Ermenegildo Zegna's Strategic DTC Shift: A Pathway to Sustainable Margin Expansion

Ermenegildo Zegna Group’s strategic pivot to direct-to-consumer (DTC) sales has emerged as a critical driver of margin resilience and growth in the first half of 2025. Despite a 3.4% year-on-year (YoY) decline in groupwide revenues to €927.7 million, the DTC channel outperformed expectations, delivering 6.1% organic growth and accounting for 82% of branded group revenues—up from 76% in H1 2024 [1]. This shift has directly fueled a 110-basis-point increase in gross profit margins to 67.5%, underscoring the long-term value creation potential of a DTC-centric model [1]. However, the path to sustainable margin expansion remains nuanced, with regional headwinds and underperforming segments posing significant risks.

DTC-Driven Margin Expansion: A Structural Advantage

The Zegna segment, the group’s core luxury brand, exemplifies the power of DTC in enhancing profitability. Its Adjusted EBIT margin surged 150 basis points to 14.3% in H1 2025, driven by disciplined cost control and stronger operating leverage [1]. This performance aligns with the company’s long-term goal of achieving 13–14% segment margins for 2025, as outlined in its earnings call [2]. The DTC model’s ability to capture higher margins stems from its direct relationship with consumers, which allows for better pricing control, reduced intermediary costs, and enhanced data-driven personalization.

According to a report by Business Wire, the Zegna segment’s DTC growth was particularly robust in the Americas, where the group has prioritized expanding its luxury retail footprint [1]. This regional focus has enabled the brand to capitalize on high-margin markets while mitigating exposure to volatile wholesale dynamics. For instance, wholesale revenues plummeted by 27.1% YoY, a stark contrast to DTC’s resilience [1]. Analysts attribute this divergence to the DTC model’s ability to stabilize demand through direct engagement, even in macroeconomic uncertainty.

Risks to Margin Sustainability: China and Segment Underperformance

While the DTC strategy has bolstered margins, two critical risks threaten its long-term efficacy. First, Greater China’s 21.3% revenue decline in H1 2025 highlights the region’s persistent challenges. Despite being a key growth market for luxury brands, China’s recovery has been slower than anticipated, with consumer confidence and discretionary spending remaining subdued [3]. Zegna’s cautious outlook for the region underscores the need for localized strategies to re-engage Chinese consumers, such as leveraging digital platforms and co-creation with local influencers.

Second, the underperformance of acquired brands like Thom Browne and Tom Ford casts a shadow over the group’s diversification efforts. Thom Browne’s revenues fell by 22.5% YoY, while Tom Ford Fashion reported a negative Adjusted EBIT of €19.4 million [1]. These segments, which were acquired to broaden Zegna’s luxury portfolio, have yet to integrate seamlessly into the DTC framework. Their struggles reflect the complexities of harmonizing distinct brand identities with a unified digital and retail strategy.

Strategic Implications for Investors

For investors, Zegna’s DTC-driven margin expansion represents a compelling narrative, but it must be weighed against operational and regional risks. The 67.5% gross margin and 14.3% Adjusted EBIT margin in the Zegna segment demonstrate the scalability of the DTC model, particularly in high-margin markets like the U.S. and EMEA [1]. However, the group’s overall Adjusted EBIT margin for H1 2025 fell to 7.4% from 8.4% in H1 2024, signaling that the benefits of DTC are not yet fully offsetting underperforming segments [1].

A key test for Zegna will be its ability to optimize its DTC infrastructure while addressing the drag from China and acquired brands. This includes accelerating digital transformation, refining inventory management, and potentially restructuring underperforming segments. If successful, the company could solidify its position as a leader in DTC-driven luxury retail, with margins and profitability outpacing peers.

Conclusion

Ermenegildo Zegna’s strategic shift to DTC has proven its value in stabilizing margins and driving organic growth, as evidenced by the 6.1% organic DTC growth and 67.5% gross margin in H1 2025 [1]. However, the path to long-term margin expansion hinges on navigating China’s slow recovery and revitalizing underperforming segments like Tom Ford. For now, the DTC model offers a robust foundation for value creation, but investors must remain vigilant about the challenges that lie ahead.

**Source:[1] Ermenegildo Zegna Group Reports First Half 2025 Revenues of €928 Million With Profit at €48 Million and Adjusted EBIT at €69 Million [https://www.businesswire.com/news/home/20250905544086/en/Ermenegildo-Zegna-Group-Reports-First-Half-2025-Revenues-of-%E2%82%AC928-Million-With-Profit-at-%E2%82%AC48-Million-and-Adjusted-EBIT-at-%E2%82%AC69-Million][2] Earnings call transcript: Ermenegildo Zegna NV beats Q2 2025 EPS forecast [https://www.investing.com/news/transcripts/earnings-call-transcript-ermenegildo-zegna-nv-beats-q2-2025-eps-forecast-93CH-4226886][3] Zegna Group revenues fall 6% in Q2 [https://www.voguebusiness.com/story/companies/zegna-group-revenues-fall-6-in-q2]