Ermenegildo Zegna Earnings Call Balances Optimism, Caution

Ermenegildo Zegna Group ((ZGN)) has held its Q4 earnings call. Read on for the main highlights of the call.

Ermenegildo Zegna Group’s latest earnings call struck a cautiously upbeat tone, with management highlighting stronger profitability, healthier cash generation and an improved balance sheet despite flat reported sales. Executives balanced this optimism with a frank acknowledgment of short‑term pressures from SG&A deleverage, wholesale rationalization, FX headwinds and geopolitical uncertainty.

Resilient Revenues Masked by Currency and Timing Effects

Full‑year revenues came in at EUR 1.917 billion, down 1.5% year on year on a reported basis but showing 1.1% organic growth once currency and timing effects are stripped out. Management framed this as evidence of underlying demand resilience, particularly in direct‑to‑consumer channels, even as macro and FX conditions weighed on the headline number.

Gross Margin Lift from Direct‑to‑Consumer Shift

Group gross margin expanded by 90 basis points to 67.5%, a key positive in the call. The improvement was driven largely by the growing weight of direct‑to‑consumer business, which now accounts for 82% of branded revenues versus 78% a year earlier, underscoring the strategic shift away from lower‑margin wholesale.

Profitability Up Despite One‑Off Provisions

Adjusted group EBIT reached EUR 163 million, or EUR 173 million when excluding EUR 10 million of provisions linked to Saks. The Zegna brand segment delivered EUR 197 million of adjusted EBIT, rising to an implied EUR 200 million and a 14.7% margin without its share of provisions, while group reported profit increased 20% to EUR 109.5 million.

Strong Free Cash Flow and Return to Net Cash

Cash generation was a standout, with free cash flow jumping to EUR 82 million from EUR 10 million in the prior year. Combined with EUR 107 million of proceeds from the sale of treasury shares to Temasek, this swing allowed the group to move from EUR 94 million of net debt to a net cash position of EUR 52 million at year‑end.

Working Capital Discipline and Leaner Inventories

Trade working capital was cut to EUR 408 million, equal to 21.3% of revenues, down from EUR 460 million or 23.6% of sales previously. Management credited better inventory planning, tighter control of trade receivables and some FX tailwinds, leading to roughly a 230‑basis‑point improvement as a share of revenues.

Marketing Discipline and Capex Set to Rise

Marketing spend was kept steady at EUR 121 million, or 6.3% of revenues, in line with the group’s mid‑term target of around 6%, signaling continued brand support without overspend. Capital expenditure totaled EUR 103 million, or 5.4% of revenues, and is expected to climb toward roughly 7% in 2026 as the group completes its shoe factory and IT projects.

Brand Initiatives Power Visibility and Customer Reach

The call highlighted a series of high‑profile product and brand moves, from Tom Ford fashion shows and Zegna’s “The Family Closet” concept to the new “memory” fragrance. Thom Browne’s collaboration with ASICS on a sneaker launch in early March also outperformed expectations, delivering strong social media visibility and incremental sales that should support customer acquisition and retention.

Roadmap to Double‑Digit Margins at Growth Brands

Management reiterated its ambition for Thom Browne and Tom Ford to reach double‑digit EBIT margins over time, positioning them as key growth engines. An improved second half at Tom Ford, which swung from a loss in the first half to a positive EBIT in the second, was cited as evidence that operational changes are starting to take hold.

Dividend Signals Confidence in Cash Generation

The board proposed a dividend of EUR 0.12 per ordinary share, totaling around EUR 32 million, underscoring confidence in the company’s cash‑flow profile. The payout also reflects a disciplined approach to capital allocation, balancing investment needs with shareholder returns as the balance sheet shifts into net cash.

FX Headwinds Weigh on Reported Top Line

Despite underlying growth, reported revenues contracted 1.5% year on year, with management pointing squarely to foreign‑exchange as a notable drag. They anticipate FX will shave around two percentage points off revenues in 2026 versus 2025, adding another layer of uncertainty to headline growth and margin progress.

Rising SG&A Costs Pressure Near‑Term Margins

Selling, general and administrative expenses increased to EUR 1.034 billion, representing 53.9% of revenues versus 51.8% last year. The 210‑basis‑point rise reflects the cost of investing in talent, systems and store expansion for Thom Browne and Tom Ford, alongside negative operating leverage from the shrinking wholesale base.

Thom Browne Hit Hard by Wholesale Rationalization

Thom Browne was the most acutely affected by the wholesale cleanup, generating just EUR 1 million of adjusted EBIT, including EUR 2 million of Saks‑related provisions. Management expects profitability to recover as the brand leans more heavily on direct‑to‑consumer channels, but acknowledged the near‑term margin drag from the deliberate wholesale contraction.

Tom Ford’s Loss Contained to First Half

Tom Ford Fashion posted a full‑year adjusted EBIT loss of EUR 16 million, with the red ink concentrated in the first half of the year. The business returned to positive EBIT in the second half, even after absorbing EUR 5 million of provisions tied to Saks, suggesting that restructuring efforts and brand momentum are starting to stabilize performance.

Middle East Geopolitics Dampen Regional Demand

The Middle East accounts for a mid‑ to high single‑digit share of group revenues and has seen softer demand since the outbreak of conflict. Stores remain open, with the UAE the largest market in the region, but traffic and spending are meaningfully lower, and management stressed that the duration and depth of the impact on 2026 remain highly uncertain.

Wholesale Contraction to Persist Through 2026

Management guided to further wholesale declines in 2026 as the company continues its channel shift strategy. Zegna’s wholesale revenues are expected to fall by the mid‑teens, Tom Ford’s by a negative single‑digit rate and Thom Browne’s by a still double‑digit but moderating pace, implying ongoing top‑line friction but a cleaner, more DTC‑driven model ahead.

Saks‑Related Provisions Add Caution Around Receivables

The group booked EUR 10 million of provisions for potential losses on trade receivables from Saks Global, split across Zegna, Thom Browne and Tom Ford. These one‑offs weighed on adjusted EBIT and highlighted the credit risk inherent in wholesale partners, reinforcing management’s strategic shift toward owned channels.

Guidance: Steady Margins, FX Drag and DTC Momentum

For 2026, management is targeting revenues of around EUR 2 billion with an EBIT margin broadly flat versus 2025 when adjusted for one‑offs, reflecting a “sideline” stance on near‑term margin expansion. They expect about a two‑point FX headwind, continued wholesale reductions, sustained DTC growth, marketing spend around 6% of revenues and a medium‑term push to restore double‑digit EBIT margins at Tom Ford and Thom Browne.

Zegna’s earnings call painted the picture of a group trading short‑term complexity for a stronger long‑term profile, as higher margins, healthier cash flow and a net cash position offset weak reported growth and SG&A pressure. For investors, the story hinges on execution: delivering the DTC transition, lifting growth brands to double‑digit profitability and managing FX and geopolitical risks without derailing the margin roadmap.