On Friday, Morgan Stanley (NYSE:MS) initiated coverage on Ermenegildo Zegna Group (NYSE:ZGN) stock, a luxury fashion brand, assigning an Underweight rating and setting a price target of $7.20 for the company's shares. The financial institution's analysis acknowledges the potential for long-term growth due to the Group's strategic initiatives. However, it points out several risks that could affect the company's performance in the near to medium term.
The concerns raised by the analyst include a significant reliance on Chinese nationals, which surpasses that of its competitors, with more than 35% of Zegna brand and Thom Browne's sales attributed to this demographic. Additionally, the momentum of the Triple Stitch franchise, which has been a major growth driver for the Zegna brand, contributing to 75% of its growth from 2019 to 2023, is also a point of potential risk. It is believed that this momentum might account for about 50% of the growth in 2024.
Furthermore, the report mentions the rationalization at Thom Browne, suggesting that the brand may become less of a growth factor in the future. Increased costs associated with direct-to-consumer (DTC) efforts and store network expansions are also highlighted as challenges. The analyst also points to the necessity for the Group to make operational investments in marketing, retail, and production, which could impact progress on margin expansion.
Morgan Stanley anticipates that Ermenegildo Zegna Group management will soon provide more details on the revised medium-term outlook and the strategies for margin expansion. These details could potentially be shared during the fiscal year 2024 results announcement, expected to occur between January and March. This information may offer greater clarity on the company's long-term potential.
In other recent news, Ermenegildo Zegna Group faced a challenging third quarter with revenues declining by 8% year-over-year to €397 million. The Zegna brand, however, reported a 3% organic growth, primarily driven by direct-to-consumer sales in the Americas and EMEA. On the flip side, the company's Thom Browne and Tom Ford (NYSE:F) Fashion lines experienced significant revenue declines.
UBS and Goldman Sachs (NYSE:GS) both adjusted their price targets on Zegna Group shares due to these developments, with UBS lowering it to $9.00 and Goldman Sachs to $14.20. Despite these revisions, both firms maintained their respective stances on the stock, UBS with a Neutral rating and Goldman Sachs with a Buy rating.
As part of its recent efforts, the company has opened new stores and converted wholesale locations to retail, which has impacted revenue timing. Zegna Group is also planning to streamline operations and unveil new collections for Thom Browne and Tom Ford by mid-2025.
InvestingPro Insights
Recent InvestingPro data provides additional context to Morgan Stanley's analysis of Ermenegildo Zegna Group (NYSE:ZGN). The company's market capitalization stands at $1.94 billion, with a P/E ratio of 20.28, reflecting the premium investors are willing to pay for the luxury brand's earnings. This aligns with an InvestingPro Tip highlighting that ZGN is trading at a high P/E ratio relative to its near-term earnings growth.
Despite the challenges outlined by Morgan Stanley, ZGN has demonstrated strong financial fundamentals. The company boasts impressive gross profit margins, as noted in another InvestingPro Tip, with the latest data showing a gross profit margin of 65.36% for the last twelve months. This robust margin could provide some cushion as the company navigates the operational investments and expansion costs mentioned in the analyst report.
However, investors should note that ZGN's stock price has fallen significantly over the last three months, with a total return of -25.17%, and even more dramatically over the past six months at -38.69%. This decline aligns with the concerns raised by Morgan Stanley and may reflect market uncertainty about the company's growth trajectory and reliance on specific markets.
For a more comprehensive analysis, InvestingPro offers 8 additional tips for ZGN, which could provide valuable insights into the company's financial health and future prospects.
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