ZGN

Ermenegildo Zegna N.V. Semi-Annual Report Summary (June 30, 2023)

Business Context and Reporting Period

This filing covers the six months ended June 30, 2023. Ermenegildo Zegna N.V. (Zegna) is a global luxury group operating three segments: Zegna, Thom Browne, and Tom Ford Fashion. A material event during the period was the completion of the Tom Ford International (TFI) Acquisition on April 28, 2023, where Zegna acquired the remaining 85% of TFI for $150 million in cash, becoming the long-term licensee for the Tom Ford fashion brand from Estée Lauder Companies Inc. (ELC).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 23.9% year-over-year, driven by double-digit growth in Zegna and Thom Browne segments and the inclusion of Tom Ford Fashion revenues (€64.0 million). Organic growth was 21.5%.
• Profitability: Net profit more than doubled to €52.1 million. Gross margin expanded to 64.2% due to a higher mix of Direct-to-Consumer (DTC) sales (65% of total vs. 59% prior year), price repositioning, and reduced end-of-season sales.
• Segment Performance:
  • Zegna Segment: Revenues up 17.9%; Adjusted EBIT up 47.8% to €100.5 million.
  • Thom Browne Segment: Revenues up 11.9%; Adjusted EBIT remained flat at €31.5 million due to store expansion costs.
  • Tom Ford Fashion: Contributed €64.0 million in revenue and €3.7 million in Adjusted EBIT post-acquisition.
• Balance Sheet: Net financial position shifted from a cash surplus of €122.2 million to net indebtedness of €17.0 million, primarily due to the TFI acquisition cash outflow and capital expenditures. The company disposed of €219.4 million in securities to fund these activities.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects seasonal trends to continue, with higher retail sales in Q4 and Q1. The "Zegna One Brand" strategy continues to drive price increases and a shift toward Essentials collections.
• Unusual Items:
  • Financial expenses included a €22.9 million charge related to the redemption of public and private placement warrants in February 2023.
  • Transaction costs of €5.0 million were incurred related to the TFI Acquisition and Norda investment.
  • Legal costs of €0.6 million were recorded regarding a trademark dispute between Thom Browne and Adidas.
• Risks:
  • Internal Controls: The company disclosed material weaknesses in internal control over financial reporting in its annual statements; failure to remediate could impact investor confidence.
  • Geopolitical: Risks related to the conflict in Ukraine, sanctions on Russia, and general economic instability.
  • Operational: Supply chain disruptions, raw material costs, and the ability to renew lease agreements for directly operated stores.

Key Facts for Investor Verification

• TFI Integration: Verify the preliminary purchase price allocation for the Tom Ford acquisition, specifically the €90.9 million value assigned to the license agreement and the impact of purchase accounting adjustments on future margins.
• Internal Control Remediation: Monitor progress on remediating the material weaknesses in internal controls over financial reporting identified in the prior year.
• Working Capital Build-up: Review the increase in inventories (€134.3 million increase) and trade receivables, which absorbed significant operating cash flow, to ensure alignment with sales growth and the "Essentials" strategy.
• Debt Covenants: Confirm continued compliance with the Net Financial Indebtedness to Adjusted EBITDA covenant (limit 3.0x), which was at (0.6)x as of December 31, 2022.
• Tom Ford Royalties: Note the commitment to pay minimum annual guaranteed royalties of €181.7 million (undiscounted) over the first 10 years of the ELC license agreement.