Zegna Says China Luxury Demand Returning After New Leaders Named

Ermenegildo Zegna SpA said Chinese demand for its luxury products rebounded in the fourth quarter, boosting 2012 sales growth and easing concern that the Asian nation’s leadership transition may continue to weigh on revenue.

“We saw a change of trend,” the eponymous chief executive officer of the Trivero, Italy-based company said in a Jan. 12 interview before Zegna’s fall-winter 2013 fashion show in Milan. “The slowdown in China lasted for about a quarter.”

Decelerating growth in China has been a concern for luxury companies, who benefited from a boom in demand for watches and jewelry earlier this decade. Zegna and Burberry Group Plc in September reported weaker gains in the country ahead of a once-a-decade change by the ruling Communist Party.

While revenue growth is not yet back to where it was a few years ago, “people came back to buy” in the last three months of 2012, Zegna said, adding that smaller cities in China continued to outperform Beijing and Shanghai. “Overall, I hear good news from other brands too in China.”

China’s leadership handover, which began in November and will be completed in March, should provide a more favorable backdrop for a recovery in gift-giving, even if it comes in a more temperate manner than in the past, Credit Suisse analyst Rogerio Fujimori wrote in a note last week.

Preliminary figures for 2012 suggest that Zegna’s sales advanced 11 percent to 1.25 billion euros ($1.67 billion) from 1.13 billion euros a year earlier, the CEO said, adding that full-year profitability was “pretty good.”

Tourist Spend

A decision to limit discounts in Europe and the U.S. restrained revenue growth in those regions, which nonetheless benefited from purchases by wealthy visitors from Asia, Brazil, Mexico and Russia, the CEO said. Demand from those regions has continued this month, he said, citing strong sales of Zegna’s most expensive sportswear as well as leather accessories.

Chinese travellers, motivated by large price differentials and favorable exchange rates, contribute about a third of luxury sales in Europe, Fujimori estimates. Overall, tourists account for 40 percent of global luxury spend, according to Bain & Co. Zegna said he expects that rate to increase.

The closely-held clothier plans to open about 30 stores in 2013, a third of which will be in China with the rest in Latin America, the U.S., Europe and Africa, Zegna said. At least two of the openings will be in Australia, where the company is taking control of its distribution as incomes rise and the country becomes “the California of Asia,” or a holiday destination for people from the region, the CEO said.

Conservative Forecast

Zegna is forecasting revenue growth of less than 10 percent this year, excluding currency swings, a prediction the CEO said is “conservative.” Worldwide luxury expenditure will advance 7 percent in 2013, according to Boston Consulting Group.

In China, sales may rise by a low double-digit percentage, the executive said. Growth in the country is becoming tougher to achieve, and also more costly, because of greater competition and an increasingly sophisticated consumer, meaning brands need to invest more to attract demand, Zegna said.

Retail expansion and the appointment of former Yves Saint Laurent designer Stefano Pilati as head of design at Ermenegildo Zegna and creative director of Agnona means Zegna has plenty to focus on this year without making acquisitions, the CEO said.

“We’ll see,” Zegna said. “We are always open for new things. We have enough to grow from organic growth.”

Zegna ruled out selling shares in an initial public offering, saying the company’s cash pile, which increased last year, means it doesn’t need to raise extra funds to expand.

“We want to remain private,” Zegna said. “We believe in the force of being an independent company.”

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