shops a year, has helped hold up sales during the economic downturn in Europe, Chief Financial Officer Mark Langer said, although the cost of expanding has held back margins.

Hugo Boss now expects more than 60 percent of its sales will come from its own retail stores in 2015, compared with a previous forecast for 55 percent.

As it is now selling more clothes directly to customers and seeking to generate interest in a new womenswear collection designed by Jason Wu - a favored designer of U.S. First Lady Michelle Obama - Hugo Boss is also stepping up spending on advertising and marketing to between 6 and 7 percent of sales.

This compares with rates ranging between 4.7 percent and 5.9 percent over the last five years and will also hamper margins, Langer said.

Adding to pressure on profits is the fact that Hugo Boss has been growing strongly in the United States, where profit margins are lower than in Asia.

Bearing all this in mind, HSBC analyst Antoine Belge said the margin target delay did not come as too much of a surprise.

"The United States has been growing ahead of expectations and Asia performed below expectations, and the United States is less profitable than Asia," he said.

The group also maintained a forecast made at the end of last month for currency-adjusted sales and earnings to rise by between 6 percent and 8 percent in 2013.

(Reporting by Victoria Bryan; Additional reporting by Clare Baldwin in Hong Kong; Editing by Stephen Coates and Mark Potter)

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