On Wednesday, Goldman Sachs adjusted its outlook on Ermenegildo Zegna Group (NYSE:ZGN), reducing the price target to $14.20 while maintaining a Buy rating on the stock. The luxury fashion company reported third-quarter sales that were 4% below consensus expectations, with a reported revenue of €397 million for the period. This represents a 7% organic sales decline year-over-year.
The reported shortfall in sales comes amidst a broader trend of deceleration in the Chinese market, which has also affected other large-cap luxury peers such as LVMH (EPA:LVMH). Despite the overall miss, Goldman Sachs noted that the Zegna Brand itself performed relatively well, with a 2% outperformance against consensus and a solid 3% underlying growth year-over-year. This growth was driven by robust double-digit advancements in the American, European, and Middle Eastern markets, which helped offset the significant downturn in China.
In response to the weaker-than-expected top-line performance, especially from the Thom Browne and Tom Ford (NYSE:F) Fashion lines, Goldman Sachs has revised its EBIT forecasts for fiscal years 2024 to 2026 downwards by 5-7%. Consequently, the 12-month DCF-based price target has been lowered by 8% to $14.20. Despite these adjustments, the firm's analysts continue to recommend a Buy rating for Zegna Group shares.
Goldman Sachs remains positive about Zegna Group's prospects, citing several factors that support its optimistic stance. The firm believes that the company's valuation, which currently stands well below that of its sector peers, provides a cushion.
Additionally, the loyalty of the high-end customer base to the core Zegna Brand is expected to contribute to revenue outperformance and potential multiple expansions over the medium term. Furthermore, there could be greater upside risks if the Chinese market experiences a stronger-than-anticipated recovery beginning in 2025.
In other recent news, Ermenegildo Zegna N.V., the global luxury fashion house, faced a challenging third quarter in 2024, with revenues declining 8% year-on-year to €397 million. Despite this, the company reported a year-to-date revenue increase of 2% on a reported basis, although organic growth showed a 4% decline due to recent acquisitions and foreign exchange impacts.
The ZEGNA brand achieved 3% organic growth, driven by direct-to-consumer sales, with strong performance in the Americas and EMEA. However, Thom Browne and Tom Ford Fashion experienced significant revenue declines, affected by strategic shifts and market challenges.
As part of the recent developments, the company opened new stores and converted wholesale locations to retail, impacting revenue timing. Ermenegildo Zegna anticipates a flattish wholesale performance for 2024, with potential recovery in the Americas.
The company is also planning to streamline operations and unveil new collections for Thom Browne and Tom Ford by mid-2025. Despite the challenging Greater China region, the company remains focused on enhancing the direct-to-consumer channel and adapting strategies to ongoing market challenges.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Ermenegildo Zegna Group's financial position and market performance. Despite Goldman Sachs maintaining a Buy rating, the company's stock has faced significant headwinds. InvestingPro data shows that ZGN's stock price has fallen 26.47% over the last three months and is currently trading near its 52-week low, at just 52.42% of its 52-week high.
However, there are some positive indicators. ZGN boasts impressive gross profit margins, with the latest data showing a gross profit margin of 65.36% for the last twelve months. This aligns with Goldman Sachs' observation about the strong performance of the core Zegna Brand. Additionally, an InvestingPro Tip notes that the company has raised its dividend for 3 consecutive years, with a current dividend yield of 1.5%.
It's worth noting that ZGN's P/E ratio stands at 20.28, which an InvestingPro Tip suggests is high relative to near-term earnings growth. This could be a factor for investors to consider alongside Goldman Sachs' reduced price target.
For readers interested in a deeper analysis, InvestingPro offers 8 additional tips for ZGN, providing a more comprehensive view of the company's financial health and market position.
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