Group management

Management at HUGO BOSS aims to sustainably increase the enterprise value. The Group’s internal management system helps the Managing Board and the management of the business units to focus all business processes on this objective.

Key performance indicators

The Group focuses on maximizing free cash flow over the long term in order to increase its enterprise value. Consistently positive free cash flow safeguards the HUGO BOSS Group’s independence and solvency at all times.

The main levers for improving free cash flow lie in increasing sales and operating profit (EBIT). In addition, strict management of trade net working capital and value-oriented investment activities support the development of free cash flow.

As a company committed to sustainable growth, HUGO BOSS attaches particular importance to profitable sales growth. All activities for increasing sales will be gauged in future by their potential to generate a long-term increase in EBIT and EBIT margin (ratio of EBIT to sales). Thus, starting in fiscal year 2019, EBIT will replace EBITDA before special items used by the Group up through 2018 as one of the key performance indicators. The future focus on EBIT and the associated inclusion of depreciation and amortization of fixed assets is intended to further increase the focus on capital efficiency. In doing so, the Company also takes account of the effects of the accounting standard IFRS 16 which is to be applied mandatorily as from fiscal year 2019. According to this, a majority of the lease payments mainly related to the Group’s own retail stores, recorded in the past as lease expenses, will in future be recorded as scheduled depreciation of a right of use for the respective real estate to be capitalized according to IFRS 16. Notes to the Consolidated Financial Statements, Financial Reporting

EBIT is a major driver of free cash flow. To increase the EBIT margin, the Company will focus in coming years on improving the gross profit margin and implementing the Group-wide program to increase efficiency. The efficiency program aims at improving the profitability of the Group’s own retail business, using marketing expenditures more effectively, and optimizing the organizational structure. Group Strategy, Business Plan 2022

The Management of the Group companies is directly responsible for ensuring profitable business growth. Consequently, the short-term variable compensation of managers of the Group companies and central divisions is tied to the achievement of the goals defined for sales and EBIT (until 2018: EBITDA before special items).

For HUGO BOSS, trade net working capital is the most important performance indicator for managing the efficient deployment of capital.

Management of inventories as well as trade receivables is the responsibility of the Group companies and the responsible operative central divisions. The latter are also responsible for managing trade payables. These three balance sheet items are managed by reference to the days of inventories outstanding, days of sales outstanding and days of payables outstanding. As well as this, there is a specific approval process for the purchase of inventories for the Group’s own retail business in the interests of inventory optimization. In addition to future sales quotas, this process also takes account of projected discounting levels and expected sales growth.

The ratio of trade net working capital to sales is the third component of the short-term variable compensation payable to managers at HUGO BOSS. Moreover, the compensation scheme for management at the two levels below the Managing Board includes a long-term incentive program (LTI) that corresponds to that of the Managing Board. Compensation Report

The Group’s capital expenditure focuses on the renovation and modernization of existing retail stores, selective new openings, the cross-channel integration of the Group’s own retail activities and the digitization of key activities along the entire value chain. There is a specific authorization process for key investment projects. Apart from qualitative analyses, e.g. with respect to potential store locations, this also includes an analysis of each project’s present value. With the future focus toward EBIT as a key performance indicator, the focus on capital efficiency will be further reinforced. Financial Position, Capital Expenditure

The free cash flow generated by the Group is primarily used to fund the dividend distribution. The Group has set a goal of regularly distributing between 60% and 80% of the profit attributable to the equity holders. Any liquidity available over and above this is used to further decrease financial liabilities or retained as a cash reserve. The Group analyzes its balance sheet structure at least once a year to determine its efficiency and ability to support future growth and to simultaneously provide sufficient security in the event that economic performance falls short of expectations. In addition to the net financial position or rather net financial liabilities, this analysis also takes account of future rental obligations. Financial Position

Core elements of the Group’s internal management system

The Group’s planning, management and monitoring activities focus on optimizing the key performance indicators described above. The core elements of the Group’s internal management system are Group planning, Group-wide, IT-enabled financial reporting and investment controlling.

Group planning relates to a rolling three-year period and is drawn up annually as part of the Group-wide budget process taking into account the current business situation and the mid-term targets until 2022 that were published by HUGO BOSS in November 2018. Based on targets set by the Managing Board, the Group companies prepare complete earnings and investment budgets for their respective markets or business units. A similar planning model is used for trade net working capital. Taking this as a basis, the development and sourcing units derive mid-term capacity planning. The planning of the business units is tested centrally by Group Controlling for plausibility and is aggregated for Group corporate planning. Group Strategy, Business Plan 2022

Annual planning is updated at regular intervals to factor in the actual business performance and the existing opportunities and risks. Additionally, regular liquidity outlook reports are prepared, based on the expected cash flow. This permits the early recognition of financial risks and the adoption of measures concerning financing and investment requirements. Financial Position, Principles and Goals of Financial Management

The Managing Board and management of Group subsidiaries are informed about the development of business operations through standardized, IT-enabled reports of varying detail. They are supplemented by ad-hoc analysis. Actual data compiled by the Group-wide, IT-based reporting system is compared against budget data each month. Any deviations are explained and planned countermeasures presented. Developments with a material impact on the Group’s earnings must be reported immediately to the Managing Board.

Particular attention is paid to the analysis of early indicators suitable for obtaining an indication of future business performance. In this context, wholesale order intake, the performance of replenishment business and comp store sales in the Group’s own retail business are analyzed on a weekly basis at least. In addition, benchmarking against relevant competitors is performed at regular intervals. The continuous monitoring of early indicators enables the Group to identify possible deviations from the budget at an early stage and take appropriate countermeasures.

Central investment controlling appraises planned investment projects in terms of their contribution to the Group’s profitability targets. This ensures that projects are only launched if a positive contribution to increasing the Group’s economic performance can be expected. In addition, subsequent analyses are conducted at regular intervals to verify the profitability of projects that have already been realized. Appropriate countermeasures are taken in the event of any negative deviations from the profitability targets originally set.