Ermenegildo Zegna(ZGN) - 2024 Q4 - Annual Report

PART I ITEM 3: KEY INFORMATION This section outlines key risks including brand reputation, global events, strategy execution, supply chain, currency, and internal control weaknesses Risk Factors The Group faces diverse business, operational, strategic, and financial risks, including brand integrity, global events, acquisition integration, currency volatility, and internal control weaknesses - The Group's business highly depends on the recognition, integrity, and reputation of its brands (ZEGNA, Thom Browne, TOM FORD FASHION), vulnerable to unmet customer expectations, negative publicity, or supplier misconduct[76][77][79] - The company may not successfully implement its strategy, including strengthening the ZEGNA brand, expanding TOM FORD FASHION, and reinforcing Thom Browne's DTC channel, potentially adversely affecting results[95][96] - The Group faces acquisition risks, such as the TFI Acquisition, including undetected liabilities, integration difficulties, and failure to achieve expected synergies[100] - 26% of 2024 revenues from the Greater China Region exposes the Group to economic slowdowns, geopolitical tensions, and consumer behavior changes in that market[88][89] - Material weaknesses in internal control over financial reporting could lead to material misstatements and impact investor confidence[70][207] - The Group faces currency exchange risk due to Euro-denominated expenses and revenues in other currencies like Chinese Renminbi and U.S. Dollar, with U.S. Dollar appreciation potentially causing unrealized losses on U.S. Dollar liabilities[149][152] - Controlling shareholder Monterubello holds approximately 60.5% of Ordinary Shares and 74.2% of voting power, enabling control over shareholder meeting outcomes and potential prevention of favored changes of control[203] ITEM 4: INFORMATION ON THE COMPANY This section details the company's history, business model, strengths, and strategy, focusing on its luxury brands, integrated supply chain, and global operations History and Development of the Company Established in 1910, the Group evolved into a global luxury entity through international expansion, strategic acquisitions, and a 2021 NYSE listing - The Group was established in 1910 in Trivero, Italy, by Ermenegildo Zegna and has been led by the Zegna family for three generations[214][217] - In 2018, the Group acquired an 85% interest in Thom Browne, increasing its holding to 92% by June 2024[224] - On April 28, 2023, the Company completed the acquisition of Tom Ford International (TFI), becoming the long-term licensee for the TOM FORD FASHION business[225] - The company's Ordinary Shares began trading on the NYSE on December 20, 2021, following a Business Combination[228] Business Overview The Group is a global luxury menswear leader with three brands, a vertically integrated supply chain, and a balanced global presence, focusing on brand elevation and DTC expansion Consolidated Revenues by Segment (FY 2022-2024) | Segment | 2024 Revenues (€M) | 2023 Revenues (€M) | 2022 Revenues (€M) | | :--- | :--- | :--- | :--- | | Zegna | 1,348.8 | 1,322.0 | 1,176.7 | | Thom Browne | 314.8 | 380.3 | 330.9 | | Tom Ford Fashion | 314.5 | 235.5 | 0.0 | | Intersegment eliminations | (31.5) | (33.3) | (14.8) | | Total | 1,946.6 | 1,904.5 | 1,492.8 | Consolidated Revenues by Geographic Area (FY 2022-2024) | Geographic Area | 2024 Revenues (€M) | 2023 Revenues (€M) | 2022 Revenues (€M) | | :--- | :--- | :--- | :--- | | EMEA | 680.3 | 658.7 | 520.2 | | Americas | 524.8 | 454.9 | 324.6 | | Greater China Region | 509.4 | 595.5 | 494.1 | | Rest of APAC | 229.9 | 192.5 | 150.7 | | Total (excl. royalties) | 1,944.3 | 1,901.6 | 1,489.6 | - The Group's strategy focuses on nourishing ZEGNA, rebalancing Thom Browne's distribution to DTC, aligning TOM FORD FASHION, and pursuing sustainable development via its Made in Italy platform[268] - The Group operates 461 Directly Operated Stores (DOSs) as of December 31, 2024, accounting for 71% of consolidated revenues in 2024[265] - The global personal luxury goods market was estimated at €363 billion in 2024, a 2% decrease from 2023, but is projected to grow to €460-500 billion by 2030[246][252] Organizational Structure Ermenegildo Zegna N.V. is the Group's parent company, with significant subsidiaries detailed in Exhibit 8.1 of the report - Ermenegildo Zegna N.V. is the parent company of the Group, with significant subsidiaries listed as an exhibit in the report[370] Property, Plants and Equipment The Group operates global owned and leased properties, with total PP&E at €204.8 million in 2024, and plans a new Italian production facility by 2026 - The Group operates manufacturing facilities in Italy, Switzerland, and Turkey, leasing most of its 461 directly operated stores (DOSs) worldwide[101][371][376] - The total carrying value of property, plant and equipment increased to €204.8 million at December 31, 2024, from €159.6 million at December 31, 2023[378] - The Group plans a new luxury footwear and leather goods production and R&D facility in Sala Baganza, Italy, expected to be completed by end of 2026 and employ over 300 people by 2027[377] ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides a detailed financial review for FY2022-2024, covering operating results, segment performance, liquidity, capital resources, and non-IFRS financial measures Operating Results Revenues grew 2.2% to €1,946.6 million in 2024, but profit decreased to €90.9 million due to higher SG&A despite improved gross margin Key Financial Performance (2022-2024) | Metric (€ thousands) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Revenues | 1,946,647 | 1,904,549 | 1,492,840 | | Profit | 90,861 | 135,661 | 65,279 | | Adjusted EBIT | 184,020 | 220,212 | 157,729 | | Adjusted Profit | 97,776 | 145,235 | 73,629 | Revenues by Brand and Product Line (2024 vs 2023) | Brand/Product Line | 2024 Revenues (€M) | 2023 Revenues (€M) | Growth % | Organic Growth % | | :--- | :--- | :--- | :--- | :--- | | ZEGNA brand | 1,163.7 | 1,109.5 | 4.9% | 5.5% | | Thom Browne | 314.7 | 378.4 | (16.8%) | (20.5%) | | TOM FORD FASHION | 314.5 | 235.5 | 33.5% | (0.7%) | | Textile | 138.2 | 151.0 | (8.5%) | (7.5%) | | Other | 15.5 | 30.1 | (48.4%) | (32.1%) | | Total | 1,946.6 | 1,904.5 | 2.2% | (1.9%) | - Gross profit margin increased to 66.6% in 2024 from 64.3% in 2023, driven by higher sales from the DTC channel, which reached 77.6% of branded product sales[467][403] - SG&A expenses rose by 11.9% to €1,008.3 million in 2024, due to TOM FORD FASHION's full-year impact and expansion, and growth of ZEGNA and Thom Browne DTC networks[475][476][477] - Revenues in the Greater China Region decreased by 14.5% in 2024, reflecting challenging luxury market conditions impacting all Group brands[451] Liquidity and Capital Resources Net cash from operations was €279.1 million in 2024, but increased capital expenditures of €125.5 million led to €94.2 million net financial indebtedness Summary of Cash Flows (2022-2024) | Cash Flow Activity (€ thousands) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net cash flows from operating activities | 279,129 | 275,382 | 146,398 | | Net cash flows (used in)/from investing activities | (126,014) | 21,786 | (57,335) | | Net cash flows used in financing activities | (234,534) | (250,494) | (296,997) | | Net (decrease)/increase in cash | (77,149) | 41,958 | (205,470) | - Capital expenditure increased significantly to €125.5 million in 2024 from €77.9 million in 2023, with €77 million for the store network and €25 million for production[582] Net Financial Indebtedness/(Cash Surplus) Calculation | (€ thousands) | At Dec 31, 2024 | At Dec 31, 2023 | | :--- | :--- | :--- | | Total borrowings, other financial liabilities and derivatives | 388,705 | 403,519 | | Total cash and cash equivalents, other current financial assets and derivatives | (294,480) | (392,709) | | Net Financial Indebtedness/(Cash Surplus) | 94,225 | 10,810 | - At December 31, 2024, the Group had committed revolving credit lines of €335 million, with €40 million drawn down, and certain lines linked to ESG targets[597] Critical Accounting Estimates Key accounting estimates involve impairment testing of non-current assets, goodwill, brand valuation, derivatives, inventory provisions, and deferred tax asset recoverability - Key accounting estimates include impairment testing of non-current assets, goodwill, and indefinite-lived brands, relying on assumptions about future cash flows, growth rates, and discount rates[1387][1388] - The valuation of the put option liability for the remaining 8% non-controlling interest in Thom Browne is a critical estimate, based on future profitability (EBITDA) forecasts and discount rates[1400] - Provisions for obsolete inventory are a significant estimate, based on collection age and probability of sales through secondary channels like outlets[1394][1395] - The recoverability of deferred tax assets is assessed based on the probability of generating sufficient future taxable profits across various jurisdictions[1397] ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the Board and Senior Management composition, 2024 compensation, board practices, and employee statistics, noting growth to 7,395 employees Directors and Senior Management The Company has an eleven-member one-tier board, including the Chairman & CEO, and a Senior Management Team comprising key brand and functional leaders Board of Directors | Name | Position | | :--- | :--- | | Mr. Ermenegildo Zegna di Monte Rubello | Chairperson, Chief Executive Officer and Executive Director | | Mr. Andrea C. Bonomi | Non-Executive Director | | Ms. Angelica Cheung | Non-Executive Director | | Mr. Domenico De Sole | Non-Executive Director | | Mr. Sergio P. Ermotti | Lead Non-Executive Director and Non-Executive Director | | Mr. Ronald B. Johnson | Non-Executive Director | | Ms. Valerie A. Mars | Non-Executive Director | | Mr. Michele Norsa | Non-Executive Director | | Mr. Henry Peter | Non-Executive Director | | Ms. Anna Zegna di Monte Rubello | Non-Executive Director | | Mr. Paolo Zegna di Monte Rubello | Non-Executive Director | - The Senior Management Team includes the CEO, COO/CFO, Zegna Artistic Director, Head of Textiles, and the CEOs of Thom Browne and TOM FORD FASHION[739][746] Compensation This section details FY2024 Board and Senior Management compensation, including a new 2025-2027 executive agreement for the CEO with long-term equity incentives Board of Directors Compensation for FY 2024 (€) | Name | Office Held | Total Compensation | | :--- | :--- | :--- | | Mr. Ermenegildo Zegna di Monte Rubello | Chairperson, CEO & Executive Director | 4,685,292 | | Mr. Andrea C. Bonomi | Non-Executive Director | 164,961 | | Ms. Angelica Cheung | Non-Executive Director | 180,838 | | Mr. Domenico De Sole | Non-Executive Director | 160,873 | | Mr. Sergio P. Ermotti | Lead Non-Executive Director | 181,094 | | Mr. Ronald B. Johnson | Non-Executive Director | 175,873 | | Ms. Valerie A Mars | Non-Executive Director | 190,873 | | Mr. Michele Norsa | Non-Executive Director | 185,873 | | Mr. Henry Peter | Non-Executive Director | 321,521 | | Ms. Anna Zegna di Monte Rubello | Non-Executive Director | 163,089 | | Mr. Paolo Zegna di Monte Rubello | Non-Executive Director | 199,021 | - A new executive agreement for the CEO for 2025-2027 includes a €2.0 million base salary, a short-term incentive up to 200% of base, and a long-term equity incentive targeting 300% of base salary, tied to TSR, EPS, and net financial position[778][779] - The Senior Management Team (excluding CEO) received €8.2 million in fixed pay, €2.8 million in short-term cash incentives, and €7.1 million related to long-term incentive plans for FY2024[786][787][789] Board Practices The Board has three standing committees: Audit, Compensation, and Governance & Sustainability, each with a charter and independent majority, overseeing key governance areas - The Board has three standing committees: Audit, Compensation, and Governance and Sustainability[819] - The Audit Committee, chaired by Valerie A. Mars, oversees financial reporting integrity, internal controls, and the independent auditor relationship[821][823] - The Compensation Committee, chaired by Henry Peter, determines executive compensation and reviews remuneration structures[824][826] - The Governance and Sustainability Committee, chaired by Michele Norsa, handles board nominations, performance assessments, and oversight of the Group's sustainability policies and reporting[827][828] Employees The Group's employee count increased to 7,395 in 2024, driven by Tom Ford Fashion expansion, new store openings, and IT/marketing reinforcement Employee Headcount by Year | Category | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | :--- | | White Collars | 4,997 | 4,734 | 3,953 | | Blue Collars | 2,188 | 2,191 | 2,077 | | Temporary employees | 210 | 276 | 226 | | Total | 7,395 | 7,201 | 6,256 | - The increase in employees in 2024 was mainly due to Tom Ford Fashion expansion, new Thom Browne and Zegna retail stores, and hiring in Group IT and marketing[830][834] ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the company's ownership structure, with Monterubello as controlling shareholder, and arm's-length related party transactions reviewed by the Audit Committee Major Shareholders As of March 14, 2025, Monterubello s.s. is the controlling shareholder with 60.5% of Ordinary Shares and 74.2% voting power via loyalty program Beneficial Ownership as of March 14, 2025 | Beneficial Owner | % of Ordinary Shares | % of Voting Power | | :--- | :--- | :--- | | Monterubello s.s. | 60.5% | 74.2% | | Strategic Holding Group S.à r.l. | 12.1% | — | | Ermenegildo Zegna di Monte Rubello | 3.4% | 3.4% | - Monterubello is the controlling shareholder, with voting power enhanced by the loyalty voting structure assigning Special Voting Shares A to long-term shareholders[836] Related Party Transactions The Group conducts arm's-length commercial and financial transactions with related parties, including associates and Zegna family-controlled entities, reviewed by the Audit Committee - All related party transactions are conducted on normal commercial terms and are reviewed and approved by the Audit Committee[843][844] - Key transactions include raw material purchases from associates like Filati Biagioli Modesto and from shareholder-controlled companies like Schneider Group[1600] - The Group leases key real estate properties, including manufacturing facilities and offices, from EZ Real Estate S.r.l., an entity connected to the Zegna family[372][1600] - UBS Group AG is now a related party, providing banking, credit, and hedging services to the Group following Sergio Ermotti's appointment as CEO[1601] ITEM 8: FINANCIAL INFORMATION This section includes audited Consolidated Financial Statements, details legal proceedings like the Thom Browne/Adidas trademark dispute, and outlines the dividend policy Consolidated Statements and Other Financial Information This section includes audited financial statements, details the Thom Browne/Adidas trademark dispute, and outlines the dividend policy targeting 25-30% payout - Thom Browne, Inc. is involved in ongoing trademark infringement legal proceedings with Adidas AG, with initial rulings favorable to Thom Browne but some appeals pending[855][856][857] - The company's dividend policy targets a payout ratio of 25% to 30% of profit attributable to shareholders[859] - For FY2024, the company intends to propose a dividend of €0.12 per share, totaling approximately €30 million, subject to 2025 annual General Meeting approval[865] ITEM 10: ADDITIONAL INFORMATION This section details the company's corporate structure, share capital, loyalty voting, board powers, shareholder meetings, and material Dutch and Italian tax considerations Memorandum and Articles of Association Governed by Dutch law, the company has a one-tier board and a loyalty voting structure rewarding long-term shareholders with additional voting rights - The company has a loyalty voting structure granting Special Voting Shares A, B, and C for 2, 5, and 10 years of Ordinary Share holding, providing 1, 4, and 9 extra votes per share respectively[924][925] - The Board is authorized to issue shares and limit or exclude pre-emptive rights for five years from the Business Combination Closing Date[881][885] - The IIAC Sponsor has the right to nominate one Non-Executive Director, provided it maintains a minimum holding of 5% of outstanding Ordinary Shares[905][36] - Major corporate decisions, including business transfers or acquiring at least one-third of assets, require General Meeting approval[918] Taxation This section details U.S., Dutch, and Italian tax considerations for shareholders, including dividend and capital gains taxation, PFIC status, and loyalty voting share treatment - For U.S. tax purposes, the company does not expect to be classified as a Passive Foreign Investment Company (PFIC), though this is an annual determination[984][986] - The U.S. federal income tax treatment of receiving, owning, and disposing of Special Voting Shares from the loyalty program is uncertain[998] - The company obtained a Dutch tax ruling (valid until December 31, 2026) confirming distributions will not be subject to Dutch dividend withholding tax, as it is exclusively tax resident in Italy[1019][185] - For Italian tax purposes, dividends to non-resident individuals are generally subject to a 26% withholding tax, potentially reduced to 1.2% for qualifying EU/EEA corporate entities or by tax treaties[1062][1065] - Capital gains realized by non-Italian resident holders on the sale of non-qualified listed shares are generally not subject to Italian taxation[1098] ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS This section refers to Note 35 of the Consolidated Financial Statements for detailed disclosures on market risks, including foreign currency, interest rate, and credit risk - Detailed disclosures about market risks, including foreign currency, interest rate, and credit risk, are provided in Note 35 to the Consolidated Financial Statements[1128] PART II ITEM 15: CONTROLS AND PROCEDURES Management concluded that disclosure controls and ICFR were ineffective as of December 31, 2024, due to material weaknesses, primarily affecting Tom Ford Fashion, with a 2025 remediation plan - Management concluded that as of December 31, 2024, the company's disclosure controls and procedures and internal control over financial reporting (ICFR) were not effective[1136][1149] - Material weaknesses were identified in COSO's Control Activities and Information & Communication components, primarily due to issues at the newly acquired Tom Ford Fashion business, including ineffective segregation of duties[1153][1154] - The material weakness related to the Monitoring component, identified in 2023, was successfully remediated during 2024[1146] - A remediation plan for 2025 is in place to address remaining material weaknesses, focusing on designing and implementing controls, including segregation of duties, at Tom Ford Fashion[1156] - Deloitte & Touche S.p.A. issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2024[1163][1218] ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES This section details fees paid to Deloitte & Touche S.p.A., totaling €6.011 million in 2024, categorized by service, with Audit Committee pre-approval for independence Principal Accountant Fees (€ thousands) | Fee Category | 2024 | 2023 | | :--- | :--- | :--- | | Audit fees | 5,318 | 5,972 | | Audit-related fees | 251 | 127 | | Tax fees | 374 | 356 | | All other fees | 68 | 28 | | Total | 6,011 | 6,483 | - The Audit Committee pre-approves all audit and non-audit services from the independent registered public accounting firm to ensure independence[1178] ITEM 16G: CORPORATE GOVERNANCE As a foreign private issuer, the company's corporate governance differs from NYSE standards, particularly in board independence and auditor appointment, following 'comply or explain' - The company follows Dutch corporate governance practices, differing from NYSE standards for U.S. domestic companies, especially in board independence definitions and committee composition[1184] - Under Dutch law, the external auditor is appointed by the General Meeting, unlike NYSE standards requiring audit committee appointment[1184] - The Compensation Committee is not required to be entirely independent; currently, two out of three members are independent[1184] ITEM 16K: CYBERSECURITY The Group manages cybersecurity risk via an integrated framework, overseen by the Audit Committee, with no material incidents in the last three fiscal years - Cybersecurity risk is managed through a Group-wide framework, with the Board's Audit Committee providing oversight[1191][1200] - The governance structure includes a CISO for each operating segment and a central Cybersecurity Committee for significant incident management[1200][1202] - The Group uses external consultants for services, penetration testing, and incident response, and maintains a Group-wide cybersecurity insurance policy[1192][1196] - The company experienced a ransomware attack in August 2021 but has not had any material cybersecurity incidents in the last three fiscal years[1199] PART III ITEM 18: FINANCIAL STATEMENTS This section presents the audited Consolidated Financial Statements for 2022-2024, including the independent auditor's report with an unqualified opinion on financials and an adverse opinion on ICFR Consolidated Statement of Profit and Loss Profit decreased to €90.9 million in 2024 from €135.7 million in 2023, despite revenues increasing to €1,946.6 million, due to higher SG&A Consolidated Statement of Profit and Loss Summary (€ thousands) | Line Item | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Revenues | 1,946,647 | 1,904,549 | 1,492,840 | | Gross profit | 1,296,560 | 1,224,314 | 928,008 | | Operating profit | 166,852 | 208,148 | 147,777 | | Profit before taxes | 130,608 | 169,094 | 101,081 | | Profit | 90,861 | 135,661 | 65,279 | Earnings Per Share (€) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Basic earnings per share | 0.31 | 0.49 | 0.22 | | Diluted earnings per share | 0.30 | 0.48 | 0.21 | Consolidated Statement of Financial Position Total assets increased to €2,834.0 million at December 31, 2024, with equity growing to €982.9 million, driven by higher non-current assets Consolidated Statement of Financial Position Summary (€ thousands) | Line Item | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | 2,833,973 | 2,767,011 | | Total Non-current assets | 1,627,811 | 1,479,375 | | Total Current assets | 1,206,162 | 1,287,636 | | Total Equity and Liabilities | 2,833,973 | 2,767,011 | | Total Equity | 982,887 | 900,896 | | Total Liabilities | 1,851,086 | 1,866,115 | Consolidated Cash Flow Statement Net cash decreased by €77.1 million in 2024, with €279.1 million from operations, €126.0 million used in investing, and €234.5 million used in financing Consolidated Cash Flow Statement Summary (€ thousands) | Line Item | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net cash flows from operating activities | 279,129 | 275,382 | 146,398 | | Net cash flows (used in)/from investing activities | (126,014) | 21,786 | (57,335) | | Net cash flows used in financing activities | (234,534) | (250,494) | (296,997) | | Net (decrease)/increase in cash and cash equivalents | (77,149) | 41,958 | (205,470) | Notes to the Consolidated Financial Statements Notes provide detailed accounting policies and breakdowns for segment reporting, revenue, intangible assets, PP&E, leases, borrowings, related parties, and business combinations - The Group operates in three segments: Zegna, Thom Browne, and Tom Ford Fashion, with Zegna being the largest at €1.35 billion in 2024 revenues before intersegment eliminations[1406][1411] - Goodwill and indefinite-lived brands totaled €448.8 million at year-end 2024, primarily allocated to the Thom Browne CGU (€415.5 million), with no impairment found[1466][1471] - The April 2023 TOM FORD FASHION acquisition involved recognizing a license agreement as an intangible asset with a fair value of €99.3 million and a 30-year useful life[1472][1662] - The Group has a put option liability for the remaining 8% non-controlling interest in Thom Browne, valued at €127.1 million at December 31, 2024, with exercise price based on future EBITDA[1539][1541] - Total borrowings were €373.6 million at December 31, 2024, down from €402.6 million in 2023, with €335 million in committed revolving credit lines[1530][1537]