Ermenegildo Zegna NV

NYSE:ZGN

Earnings Call Transcript 2021-Q4

[Operator]

Hello, and welcome to the Ermenegildo Zegna Full Year 2021 Financial Results Call. My name is Alex and I'll be coordinating the call today [Operator Instructions].

I will now hand over to your host, Francesca Di Pasquantonio to begin. Over to you, Francesca.

[Francesca Di Pasquantonio, IR]

Thank you, Alex, and welcome to everyone joining us today to discuss Zegna Group full year ’21 financial results and provide more details to the numbers shared in February.

Today we're going to discuss our full year revenues, the full year results, as a publicly listed company for the first time. We will be using the presentation materials posted on our website earlier today. You can find the materials along with the related press release under the investor page of our group website.

I am joined today by Zegna Group Chairman and CEO, Ermenegildo Zegna, our COO and CFO, Gianluca Tagliabue and Rodrigo Bazan, the CEO of Thom Browne. Gildo will begin today walking you through the results at a high level and discuss Group’s ongoing strategy and guidance. Gianluca will spend time going through the numbers in more deeper, and at the end of the call we will be leaving time for Q&A and Rodrigo will be happy to answer Thom Browne related question.

Before we begin, I need to point out that we may make certain forward-looking statement during today's call. Our actual results being materially different from those expressed or implied by these forward-looking statements. All such statements are subject to a number of risks and uncertainties, including those discussed in our SEC filings. I refer you to the Safe Harbor statement which is included on Page 2 of today's presentation. And of course this call will be governed by such language.

Before I turn the call over to Gildo, I also wanted to let you know that we will be holding an Investor Day at Oasi Zegna on May 17, and we will be providing further details on that after the call.

Again, thank you for joining us today. And with that, I will turn the call over to Gildo.

[Ermenegildo Zegna, CEO and Chairman]

Good afternoon to everybody and thank you very much, Francesca. Back in February, we shared our preliminary revenue, and today I'm very happy to join you all and share our first set of full year results as a publicly traded company.

‘21 was a milestone for us as a Company and the area where we performed well, showing the strength of our strategy. And I want to start with some of our top-level numbers before diving deeper into the year results as you can see from the ‘21 highlights.

However, we can see from the slide that we surely outperformed 2020 by significant margin in every metric. And more importantly, however, we are approaching 2019 levels when it comes to revenues and outperformed ‘19 in adjusted EBITDA and adjusted basic EPS, both non-IFRS figures. Our adjusted base earnings in ’21 were up 65% from pre-pandemic levels reaching €0.33 per share. And we also entered the year with a cash surplus of €145 million, thanks to the cash proceeds from the business combination in December of ‘21.

Let's move to next slide. And before we dive into the financial and our strategy for the year, I’d like to revisit some of the highlights that made ‘21 a special year for the family and for all of us. First and foremost was becoming the first Italian luxury house to list in New York Stock Exchange and the first stock within the sector adding €129 million in net proceed for the group.

Second, was kicking off our One Brand strategy for Zegna which is the foundation of our future growth. And the continued growth in the luxury leisurewear and shoe segment as well as our focus on iconic and recognizable product have taken Zegna to the next level to meet our customer changing needs worldwide.

The Zegna brand is iconic and we will continue to invest in the brand equity going forward, along the line with where we have planned. Thom Browne also saw a milestone year, which increased brand awareness and strong growth in the number of stores around the world.

Next slide. ’21 also saw the continuation of different initiatives and projects apart from Zegna [ph] core. We continue the growth of our made in Italy textile portfolio, producing some of the best fabrics and yarns in the world by acquiring 40% of cashmere yarns produced at Filati Biagioli to complement our expertise in textile, taking advantage of the very important momentum in knitwear, as knitwear is becoming more and more the new accessory of Zegna.

We also started rolling out the Zegna brand into our store, starting with the most important operation worldwide. And we have all stores completed by then this year. And as I shared with everyone we’re taking a number of lessons from both brands with digital and applying that across the board. And we have seen some traction in that sector as well.

Finally, sustainability. Sustainability is the heart of everything we do. And this has been for 120 years. And we published our first sustainability report last year as a private company. We'll be sharing our full sustainability strategy as well as new commitment at our Investor Day in May.

Next slide please. You can see that ‘21 was by far a good year for us and most importantly, showed us time and time again that our strategy and we are investing our energy and focus are paying off. The key pillar of our strategy remains the Zegna brand, the one of the kind Made in Italy luxury textile menswear and Thom Browne. And I’ll take a few minutes now to talk about our distinctive modern strategy and then turn over to Gianluca talk about the financials.

Please turn to page number 7. First, to our brand map. Our roots in custom made and formalwear continue to be strong. And our made-to-measure offerings is a key competitive advantages as this business is gradually coming back. And by the way, we also pride ourselves on evolving along with our customers, and their continued consolidation driving strength and demand for our strong luxury leisure segment. And the One Brand strategy which we kicked off last year, and which will be completed this year is already driving growth and profitability. And our iconic products are appealing to existing and new customers alike.

Keeping up with our stable activity, we continue to look for unique opportunities for collaboration, and the name and brand recognition of Zegna now command, we need even more interesting, creative collaborators.

Please go to slide number 8. Second, after having highlighted Zegna brand is our one-of-a-kind textile laboratory platform. The platform has brought together some of the Italy’s best top players in our platform [ph]. And it is of particular pride for us, especially given our genesis as a company, our roots if you want, that come from Biella region where textile has originated more than 100 years ago.

It is also the foundation of our strong vertical integration, what we call the [indiscernible] which is key to ensuring the quality of our production, as well as keeping sustainability at the heart of what we do. The platform is highly scalable. And when we have been intentional about how to grow it and provide great cost leverage for our brands, we also provide top quality textile to some of the world's major luxury players. We continue to focus on strengthening our competencies in this field, increasing the breadth of our offering and ensuring the continued legacy of the Made in Italy name for textile.

Please turn to Slide 9, where I show the first piece of our strategy is Thom Browne, which has been part of our family since 2018. And Thom Browne really elevates -- Thom has elevated with Thom Browne brands to the levels of art. And demand for men’s and womenswear has been growing across all channels around the world. And I think we have been also selective with our wholesale strategy for Thom Browne. And have seen particular strengths in digital capabilities and direct-to-consumer sales.

And last but not least, is synergies between Thom Browne and Zegna, have been hugely beneficial to both brands, with Zegna moving out from Thom Browne, and by focusing by icon and Thom Browne taking advantage of wholesale platform and our long retail success together with our made-to-measure business.

Please turning to Slide 10. Finally, our vision for growth across the board is to double down on our high performing markets is still significant growth in the U.S. and the Middle East, and have seen Europe rebound solid. Our brand elevation and the focus on luxury leisurewear are changing how the Zegna brand is perceived, and bringing it more in line with what customers are looking for driving our DTC performance.

We have significant potential in Greater China, with room for a bigger footprint for Thom Browne in particular. With all this strength we are uniquely positioned for growth in the luxury space which is itself a growing and diversifying market.

Anyway, as always we do it all while keeping our brands at the heart of what we do. Sustainability has been part of Zegna DNA from day one. And we’ll be even more intentional about specific goals as we will share it at our Investor Day, at Oasi Zegna on May 17.

And with that, that's all for me. Let me turn over to Gianluca, who can dive deeper into the numbers for the year. Thank you.

[Gianluca Ambrogio Tagliabue, COO and CFO]

Thank you, Gildo. Good morning, good afternoon, everybody. I take it from slide number 11. Today, we'll be discussing our revenue, profitability, cash position, followed by a breakdown of results by segment, the Zegna segments and Thom Browne segment, highlights of our income statement. Then I will hand it over back to Gildo who will close with guidance for 2022.

First, as shared back in February, our revenues for 2021 were up 27% at actual rates compared to 2020, reaching almost €1.3 billion. This is down 2% from 2019. The Zegna segment was up 23% compared to 2020, bringing in just over €1 billion in ’21. This was 11% below 2019 performance driven by unfavorable expected trends in formalwear.

Thom Browne saw even more significant growth, growing 47% from 2020 levels to €664 million with a two year stack of 64%. We continue to see strong retail performance, reflecting our goal of gaining more control of our distribution channel. The direct-to-consumer channel represented in 2021, around two-thirds of our consolidated revenues, while in ’19 and ’20 it was at around 60%. And we have been observing solid growth versus 2020 in North America, Europe and as Gildo pointed out in the Middle East.

Finally, as Gildo shared, luxury leisurewear continues to be a strong driver of growth along with shoes, especially in the Zegna brand. Together, they represent about 60% of our ’21 Zegna brand revenues.

Moving now to Page 12, we can appreciate our excellent progress over the prior year. And compared to the plan that we presented in July while we were in the middle of the NASDAQ enlisting process. So when we made the plan, it means that plan that we presented in July is our business plan through 2023.

Our adjusted EBIT in ‘21 was €149 million, with an accelerated margin expansion of over seven times compared to 2020 which was €20 million, and 39% increase over 2019, which was €107 million. When we announced our preliminary earnings earlier this year in February, the adjusted EBIT as a percentage of revenue was anticipated to land at around 10%. The group is today pleased to have surpassed that guidance with an adjusted EBIT accounting for 11.5% of revenues exceeding the 8.1% seen in 19, in large part due to the full price sales and realized cost efficiencies. I remarked that 11.5% was the margin expected between ‘22 and ‘23 in the plan that we presented in the listing process. So we are well one year ahead of the plan.

Zegna segment specifically saw €111 million adjusted EBIT, exceeding the €80 million projection of the business plan of July, and exceeding €91 million of 2019 figures. We saw similar trend for Thom Browne, which has recorded an adjusted EBIT of €38 million in excess of €29 million in 2019 and above €31 million from the July business plan.

Zegna group had €75 million adjusted profit, a significant uptick at the 75% rate compared to 2019 figure which was €43 million. We will see later how the adjusted profit and the adjusted EBIT reconcile to the reported figures. From a cash perspective, our cash surplus, intended as the cash net of the financial investment was strong at €145 million net cash, of which €139 million were net proceeds from the business combination finalized in December ‘21.

Now moving to Page 14, we focus on the Zegna segment. And the Zegna segment was particularly outstanding in terms of performance reaching about €1 billion mark in sales, amid cost normalizing versus the low seen in 2020. It is worth noting that all corporate costs are at moment fully allocated in the Zegna segment. In this respect, 2022 will include a full year impact of this cost.

The segment benefited from good cost leverage both in the structures and in the factories, both for the clothing supply chain and the textile supply chain and lower D&A. Adjusted EBIT for the Zegna segments was 10.7% against exceeding the July business, which was set at 8%.

And we see turning to page 16, Thom Browne segment met the plan at 14.4% in revenues when the plan was set at 14%. Again, also Thom Browne, as you can notice and appreciate is one year ahead of the July plan in terms of sales, because they delivered in ’21 the sales expected for ‘22. In terms of bottom line, it has been effected as expected by the growth in cost due to the network expansion of stores. They had 28 stores at the end of ’19 and they finished the year with 52 directly operated stores. And it has been affected also by the strengthening in headquarter function personnel and processes, nothing different than was expected.

Page 18, this slide is important as it shows how we reconcile the bottom line from reported figure of €127 million negative to the adjusted profit of €75 million. The bulk -- the big number, which comes out is the cost related to the business combination, which altogether amounts to €205 million.

The bulk of this cost, 72% of the cost to be precise are non-cash transaction adjustment. In short the bulk of this cost is related to the accounting of the authorization [ph] of the promote shares and warrants effectively given to the sponsors and to the SPAC shareholders. The rest is mainly coming from the P&L charge-off transaction expenses and other items like €1,500 to all employees of Zegna Group, which is reported as a cost but it's financially neutral to the company since it is covered by an equivalent equity contribution by the family holders.

One word on the other adjustments, they were equal to €17 million before taxes, and are related mostly to impairment, severance payments. There has been one factory that has been closed in Spain. And these are the costs that are related to that severance and early termination of few leases. For 2022, we expect as the guidance, overall adjustment at low-teens millions of euros.

If we go to page 19, capital expenditure in 2021 amounted to €48 million, net of €46 million for the purchase of a building in London that was subsequently part of the disposition offered before the IPO in November ‘21. This amount was -- this €48 million in 2021 is related to new store openings, relocation, renewals and some key IT process particularly in relation to the change of point of sale system and distribution of ERP.

We know also that there has been a minor shift in payments between ‘21 and ‘22. And we expect CapEx step up in terms of guidance for 2022 to around €80 million. Investment for 2022 will be dedicated for two-thirds to retail. Again, the renewals, relocation, new openings and the Zegna rebranding inline to the One Brand strategy and IT and digital projects.

In terms of trade working capital, we have seen improvement and received the incidence of trade working capital going back almost to the pre-COVID-19 levels. We expect’22 make a further step in terms of improvement.

Now I think I can turn it back to Gildo to talk about goals and guidance for 2022.

[Ermenegildo Zegna, CEO and Chairman]

Yeah. Thank you Gianluca. Please turn to Page 20. And I want to focus again on our key priorities. And we said we're encouraged by our strong performance in the ‘21 fiscal year exceeding key aspects of the business plan presented in July ‘21, many of which have been discussed today.

Our growth focus in ‘22 will take place again the execution of our brand, One Brand strategy to create value for shareholders and the network will be focused on enhancing the business by capitalizing on luxury leisurewear and enhancing the customer experience to make Zegna Group the model for retail excellence across regions and generations.

Please finally turn to Page 21, of course, we are keeping an eye on the geopolitical environment in ’22 which creates volatility alongside developments related to the pandemic, especially in China. ’22 has started solid over the collection and positive pricing related to our core ‘22 collection. And our fiscal year ‘22 guidance has been confirmed in low-teens revenue growth and accelerates compared to 2021.

As for the profitability, we did expect a nice advancement in ‘22. However, in ‘21, we delivered an adjusted EBIT margin ahead of our own expectation and in excess of the original plan for ’22. While these higher bar may limit our margin upside for this year, we see a nice adjusted EBIT growth in absolute terms, despite the expected increase in investment costs and logistics, and the step up in leasing related overhead and rebranding costs.

However, we also expected our cash operation 2020 [ph]. So overall, I would say a positive picture. And we thank you again for joining us. And with that I'll hand back to Francesca.

[Francesca Di Pasquantonio, IR]

Thank you, Gildo. Thank you, Gianluca. We are ready to take your questions. Alex, if you want to manage the Q&A we are ready to deal with questions. Thank you.

[Operator]

Thank you. [Operator Instructions] Our first question for today comes from Karina Shooter of Goldman Sachs. Karina, your line is now open.

[Karina Shooter, Goldman Sachs]

Thank you. And congratulations on the results this morning. I have a few questions, if you don't mind. So the first one, given I'm ticking off all the obvious one in terms of the question that's on all active investors mind at the moment, just in terms of the situation, given current COVID developments recently, particularly in China. Could you just give us some color and help us understand the situation in China at the moment, and just more broadly, regional trends in general that you're seeing right now?

And then my next question relates to the margin. At Zegna brand, you saw a nice rebound in your adjusted EBIT margin in the second half of the year, despite the relaunch of the One Brand strategy. I appreciate that was fairly close to the end of the year. But as we think about this year, and about the investments in the program and the associated marketing, how do you think that will impact the Zegna brand margin in 2022?

And then my final question is quickly on Thom Browne. That one saw dilution in the margin slightly this year, relating to expansion the store network and admin processes. Should we view these costs and particularly on the admin side as more one-off in nature, and how should we think about the margin for ‘22? Thank you.

[Ermenegildo Zegna, CEO and Chairman]

Yeah. Okay, hi, this is Gildo Zegna. China as you know, Greater China is our key market and it represents about 4% to 6% of our sales. And I can tell you that we surely are closely monitoring the ongoing development of the COVID-19 pandemic crisis there.

I must say that the start of the year was good in China. However, there is an increase in COVID cases, and lockdowns which continues the drop in sales. And we now have had some store closed being good number of city lockdown. And we’ve seen traffic there significantly if that we have to be realistic about it.

However, I wish to express a positive thought, the real [ph] is that in my career in China, we have seen that the business in China is resilient and tends to be very quick to come back. And in the meantime, our e-commerce business continues to operate normally. So I believe that our guidance gives us some room to navigate development in China and the COVID situation there in-line with the Zero COVID policy. That’s what I can tell you. On margin, Gianluca…

[Gianluca Ambrogio Tagliabue, COO and CFO]

On margin, so on margin. let's set the scene on the Zegna brand. We declared in the business plan the target for 2021, at the time we were in July, 8%. We delivered 10.7% which is higher than the plan set at 9%. So let's dissect why we came in ahead of the plan. So revenues came out higher than we expected. So there is definitely a scale effect. Scale effect also since we are vertically integrated, there is part of the cost of the production, cost of product which is fixed for us. So there is a positive trickle down effect on that.

In addition, we have benefited from price increases whether that’s been activated along 2021 is going to be intensified in spring ‘22 and fall ‘22. So we are seeing the legitimacy of the Zegna brand in terms of carrying higher margin -- higher prices by consumers and also by wholesale customers. And so we have been continuing to adapt prices and this will generate also a positive effect on 2022.

We are benefiting from improved full price sell through and lower bargain and markdowns at the end of the season. This is going to continue. And on the cost side we are managing products pretty well. Of course there is -- there will be a step up as I declared by being full year listed company infancy but we are ready to absorb that.

So we are seeing improvements across the P&L, all of which should translate also some nice effects on 2022. So I think probably looking backwards, we were probably somehow proven when we delivered our plan on Zegna brand margins. And we will improve -- we have proven ourselves and stakeholders that the exit speed from 2021 is solid and is promising for 2022.

[Ermenegildo Zegna, CEO and Chairman]

So Gildo Zegma. So from a point of view as to your question about the margins, it is [indiscernible] largely and effective 2021, we had the full support of the board in 2020, to continue to accelerate the opening that took place in 2021. We also took a stock accrual that is cautious for 2021 and we believe that we are nicely accrued for that line. So certainly a one-off moment of very strong from a top line, one year of the plan is still a very important and for margin for the company looking to the long-term cost for the company.

From a channel point of view, similar to Gianluca’s comments, it's obvious that there is an impact in certain capital, where we can say compared to 2020 that's a reality. There is still at some point closedown and reopening and in 2020 at least we can confirm it will start. We continue to support our efforts in China through the situation and we continue to reopen as quickly as the cities open up the lockdowns.

[Francesca Di Pasquantonio, IR]

Karina, do you have any follow up, or can we move to the next question?

[Karina Shooter, Goldman Sachs]

No, that's perfect. Thank you so much for the comprehensive answers.

[Francesca Di Pasquantonio, IR]

Thank you. Next question, please.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Jon Dye [ph] of Jefferies. Jon, your line is now open.

[Unidentified Analyst]

Yeah. Thanks very much. Good afternoon, everybody. Thanks for taking my questions. Maybe just first one to Gildo. It's pretty impressive to keep your guidance unchanged, given what you're seeing in China at the moment. So you talked about some flexibility in that guidance and seeing stronger growth in Europe in terms of rebound in UAE and also the U.S. Could you talk a little bit about the order books that you're seeing for spring, summer, fall, winter, just to give us some idea of how they're progressing as you move to, obviously to new products with new labels, and a change in the mix? That's my first question.

My second question is to Gianluca around the margin. Just elaborating on the previous set of questions. Gianluca, can you provide a little bit more detail please around the cost efficiencies that you've seen, the scale of the increase around full price sell through year-on-year, or against 2019? And what we can expect going forward into ’22?

And then finally, maybe -- well in addition to that, if you could also flag the really strong working capital and cash flow, I think was much much better than expected. You talk about lean inventories. If you could maybe expand on that going into ‘22 as well how you're going to keep the very good cash flow running.

And finally, thinking about M&A bolt-ons, Gildo, if you can provide any sort of further details as to how you're thinking about M&A, whether it's more in the manufacturing space or a combination of manufacturing assets, plus smaller brands that don't cannibalize your existing ones. Thank you.

[Ermenegildo Zegna, CEO and Chairman]

Yeah, I will start with the last one, M&A, we surely are considering several opportunities. But I think our first priority is right now is focusing on what's going on around the world and doing even better than we did in ’21 on our target in terms of value positioning, in terms of product mix, in terms of margin, in terms of pricing, in terms of marketing. So I would say that we are focusing right now on organic growth. But as I said that previously if something comes along we surely we will consider seriously.

I can tell you that probably, right now we are thinking more about this more seriously [ph] than other one. Because we do believe that this intelligent know-how has to be preserved, in particularly the moment in which there's more enterprise that’s suffering because of the energy costs, because of the logistic issues. And so if we can give them a hand, we surely will do it.

I can tell you that our supply chain is working full speed. As a matter of fact, we are hiring people, and as you saw from the press release we're very proud to say that we are hiring. We're trying to hire some of the fellows to help them out in our factories in Italy, in particular. So that's for M&A

Summer and fall, winter, I must say that I'm extremely positive on how the checkout of the new products are doing in the store. We have been quick to renovate several stores, and we've seen the impact of the renovation in terms of lighting, in terms of shelf space, in terms of visual, in terms of how the product are put together, columns. And it helps the cross selling of the product immensely. And to be honest with you, we are seeing some comeback of the tailoring business. I mean, lots of business people going back to work, want to renew their wardrobe. And so they are buying again, some clothing, in particular sport jackets, but it's [indiscernible] sports jacket.

And I must say that the old shirts, they are wearing today, I mean, it's checking out together with the sneaker extremely well. So even -- no, we have not introduced that one brand yet to our product, because the first delivery of the One Brand label will be in the store late-May, June. The product transformation and the fact that the story is named Zegna and not [indiscernible] surely is procuring some good result.

And I can tell you that four season in terms of wholesale, in terms of selling, I think we had some good reaction, I would say in the low-double digit numbers. Even though, we’re affected by Russia. In Russia, we have embargo that we have to respect very diligently. And so, I mean of course our trade right now are stopped. That's the only minus of the four seasons.

And I can tell you about we are working already on spring-summer ’23 and the collection looks really marvelous. And so I remember it should to be One, no doubt. But thank god we did this transformation because it's what the market desires. And regardless of the country, regardless of the customer -- Gianluca, you want to go on margin?

[Francesca Di Pasquantonio, IR]

If you want to on platform with this wholesale and the current situation and then move to the margin?

[Gianluca Ambrogio Tagliabue, COO and CFO]

The current trading, we will disclose that Q1 sales in May. But as Gildo was saying we stay positive. We are hearing bit noise. Okay, fine. That is of the line. So we are seeing good momentum in terms of sales performance. Clearly, we stay cautious on the COVID situation in China, which was more likely to be March but until February, we've seen good momentum. The same momentum has over delivered sales at the end of the year.

So going, Jon to your questions about cost efficiency, good supply, performance and working capital. So in terms of efficiency, we see cost efficiency throughout the geography of our P&L. So starting from starting from the cost of the product and Gildo was saying our order intake in fall-winter ‘22 has been very high. So now the supply chain is running at full speed and full capacity. This generates fixed cost absorption that will be positive to the P&L in 2020.

The full capacity volatility is huge, over shirts, menswear, over outerwear and the constructed jacket. So that is one driver efficiency. Other driver efficiency that reduced and focused collection determines lower cost of prototypes, lower obsolescence in the stores because we have less broad collection, more narrow offering, more depth, and therefore fewer obsolescence accruals at the end of the year.

We also translate a more focused collection in terms of more focused retail spaces. Our remodeling tends to go to smaller surfaces more effective. So maybe the surfaces that were at 400 square meters, we don't need them anymore. We can well stay in 250 square meters. And finally, the fact that with iconic product, we are moving more and more into items that we carry on for more than one season, that continuously products also that generate a positive effect in terms of markdown and lower obsolescence. accruals.

In terms of full price, we are seeing sell through at full price every season going down by a few points. And yet at this point, reduce the bargain end at the end of the season to very few points in terms of incidents. We're not disclosing specific numbers, but it is becoming marginal. Another important point is that of course, the make-to-measure is gaining traction, not only informal wear, which is a resilient part of our business, but also casual wear. And this carries a premium price because we tend to present make-to-measure at 20 plus compared to where ready to wear item. So adding make-to-measure picking up also on the casual side of the offering is also a positive for the margins.

Your final question Jon was on inventory. We have been reducing and effectively managing our working capital as a whole. Our goal for 2022 is to make a further set and get as close as possible to the 2019 levels. We need to be aware that during the year there will be the transition from the all -- the three collection to the one. So we probably -- we will need probably some months to swallow that transition entirely. But the goal is to narrow the gap to 2019 levels in terms of incidents of working capital.

[Unidentified Analyst]

Got it. That’s very clear. Thank you very much.

[Francesca Di Pasquantonio, IR]

Thank you. Operator?

[Operator]

Thank you. [Operator Instructions] Our next question comes from Rogerio Fujimori of Stifel. Rogerio, your line is now open.

[Rogerio Fujimori, Stifel]

Hi, thanks for taking my questions. I have one about retail productivity for the Zegna brand. Could you give us an idea of the sales density for Zegna brand in 2021? And looking ahead, what level of sales productivity the Zegna brand can achieve in three to five years? And which retail KPIs offer perhaps the greatest opportunity for improvement?

And then if I may add a second quick one on Europe, have you seen any changing in Western European consumer behavior since the start of the war in Ukraine? Thank you.

[Francesca Di Pasquantonio, IR]

Hi, Rogerio. On your retail productivity question, we don’t disclose the metric, I'm afraid. I can tell you that you can -- you have all the elements to calculate it yourself to because we disclose the sustainability [ph] revenues, you have the number of stores. And I think that you can be fairly accurate estimate with these elements.

Gianluca and Gildo can elaborate about at the metrics and the KPIs that we look at. Clearly the growth in the Zegna brand is all going to be organic, because we are not expecting any major changes to the footprint store, but also that you are seeing that we have projected in our channel foot overall is all coming from activities. And Gianluca can take you through the key drivers of these productivity improvements.

[Multiple speakers]

[Ermenegildo Zegna, CEO and Chairman]

In European consumption, we have not seen to be honest with you any slowdown in European consumption since the Ukraine crisis, which is good news. In America, very, very strong trend. I must say that the new brand position surely has something to do with that. As I said before the store innovation, also. But I must say that in particular, the UK trend has been extremely brilliant during the past two months. Probably more in the strong market, in the stronger market in the bigger cities than in small cities. And we've seen some results, I would say in the past two months also.

So overall, a positive trend and also down for some renewal beside Russia operationally, is what it is. And sorry, in the last part, I mean, I know this is not Europe, we consider part of big Europe, Dubai, the Emirates -- the Emirates are already running, they keep going at an incredible speed and going beyond the numbers, the good numbers really ’21.

[Gianluca Ambrogio Tagliabue, COO and CFO]

Just add one point to the driver productivity summer, I mentioned before the sale throughput price is tend to be one important metric, which is directly related to performances also the average ticket. Average ticket is going up for several reasons. One definitely is the like-for-like price increases that we have been applying starting from spring ’22. And also we started in fall ’21. But it will come to full steam in spring ’22 and fall ’22. So like-for-like price increase has been one driver.

Second unit for transactions is going up, moving from formalwear to casualwear. We are seeing people coming, buying casualwear more units for specific items. So they buy two pairs of triple stitched. They buy three pairs of knit wear that they like different colors. So we are seeing also the cost, the numbers of units per transaction going up. And of course we reduced the level of offering because we decided definitely to focus on luxury position.

So the move to the One Brand means that we are leaving behind some price points that were covered by Zegna. Also this is an important factor to raise the store productivity and euro per square meter.

On the other side, the fact that any kind of renewal will consider the need to add those surfaces or rather, we can make a small bit in terms of square meters, because we carry more focused products.

[Ermenegildo Zegna, CEO and Chairman]

Rodrigo, you want to say something on Thom Browne?

[Rodrigo Bazan, CEO, Thom Browne]

Thom Browne contributed obviously -- don't disclose the details. But what we can tell you is that we have extremely healthy KPIs both from sales force coordinator, both from the average ticket. You have to remember that we're still approximately by the one which is large, but extremely healthy. We do compare ourselves to the number of established designers and luxury brands, mostly European. And we are turning extremely positive numbers in comparison to them.

And looking to the future, we will continue to strengthen the growth in client value management and growth in the quality of clients. And then in terms of stores, or the network just to the point that it makes a lot of sense to Thom Browne. Also the growth plan more than specifically opening new doors or expanding such stores.

[Ermenegildo Zegna, CEO and Chairman]

So on positive trend, I don’t know where it is trending at the beginning with made-to-measure. We have seen made-to-measure getting back close to 2019, which I think is important. So it's good indication that gradually retail base is back and seems we are quite unique in offering and the service and people are coming to us. The wedding season has been blocked for a number of seasons.

So people want to get dressed and take advantage. And so that's really -- it's very helpful. And every season so we continue to see a good traction on that side worldwide.

[Rogerio Fujimori, Stifel]

Thank you very much for the comprehensive answer.

[Operator]

Thank you. I will now hand back to Francesca for any additional questions and any closing remarks.

[Francesca Di Pasquantonio, IR]

Thank you, Alex. We have received a few questions through email. There is a question about marketing, and what are our intentions in terms of the marketing spend going forward? And if we plan to increase the spending in absolute terms and as a percentage of sales.

There is a question on digital, and what the digital present for us in terms of percentage of revenues and opportunities? And there is a question on the U.S., inquiring about the trends that we're seeing in the U.S., what is the most successful business? And what can we comment about U.S. performance in general, by customers and by challenges.

[Ermenegildo Zegna, CEO and Chairman]

I say, with the U.S. stellar performance. I haven't seen a trend in the U.S. for years. And I think there are two reasons. Most retail, I would say, we know that in the United States, we still have a good number of processers, our wholesalers even though we are converting more and more door. And I think that they are coming out and we've got inventory. And so finally, we’re going to get into some good traction with the new inventory that we delivered. And so good sell-through and good interest not only on the luxury sportswear, as I was saying before, also the retailing, because many of that -- many guys have been buying for the past two years. And they just do -- they leave their work. So that’s a part of it.

I must say that the new sneaker, with the stitch is doing extremely well, across the world, also in United States. And we have noticed that the price, we will increase prices in the middle of the season. And in South America in particular in the iconic item and in certain categories. And we've seen a good response. So no resistance to buyers.

In our retail stores, we have a few new stores. We have also One Brand and we started well the journey we've seen a good amount in traffic in New York and in Los Angeles. But I would say it's good numbers across United States and Canada. And if we want to talk about in America, then Latin America is healthy as in the past six months. So good performance both in Brazil and in Mexico, where we have a very strong brand awareness.

In terms of marketing spending, I talked about Zegna, and Rodrigo can talk about Thom Browne. Yes, in absolute terms, we decided to increase our spending, and that the spending goes I would say for rebranding for sure, goes individual, goes into project that we have, goes into social media. And I would say that this area is very good. I think is pretty well spread across the region.

But we want to highlight the strong progress of the season which is -- which are the one we talked about, the luxury leisurewear in particular the knit wear, the outer shirt, and the bigger stage. And we are going to roll also to support the new outdoor collection which we tested last fall and rapidly built out.

In terms of Thom Browne?

[Rodrigo Bazan, CEO, Thom Browne]

So for Thom Browne continuing the marketing questions, we traditionally have always invested in PR, in special shows in the work that we're doing, celebrities, which is all organic and in branding. But we have a tendency to -- and last year the Board truly supported and passionately approved last year an increase on pure marketing. We talk about increase in absolute value as well as percentage. IT’s a significant increase. And marketing is different for us, going after a specific story to communicate product to communicate to our clients. So faithfully our Board supported us last year. We will continue to plan that type of significant investment.

[Francesca Di Pasquantonio, IR]

And then we have a question on digital.

[Ermenegildo Zegna, CEO and Chairman]

Digital, yes, in digital we are seeing an extremely positive trend. The trend is across on our dotcom, across platforms such as [indiscernible] and across new localized titles such as Tmall that we launched last year in China. We are looking for the local platforms in certain market and continue to serve our clients extremely well with a better traffic response. We continue to see a very full price non-promotional trend for us. And we're extremely -- you can say that total [indiscernible] we have across DTC which for us became the majority of our sales last year.

[Francesca Di Pasquantonio, IR]

And Zegna?

[Gianluca Ambrogio Tagliabue, COO and CFO]

On Zegna, we see digital holistically, not only looking at e-commerce per se, but also looking at sales that are digitally enabled. So we have what we called internally B2C. So Zegna to consumer outreach, all customer advisors are now enabled to outreach their customer portfolio and invite them to either visit the store or to select through WhatsApp WeChat in China. The proposal of a total low cost category items of this -- of the new winter collection, and then the customers can either buy it online or come in to the stores.

So this outreach helps us greatly to activate traffic into the stores. And in the last month, we have seen this activity, digital activity as enablers of sales that are percentage wise solidly double digits in terms of representation of our repeat sales.

So that is a big component, especially for waking up sleeping customers that we would like to make aware of the new collection. So every single customer advisor is making the activity of proactively reaching out through digital tools to customers. And then ultimately and eventually this becomes a brick and mortar but is native as a digital activation.

Then the fact of pure e-commerce sales, I think that Thom Browne is likely higher than us because they have more iconic and recognizable pieces. But the move of Zegna to pay postage for iconic pieces will favor this journey of stepping up. Today, we are probably in the mid-single digit percentage in terms of DTC sales coming from pure e-commerce through our zegna.com or e-commerce platform. Another part that is nicely growing up is the sales, not existing but through retailers, which is which is becoming more and more successful, especially with the new collection that was presented in fall ’22.

[Francesca Di Pasquantonio, IR]

Thank you. Operator, I think, are there any more questions on the line? Otherwise, I think we need to wrap up.

[Operator]

We currently have no further questions.

[Francesca Di Pasquantonio, IR]

Okay. I think it’s now 3 o'clock. And we can close the conference call. Thank you very much everyone for participating. And as said we will be hosting our Investor Day on the 17 of May at Oasi Zegna. And we will be reaching out with other details and a fully detailed conference at the end of the day.

[Ermenegildo Zegna, CEO and Chairman]

Thank you.

[Operator]

Thank you for joining today's call. You may now disconnect.