Global Expansion And One-Brand Strategy Will Build Customer Loyalty In The Future

Key Takeaways

• A focused one-brand strategy and innovative product offerings could enhance customer loyalty and drive future revenue growth.
  
• Strategic global expansion and strengthening the direct-to-consumer channel may boost brand exposure, sales, and profit margins.
  
• The luxury sector's normalization, combined with high costs and macroeconomic uncertainties, may hamper Ermenegildo Zegna's revenue growth and profitability.

Catalysts

Designs, manufactures, markets, and distributes luxury menswear, footwear, leather goods, and other accessories under the Zegna and the Thom Browne brands.

• The implementation of a one-brand strategy and the focus on engaging a targeted audience rather than a broad one could enhance customer loyalty and drive higher revenues in the future.
  
• Investments in new innovative product offerings, such as the Il Conte jacket and expansion of iconic collections, have the potential to boost sales and improve profit margins by focusing on high-value items.
  
• The strategic expansion in key global markets through flagship store openings in major locations such as New York, L.A., and Tokyo is likely to increase brand exposure and sales, positively impacting revenue growth.
  
• Streamlining the wholesale channel and strengthening the direct-to-consumer (DTC) channel could improve gross margins due to the higher profitability of DTC sales compared to wholesale.
  
• The appointment of Haider Ackermann as the new Creative Director for Tom Ford, and initiatives to revamp Thom Browne’s branding and management, are expected to enhance the creative direction and operational efficiency, potentially leading to higher earnings in the long term.

Ermenegildo Zegna Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ermenegildo Zegna's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 6.0% in 3 years time.
• Analysts expect earnings to reach €132.7 million (and earnings per share of €0.53) by about February 2028, up from €100.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.6x on those 2028 earnings, up from 21.3x today. This future PE is greater than the current PE for the US Luxury industry at 17.8x.
• Analysts expect the number of shares outstanding to grow by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.97%, as per the Simply Wall St company report.

Ermenegildo Zegna Future Earnings Per Share Growth

Risks

• The luxury sector is experiencing a deep normalization phase, which can lead to unpredictable revenue fluctuations and impact net margins due to changing consumer spending patterns.
  
• Ongoing challenges in China and the lack of a clear inflection point could negatively affect revenue growth, especially since China is a significant market for luxury goods.
  
• High SG&A costs, notably due to investments in Tom Ford Fashion and marketing expenses, have led to decreased adjusted EBIT, affecting overall profitability.
  
• Macroeconomic uncertainties and soft global demand for luxury goods, including challenges in the wholesale sector, may delay achieving long-term financial targets, impacting growth expectations for earnings.
  
• Expenses related to CapEx for new store openings and production facilities pose short-term financial pressures, potentially affecting net margins as these investments may take time to realize returns.

Valuation

• The analysts have a consensus price target of $10.059 for Ermenegildo Zegna based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.19, and the most bearish reporting a price target of just $7.15.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.2 billion, earnings will come to €132.7 million, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 12.0%.
  
• Given the current share price of $8.76, the analyst price target of $10.06 is 12.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.