The Fiscal Year

Global economic growth losing pace in 2012

After the first months of 2012 indicated an improving global performance, the development of the economy slowed down considerably over the course of the year. This downturn in the economic situation was perceived not just in the euro zone, but in the United States and China as well. As a result, the general economic conditions for the HUGO BOSS Group deteriorated year-on-year in the past year.

Debt crisis leading to slight recession in euro zone

Last year, the euro zone suffered from a slight decline in economic activity. The reasons for this included the ongoing political and economic uncertainty surrounding the debt crisis. In particular, the peripheral nations of the euro zone, where high debt levels and rising unemployment reign, were hit by a sharp drop in economic activity over the course of the year. Weak investment activity, falling private consumer spending in many areas and diminishing demand for exports also increasingly muted the economic performance of the core euro zone countries. As a result, Germany also saw a dip in growth in the second half of the year, though it still outperformed the region as a whole thanks to comparatively robust investment and export activity by companies and stable private consumer spending.

American economy sees moderate growth

The American economy posted moderate growth in the past year. In spite of record highs in unemployment, private spending proved robust over the year. However, companies were more cautious in their investment activities in light of the lingering fiscal and political uncertainty. In spite of various examples of monetary and fiscal policy support, the economy was affected by the mixed performance on the real estate market and the drop in export demand due to the global economic slowdown. Economic momentum also decreased in Latin America owing to slower growth in exports and reduced investment activity. The slowdown was particularly evident in Brazil, while Chile, Colombia and Peru in particular developed positively.

Slower growth rates in Asia

There was a further moderation in economic growth in Asia in the past year. Factors contributing to this included weaker export activity and, in China in particular, falling domestic demand. Growth in China was curbed by the measures taken in recent years to combat inflation and to restrain surging prices on the real estate market. However, there were the first signs of recovery again towards the end of the year, seemingly indicating that the Chinese economy could have overcome its temporary weakness. Moreover, the slight economic improvement is also due to last year’s change in government and the hope for comprehensive economic reforms. The economic situation in Japan and Australia grew dimmer as the year progressed, partly on account of weak consumer demand, strong local currencies and diminishing exports.

Premium and luxury goods industry outperformed economy as a whole

The positive trend in the global premium and luxury goods industry continued in the past year despite difficult general economic conditions and a weak consumer environment. After adjustment for currency effects, the industry posted growth of 5% overall — less than in the previous year but significantly higher than the growth rates for the economy as a whole.

In particular, own retail activities were again a growth driver, while the wholesale environment proved to be increasingly challenging. Strong growth rates were also posted in the online business.

Positive sector performance in all regions

Consumer confidence dwindled visibly in Europe on account of the escalating concern over the future of the euro zone. However, the strong development of Eastern European markets and a sound performance in Western Europe largely compensated for weaker growth in Southern Europe. In the metropolitan regions of Western and Southern Europe especially, demand from tourists, particularly from Asia, supported market growth. The industry continued to expand in America, building on continuing positive consumer sentiment in the relevant market segment. This growth was supported by a stable performance at U.S. department stores and consistently strong consumer demand in South America. Growth slowed down in Asia over the course of the year on account of rising consumer uncertainty, especially in China. Concern over the country’s future political outlook and the general decline in economic growth caused a slowdown in momentum within the industry here. Nonetheless, the region enjoyed strong growth rates as compared to the overall sector and benefited from the positive trends in disposable income, which is allowing a steadily larger number of consumers to purchase premium and luxury goods.

Overall statement on business development

HUGO BOSS sets new records for sales and consolidated earnings in 2012

The HUGO BOSS Group continued its growth in fiscal year 2012, exceeding not only its sales and consolidated earnings for the previous period but also the growth rates for the economy as a whole and the industry. The strong brand portfolio, the expansion and greater professionalism of the Group’s own retail operations and excellent relations with wholesale partners ensured that HUGO BOSS improved its sales and earnings in all regions in fiscal year 2012 as well.

Sales development

HUGO BOSS generated consolidated sales of EUR 2,346 million in fiscal year 2012. Thus, sales performance in Group currency was up 14% on the previous year’s level (2011: EUR 2,059 million). Currency fluctuations had a positive effect on consolidated sales performance in the reporting period. Thus, HUGO BOSS posted a 10% year-on-year sales increase in local currencies in the past fiscal year.

Sales development throughout year emphasizes growth

Sales performance during the year highlighted the dynamic growth in fiscal year 2012, reflecting both the rising share of sales of the Group’s own retail activities and the faster collection cycle in preorder business. HUGO BOSS had an extremely successful start to 2012, with sales of EUR 607 million in the first quarter exceeding the strong prior-year level by 13% (Q1 2011: EUR 539 million). This corresponds to a 10% rise in sales after adjustment for currency effects. Increases in all regions also resulted in a double-digit consolidated sales growth. At EUR 485 million, sales here exceeded the same period of the previous year by 20% (Q2 2011: EUR 405 million), or 14% after currency adjustment. HUGO BOSS also posted a solid performance in a challenging market environment in the third quarter, generating sales of EUR 646 million (Q3 2011: EUR 615 million). Due to a strong previous period and the shifts in the collection and delivery cycles in preorder business, sales growth of 5% was generated in reporting currency. Sales matched the previous year’s level after currency adjustment. In the fourth quarter, HUGO BOSS benefited in particular from the strong trend in the Group’s own retail operations and the boost to wholesale partner budgets favoring the winter collection delivered in the fourth quarter. At EUR 607 million, sales exceeded those in the same quarter of the previous year by 22% (Q4 2011: EUR 499 million). Even after currency adjustment, sales in the fourth quarter were up significantly on the same period of the previous year by 18%.

Sales by region

03|03 Sales by region

03|04 Sales by region – five-year-overview

Sales growth in all regions

HUGO BOSS generated sales growth in all three regions in fiscal year 2012. Sales in Europe including the Middle East and Africa increased by 11% in reporting currency to EUR 1,378 million in fiscal year 2012 (2011: EUR 1,245 million) and were up 10% on the previous year’s level in local currencies. In the Americas, sales in reporting currency increased by 23% year-on-year to EUR 559 million (2011: EUR 455 million). Sales growth of 14% was posted in local currencies in the past fiscal year. This dynamic performance was aided by consistently positive consumer sentiment in the relevant market segment. After the end of fiscal year 2012, sales in Asia/Pacific were up 14% on the previous year’s level in reporting currency at EUR 353 million (2011: EUR 309 million). In local currencies, sales rose 4% as against the same period of the previous year. In particular, this development reflects the difficult market environment in China in fiscal year 2012.

Sales by distribution channel

03|05 Sales by distribution channel

03|06 Sales by distribution channel – five-year-overview

Positive sales performance in wholesale channel

Sales in the wholesale channel climbed by 5% in reporting currency in fiscal year 2012 to EUR 1,140 million (2011: EUR 1,085 million). This corresponds to a growth of 2% after adjustment for currency effects.

The acquisition of stores previously operated by franchisees, particularly in Spain, Switzerland and China, caused a shift in sales from wholesale business towards the Group’s own retail operations. In addition, the more difficult market environment in the second half of the year in Europe in particular meant a drop in demand among predominantly smaller partners. However, this was more than offset by consistently high demand among the 50 biggest international partners and the replenishment business, which allows HUGO BOSS to react to sudden surges in demand from partners.

The share of the wholesale channel in consolidated sales dropped from 53% in the previous year to 49% in the reporting period.

Retail operations continued to be a major growth driver in the past fiscal year. The expansion of this distribution channel driven forward by the opening and acquisition of new stores and the continuing professionalization of the existing store network made a key contribution to the Group’s positive overall performance. Sales by the Group’s own retail stores including outlets and online stores increased by 24% in the past fiscal year to EUR 1,150 million (2011: EUR 924 million), thereby rising above the one-billion-euro line for the first time ever in November. This corresponds to a 19% increase in sales after adjustment for currency effects. In 2012, the Group’s own retail operations accounted for 49% of total sales (2011: 45%), for the first time matching sales in the wholesale channel. Retail comp store sales increased by 10% year-on-year in Group currency and 5% in local currencies.

Sales by retail format

Sales from directly operated stores (DOS) grew by 23% (17% after adjustment for currency effects) to EUR 758 million (2011: EUR 618 million) in the reporting period.

With sales growth of 25% in reporting currency to EUR 343 million, outlet stores also contributed to the positive development of sales in the retail channel in fiscal year 2012 (2011: EUR 274 million). Adjusted for currency effects, this corresponds to an increase of 21%.

Sales generated by online stores in Germany, the Netherlands, France, Great Britain, Austria, Switzerland and the United States increased by 49% in the past fiscal year to EUR 49 million (2011: EUR 33 million). This corresponds to a 47% increase in local currencies.

Number of Group’s own retail stores

In fiscal year 2012, the total number of the Group’s own retail stores increased by a net figure of 218 since the beginning of the year to 840 (2011: 622).

Group’s own retail network grows by 218 stores in net terms in 2012

The global presence was expanded by 122 new stores and the takeover of 116 shop-in-shop units from wholesale partners, amounting to 238 additional locations in total. Including six closures, the number of shop-in-shop units climbed by 149 in net terms to 412 in the reporting period. The opening of 83 directly operated freestanding stores including outlets was offset by 14 closures. As of the end of the year, the number of directly operated freestanding stores including outlets therefore amounted to 428.

New stores opened in all relevant European markets

In Europe in particular, the retail network grew by 79 new stores with the takeover of 87 shop-in-shop units from wholesale partners. The Group especially expanded its presence on the markets of Spain, France and Switzerland. Taking into account seven closures, there was a net rise in the number of retail stores in Europe of 159 to currently 469 (2011: 310).

Group’s retail network grows in America as well

The expansion of the retail network in the Americas progressed with the opening of 19 stores and nine takeovers in the past fiscal year. In particular, the focus here was on the North American market, where the store network was expanded by eleven attractive stores in Canada and nine in the US. In addition, eight new retail stores were opened in Central and South America. This was offset by the closure of a total of five locations in the U.S. and Canada. Thus, there was a net rise in the number of retail stores in the Americas region of 23 to 147 as of the end of the year (2011: 124).

Expansion in China strengthens retail network in Asia/Pacific

Market presence in Asia/Pacific was raised further in fiscal year 2012 with the opening of 24 new stores and the takeover of 20 attractive locations. The expansion continued to focus on the growth market of China, emphasizing the Beijing site in particular. The total number of retail stores in China increased by 23 in net terms. The retail network in the Asia/Pacific region was expanded further thanks to the opening of further stores in Australia, Japan and Taiwan. Taking into account eight closures in the reporting period, there was a net rise of 36 to a total of 224 retail stores in this region (2011: 188).

Including the around 1,200 franchise stores and shops, whose sales are recognized in the wholesale channel, the HUGO BOSS Group owns more than 2,000 monobrand stores and shops in total in over 80 countries.

Royalty sales

Royalty business grows by 15% in 2012

Royalty business developed positively in fiscal year 2012. Products manufactured by partners include fragrances, eyewear, watches, children’s fashion, motorcycle helmets, cell phones, mobile accessories and home textiles. External sales with outside licensees increased by 15% as against the previous year to EUR 57 million (2011: EUR 49 million). High growth rates were generated in sales with licensees for fragrances, watches, children’s fashion, home textiles and cell phones in particular.

Total brand sales of HUGO BOSS products worldwide amounted to EUR 5,077 million in the 2012 reporting year (2011: EUR 4,506 million). This figure is based on HUGO BOSS consolidated sales minus royalty income and plus sales by HUGO BOSS license partners.

Sales by brand

Sales increases in all brands

HUGO BOSS posted sales increases in all brands in fiscal year 2012. Sales by the core brand BOSS rose by 16% as against the previous year. The BOSS Green brand also saw further increases in the past fiscal year, posting year-on-year growth of 23%. The BOSS Orange brand’s sales rose by 3% in the reporting period. Sales of the HUGO brand were up 12% on previous year’s figure.

Menswear sales increased by 15% to EUR 2,097 million in the past fiscal year (2011: EUR 1,828 million). Like in the previous period, this figure corresponds to an 89% share of total sales (2011: 89%). Sales in womenswear were up 8% on the previous year’s level at EUR 249 million (2011: EUR 231 million). Womenswear sales therefore accounted for 11% of total sales (2011: 11%).

HUGO BOSS’ business model has changed increasingly in recent years. Instead of the preorder business that dominated in the past, business today is increasingly driven by sales generated either through the Group’s own stores and shops or replenishment business. Ongoing integration processes along the entire value chain, the gradual reduction in complexity and the continuous market-oriented development of the brand and collection portfolio are necessary in order to meet customers’ changing demands.

Preorder business accounts for 38% of total sales

Today, HUGO BOSS provides four up-to-date fashion collections a year for its customers all over the world, and is increasing the number of monthly themed deliveries at the same time. The share of traditional order business, i.e. selling preordered goods to trading partners, dropped to 38% of sales in the past fiscal year (2011: 43%). In absolute terms, the sales generated in this distribution channel increased by 3% in the reporting period and matched previous year’s level after currency adjustment. By contrast, classic HUGO BOSS products in particular can today be replenished flexibly for partners. In order to allow predictable production conditions in the future as well given the ongoing changes in distribution, HUGO BOSS does not rely solely on order figures, but is also increasingly using information from the distribution companies and the Group’s own retail stores in its volume planning.

Income statement

03|11 Income statement

Notes to the income statement

Gross profit margin rises to 61.9%

The gross profit margin increased by 50 basis points to 61.9% in the past fiscal year (2011: 61.4%). This positive development is mainly due to the expansion of the Group’s own retail operations and the positive development in royalty business. In addition, the continuing optimization of global goods production also contributed to the positive gross profit margin development. These effects offset higher discounts in the Group’s own retail and wholesale operations. Gross profit climbed by 15% to EUR 1,453 million in fiscal year 2012 (2011: EUR 1,265 million).

Expansion of retail operations leads to higher distribution expenses

At EUR 809 million, selling and distribution expenses were 19% above the previous year’s figure in fiscal year 2012 (2011: EUR 682 million). In relation to sales, selling and distribution expenses rose from 33% to 34%. As a result of the global expansion in the Group’s own retail operations in particular, distribution expenses increased by EUR 103 million in fiscal year 2012 and were therefore up 23% on the previous year’s level. This includes additional expenses for 218 net new openings and takeovers in the reporting period as part of the global expansion of this distribution channel. At 11%, marketing expenses rose less rapidly than sales. A key factor for the absolute increase were expenses for further emphasizing the appeal and acceptance of the Group's brands among key target groups. Besides expenses for sports sponsorship activities and traditional forms of advertising such as print and increasingly online media, a significant portion of this was accounted for by the HUGO BOSS Fashion Show in Beijing, which represents a long-term investment in the Asian market.

In relation to sales, logistics expenses were reduced from 6% to 5% as against the same period of the previous year. This was aided by the optimization of global warehouse capacity that was already initiated in the previous fiscal year. Allowances for doubtful accounts and bad debt losses played only a minor role in 2012 thanks to the ongoing systematic receivables management.

Administrative expenses stable in relation to sales

At EUR 211 million, administrative expenses and the balance of other operating income and expenses were up 12% on the previous year’s level (2011: EUR 189 million). In relation to sales, administrative expenses and the balance of other operating income and expenses remained constant at 9%. As a result of the increased personnel expenses in particular, the research and development costs incurred to create the collections rose by 15% or EUR 9 million in absolute terms to EUR 64 million (2011: EUR 55 million). The extraordinary effects of EUR 4 million (2011: EUR 1 million) relate to the simplification of the brand structure and the bundling of the creative areas under the BOSS brand.

Adjusted EBITDA margin of 22.6%

The internal performance indicator EBITDA before special items increased by 13% year-on-year to EUR 529 million (2011: EUR 469 million). The adjusted EBITDA margin therefore declined slightly by 20 basis points as against the previous year to 22.6% (2011: 22.8%). The positive sales performance and the improvement in the gross profit margin did not fully offset the higher operating expenses in distribution and marketing.

At EUR 92 million, depreciation and amortization was up 25% on the previous year’s level (2011: EUR 73 million). This was due to greater investment intensity for the Group’s own retail operations and a EUR 5 million rise of impairments on property, plant and equipment in own retail stores.

EBIT amounted to EUR 433 million in fiscal 2012, up 10% on the previous year’s figure (2011: EUR 395 million).

As the total of net interest income less other net financial income, the financial result climbed by EUR 12 million in fiscal year 2012 to EUR 24 million (2011: EUR 12 million). As in the previous year, net interest expenses amounted to EUR 16 million. Hereby, the low market interest rates affected interest expenses and interest income equally. The other financial items amounted to a net expense of EUR 8 million (2011: net income of EUR 4 million). This includes exchange rate effects that were limited by targeted hedging measures implemented at an early stage. The expense resulting from exchange rate effects amounted to EUR 3 million (2011: income of EUR 5 million).

Tax rate stable year-on-year at 24%

Earnings before taxes therefore rose by 7% to EUR 410 million (2011: EUR 383 million). At 24%, the tax rate was on par with the previous year’s level (2011: 24%). Changes in the regional earnings mix resulting from differences in regional earnings growth had a neutral effect on the tax rate of the HUGO BOSS Group in fiscal year 2012.

Rise in net income

The net income increased by 7% year-on-year to EUR 312 million in fiscal year 2012 (2011: EUR 291 million). The net income attributable to shareholders amounted to EUR 307 million, 8% higher than the previous year’s figure (2011: EUR 285 million). Non-controlling interests fell to EUR 4 million in the same period (2011: EUR 6 million) and primarily related to the 40% share held by the Rainbow Group in the joint venture companies in China.

Earnings per ordinary share rose by 8% year-on-year to EUR 4.45 (2011: EUR 4.12). The conversion of preferred shares into ordinary shares became effective when trading closed on June 15, 2012. Since June 18, 2012, the HUGO BOSS shares are traded as registered ordinary shares via the electronic trading system XETRA, on the Frankfurt Stock Exchange and on all regional stock exchanges in Germany under the ticker symbol BOSS. Earnings per preferred share amounted to EUR 4.13 in the previous year.

Dividend and appropriation of profits

HUGO BOSS AG closed fiscal year 2012 with a net income for the year of EUR 288 million (2011: EUR 88 million). The unappropriated surplus after allocation to retained earnings amounted to EUR 220 million (2011: EUR 203 million). Given its profits-based distribution policy, the Managing Board and the Supervisory Board will recommend the distribution of a dividend of EUR 3.12 per ordinary share (2011: EUR 2.88 per ordinary share and EUR 2.89 per preferred share) for fiscal year 2012 at the Annual Shareholders’ Meeting. This corresponds to an amount of EUR 216 million (2011: EUR 199 million). A recommendation will also be made to the Annual Shareholders’ Meeting for the dividend amount attributable to own shares of EUR 4 million to be carried forward to new account (2011: EUR 4 million).