Ermenegildo Zegna (NYSE:ZGN) (in the following referred to as “Zegna”) stands out as a fresh contender in the luxury domain, implementing strategic maneuvers to outmaneuver the big guns. A dash into the stock market was seen as a savvy move, timed perfectly with the frenzy for high-end goods. However, after a short-lived surge, the share price has wallowed in the doldrums, failing to reflect the company’s steadfast performance. But don’t despair. A forthcoming Capital Markets Day could be the silver bullet investors have been waiting for. Let’s delve deeper into whether Zegna is a tempting investment right now.

But before we jump in, let’s take a visual journey into this intriguing luxury enterprise whose roots run deep.

Embarking on Excellence

The story of Zegna commenced in 1910, when Ermenegildo Zegna set up shop in Northern Italy, nurturing a vision to craft the world’s most exquisite fabrics. He embarked on an odyssey to import top-tier natural fibers directly to Italy, exporting finely woven products worldwide.

Ermenegildo Zegna firmly believed that sustained success lies in fostering harmony among industry, people, and nature.

(Born in Oasi)

Driven by unwavering commitment to product quality and regional artistry, the founder expanded his humble wool mill in an Italian village. The “Oasi Zegna” emerged from this vision, blooming into a colossal reforestation project around the mill, and a myriad of contributions to local society. Today, this unspoiled natural haven, “Oasi Cashmere,” narrates the tale of sustainable opulence at the Zegna brand, culminating in its “Oasi Cashmere” collection.

Zeroing in further, Zegna isn’t a household name like other luxurious brands, allowing us to fathom the brand’s birth and the family’s aspirations to chart its future.

After the torchbearers expanded the enterprise both geographically and product-wise, Ermenegildo “Gildo” Zegna and Paolo, their sons, kickstarted a brand extension strategy. It encompassed organic growth, strategic acquisitions, and vertical integration of Zegna’s supply chain. Snapping up specialist, artisanal Italian companies paved the way for not just a fully integrated supply chain, but also for providing production services for other high-end fashion labels. But I’m leaving the details for later. First, let’s dissect the unconventional acquisitions in recent years.

In 2018, the company acquired an 85% stake in Thom Browne, a New York-based luxury fashion label, in a $500-million deal. The founder, Thom Browne, still retains the remaining shares. This move injected fresh momentum into the group’s growth trajectory by lending strong manufacturing muscle and a robust supply chain network to the relatively diminutive label. The luxury textile platform also paved the way for the acquisition of Tom Ford’s fashion subsidiary in 2022, under a long-term licensing arrangement with Estée Lauder (EL). Consequently, Zegna is set to produce a wide array of Tom Ford’s line, from menswear to home design.

Now, the present structure features two fully-owned flagship brands, shepherding a robust manufacturing group and an array of license agreements.

The Business Balancing Act

Having chronicled the origins and evolution of the current Zegna Group, let’s unpack the company’s finances. As per the latest quarterly revenue report, Zegna’s sales are categorized into three segments:

• Zegna
• Thom Browne
• Tom Ford Fashion

Zegna

Zegna, the foremost segment, commands over 70% of the company’s total sales. While the lion’s share emerges from the parent brand Zegna, it also encompasses the company’s textile platform and third-party offerings, serving as the conglomerate’s “original” nucleus.

Now, things have been stirring here. The flagship brand underwent a substantial rebranding, consolidating the entire gamut under the ZEGNA brand in 2022, revamping its image from having multiple sub-brands like Ermenegildo Zegna, Z Zegna, and Ermenegildo Zegna XXX. The One Brand strategy refashions the brand, shifting the focus from strictly formal wear to encompass more casual yet opulent collections. This new emphasis on luxury leisurewear caters to a younger demographic veering towards casual dressing, a trend fueled by the pandemic’s impact on the work setting. Moreover, these products are less seasonal, rendering store management more efficient and potentially bolstering turnover from a broader customer base. The company’s management expounds on the advantages of this rebranding strategy:

Thanks to the One Brand strategy and changes in our brand positioning and offering, we can develop more sophisticated merchandising, blending seasonal products with our all-season Essentials collections to achieve higher sell-through. Dynamic management of our DOSs, including location optimization, and thoughtful attention to customer relationship management and retail KPIs are integral to our Retail Excellence strategy.

From my lens, Zegna’s rebranding was a necessary step to perpetuate customer allure, unlock fresh growth channels, and flatten the seasonal sales curve.