Executive Summary / Key Takeaways

• Ermenegildo Zegna (NYSE:ZGN) is strategically transforming into a Direct-to-Consumer (DTC) centric luxury powerhouse, leveraging its rich Italian heritage and integrated supply chain to drive growth and enhance profitability.
• The company demonstrated resilience in H1 2025, with revenues of €928 million (down 2% organically) and a notable 110 basis point gross margin improvement to 67.5%, primarily fueled by DTC channels now representing 82% of branded revenues.
• Zegna's core brand continues to outperform, achieving a 14.3% adjusted EBIT margin in H1 2025, while Thom Browne and Tom Ford Fashion are undergoing strategic investments and wholesale rationalization, expected to yield long-term double-digit EBIT margins.
• Despite a challenging and volatile Greater China Region (GCR), Zegna is cautiously managing expectations for 2025, anticipating low single-digit organic revenue growth and adjusted EBIT around €173 million, with a focus on strategic investments and cost control.
• The company's unique "Filiera" supply chain and commitment to full-price sales, coupled with technological advancements in materials like Vellus Aureum and personalized services, form a strong competitive moat against larger luxury conglomerates.

The Enduring Craft of Zegna: A Legacy Reimagined

Ermenegildo Zegna, founded in 1910 in Trivero, Italy, has long been synonymous with unparalleled Italian craftsmanship and luxury. The company designs, manufactures, markets, and distributes a comprehensive range of high-end apparel and accessories under its flagship Zegna brand, alongside Thom Browne and Tom Ford Fashion. Zegna's journey from a textile innovator to a publicly traded luxury group in 2021 highlights its adaptability and ambition. This evolution is deeply rooted in its "Filiera," a fully integrated Italian supply chain that stands as a core technological differentiator, ensuring excellence, innovation, and traceability from raw materials to finished products.

The Filiera provides Zegna with a unique competitive advantage, enabling superior quality control and responsiveness to market demands. This integrated approach allows Zegna to develop groundbreaking materials, such as Vellus Aureum, the world's finest wool textile, which stems from the Zegna family's wool trophy awards established in Australia in 1963. Such innovations translate into tangible benefits: higher average selling prices (ASPs), enhanced brand prestige, and a stronger competitive moat. For investors, this means a business capable of commanding premium pricing and fostering deep customer loyalty, contributing to resilient financial performance. The company's ongoing investment in a new shoe factory, expected by 2026, further strengthens this vertical integration, expanding its in-house production capabilities and reinforcing its commitment to artisanal quality.

Strategic Pivot: DTC-Centric Growth and Brand Portfolio Dynamics

Zegna's overarching strategy is a deliberate pivot towards a DTC-centric model, aiming to enhance brand control, customer intimacy, and profitability. This strategic shift is evident across its brand portfolio, even as it navigates a complex global luxury landscape. The company's historical reliance on the Greater China Region (GCR), which accounted for 46% of revenues in 2021, has been consciously rebalanced, with GCR's contribution decreasing to 26% by the end of 2024. This geographical diversification, coupled with a sharpened focus on DTC, positions Zegna for more sustainable, high-quality growth.

In the competitive luxury market, Zegna distinguishes itself through its heritage and specialized expertise. While larger conglomerates like LVMH (LVMUY) and Kering (PPRUY) leverage vast, diversified portfolios and rapid trend cycles, Zegna appeals to a discerning clientele valuing timeless elegance and bespoke services. Its direct retail and online channels offer personalized experiences, fostering loyalty that can be a powerful counter to competitors' broader reach. Zegna's commitment to selling "only at full price" further underscores its premium positioning and brand integrity, a notable achievement in a sector often prone to discounting.

Financial Performance: A Story of Strategic Realignment

Zegna's financial performance in the first half of 2025 reflects its strategic realignment and operational effectiveness. Revenues reached €928 million, a 2% organic decrease year-over-year, primarily driven by a robust 6% organic growth in the DTC channel. This DTC strength significantly improved the gross profit margin by 110 basis points to 67.5%, as DTC revenues now represent 82% of group branded revenues, up from 76% in H1 2024. This shift underscores the positive impact of the DTC strategy on profitability.

However, the strategic investments necessary for this transformation have impacted short-term profitability. Selling, general, and administrative (SG&A) costs rose to 54.1% of revenues in H1 2025, up from 51.8% in H1 2024. This increase is attributed to negative operating leverage at Thom Browne, significant investments in talent, IT infrastructure, and CRM platforms for Tom Ford Fashion, and initial higher costs associated with new store openings. Consequently, adjusted EBIT for H1 2025 was €69 million, with a margin of 7.4%, a 100 basis point decline from H1 2024, also affected by adverse currency movements.

The Zegna segment, encompassing the flagship brand and textile division, demonstrated strong performance, with adjusted EBIT reaching €94 million and a margin of 14.3% in H1 2025, a 150 basis point increase from the prior year. This was driven by higher operating leverage and efficient DTC operations. In contrast, the Thom Browne segment saw its adjusted EBIT contract to €4 million, impacted by a sharp decline in wholesale revenues (down 48% organically in Q1 2025) and DTC network expansion costs. Tom Ford Fashion recorded an adjusted EBIT loss of €19 million, reflecting planned investments to build a robust platform for future expansion. Despite these segment-specific challenges, net profit for H1 2025 surged 53% to €47.9 million, benefiting from higher financial income and foreign exchange gains.

Outlook and Strategic Initiatives

Looking ahead, Zegna's management maintains a cautious yet confident outlook for 2025. The company anticipates low single-digit organic revenue growth for the full year, with adjusted EBIT expected to be around €173 million, reflecting currency fluctuations and ongoing market volatility. Management projects adjusted EBIT in the second half of 2025 to be higher than the first half, driven by implemented profitability protection measures.

Strategic investments remain a priority. Capital expenditure in H1 2025 was €54 million, with two-thirds allocated to store network development and the remainder to production and IT. Full-year CapEx is projected at 6-7% of revenues, including significant investments in the new footwear production site. For the Zegna brand, the long-term EBIT margin target is 15%, with 13-14% expected for 2025, as the company continues to invest in brand-building initiatives like the "Villa Zegna" marketing campaign and exclusive "Salotto" by-appointment stores. The Triple Stitch shoe family, now a mid-teens percentage of sales, exemplifies the success of focusing on iconic products and controlled distribution.

Thom Browne is undergoing a significant transformation under its new CEO, Sam Lobban, who assumed the role on September 2, 2025. The brand aims for a double-digit EBIT margin, with wholesale declines expected to moderate to around -20% for the full year 2025, a substantial improvement from the -52% seen in H1. This is driven by a DTC-centric approach, focusing on merchandising, retail training, and strategic store openings in key markets like the U.S. and Tokyo. Tom Ford Fashion, considered an "early story," is poised for growth in the second half of 2025, as Haider Ackermann's first collections hit stores in late August, generating positive initial reactions and driving DTC growth, particularly in EMEA and the U.S.

Risks and Competitive Dynamics

The luxury sector remains challenging and volatile, with the Greater China Region (GCR) posing a significant risk. Management anticipates GCR trends to remain negative throughout 2025, albeit potentially less severe than in Q1, and is planning for a "new normal" in 2026 without banking on a rebound. This cautious stance is reflected in flexible production planning and conservative open-to-buy strategies for 2025. Currency fluctuations, particularly the Euro's appreciation, also present a headwind.

Zegna's competitive landscape includes formidable players like LVMH, Kering, Burberry (BURBY), and Prada (PRDSY). While Zegna excels in specialized Italian craftsmanship and a heritage-driven approach, its smaller scale compared to conglomerates like LVMH can lead to higher operational costs and potentially slower innovation. However, Zegna's integrated Filiera and direct customer relationships provide a strong defense. The company's ability to implement mid-single-digit price increases in the U.S. for Fall/Winter 2025 to offset tariffs, without significant volume impact, demonstrates its pricing power and brand strength. The strategic streamlining of wholesale across all brands, with 2025 serving as a "reset year," is a calculated move to protect brand equity and focus on higher-margin DTC channels, even if it entails short-term revenue impacts.

Conclusion

Ermenegildo Zegna is executing a deliberate and comprehensive strategy to solidify its position as a leader in timeless luxury. By prioritizing a DTC-centric model, leveraging its unique integrated supply chain, and making targeted investments in brand building and talent, Zegna is actively shaping its future. While macroeconomic headwinds, particularly in the GCR, and the inherent volatility of the luxury sector present challenges, the company's focus on full-price sales, personalized customer experiences, and innovative materials like Vellus Aureum provides a robust foundation. The strategic transformations underway at Thom Browne and Tom Ford Fashion, coupled with the proven resilience of the Zegna brand, underscore a compelling investment thesis centered on long-term value creation through disciplined execution and a commitment to its distinctive heritage.