Material external risks
HUGO BOSS is subject to a wide variety of external risks, mainly in connection with macroeconomic, political and social developments as well as environmental and health aspects.
As a global company, HUGO BOSS is exposed to macroeconomic risks in terms of global economic trends. This means that an economic downturn usually results in a decline in demand for premium and luxury goods that may have a negative effect on the sales and earnings growth of the Group. The effects of macroeconomic developments can occur globally as well as limited to one region and may influence each other.
In order to reduce the impact of economic fluctuations, HUGO BOSS aims to achieve a balanced distribution of sales between the most important regions. The Group continuously keeps a close eye on macroeconomic trends as well as the industry environment in order to identify risks at an early stage and be able to react to them quickly by re-aligning its business activities. Internal early indicators are also analyzed regularly, which makes it possible to forecast the impact of potential macroeconomic risks. Group Management
In addition to reducing production and sourcing activity, some of the possible reactions to a cyclical decline in demand include more strictly managing the trade net working capital, increasing cost controlling, price adjustments and adjustments in the Group’s own retail business.
An increasing uncertainty regarding the global economic outlook should be noted for fiscal year 2019. A further escalation of the Chinese-American trade war is considered to be a significant risk. In the worst case, a global trade war could have a noticeably negative effect on economic momentum worldwide. The flagging growth of the Chinese economy as a significant factor for global economic momentum constitutes a further risk. Consequently, a slight weakening in global economic growth is expected for 2019 overall. It is expected that the upper premium segment in the apparel industry, which represents the best benchmark for HUGO BOSS, will experience a growth rate in the area of a currency-adjusted 3.5% to 4.5% in fiscal year 2019. The potentially negative effect of economic trends on Group sales and earnings may be significant, despite the measures described. Management judges the likelihood of occurrence as likely. Outlook
Political and social risks
HUGO BOSS is exposed to political and social risks as a result of the global nature of its business activities. For example, changes in the political and regulatory environment, geopolitical tension, military conflicts, changes of government or terrorist attacks can have a negative impact on consumer behavior.
The Group does not expect uncertainties regarding worldwide political and social developments to decrease in 2019. For example, the continuing geopolitical tensions in the Middle East, the ongoing danger of terrorist attacks and political uncertainties in the European Union, particularly with regard to the fiscal stability of Italy and the anti-European developments in individual member states, also represent significant risks for the premium and luxury goods industry in the coming year, and for the Group’s business development too.
There are also risks as a result of the ongoing uncertainty surrounding Brexit. Overall, management considers the Brexit-related risks to be likely. The financial impacts associated with it are estimated to be moderate in scope. In particular, a “no-deal” Brexit could affect the confidence of companies and consumers in the economic outlook for the country, resulting in a reduced willingness to invest above all in Great Britain, but also in the other countries in the European Union, as well as repercussions in the global financial markets. A significant decline in consumer confidence in particular and an accompanying decline in customer demand could also have a negative impact on the business of HUGO BOSS. Particularly in the event of a “no-deal” Brexit, the Company also faces risks related to short-term merchandise bottlenecks in Great Britain, a possible delay in the arrival of seasonal products in particular, and the associated risk of lost sales opportunities and short-term increases in inventories in Great Britain. It also remains uncertain what final form any future tax and customs regulations will take. The potential levy of import duties could lead to higher costs for the Company. The Group has initiated a cross-departmental working group that is closely monitoring the exit process by reference to central risk management, evaluating the possible impact on the Group and coordinating all local and worldwide measures. For instance, precautions were taken to reduce the risk of short-term merchandise bottlenecks in Great Britain in the event of a potential “no-deal” Brexit. In doing so, the Company is seeking primarily to prevent a delay in the arrival of seasonal products in particular, as well as the associated risk of lost sales opportunities. The Company generally also includes price adjustments among the possible responses to any decline in demand due to economic factors or to a potential rise in costs related to a levy of import duties.
Due to its increased significance, HUGO BOSS assesses the risk resulting from political and social changes as an “emerging risk”. It raises strategic questions, for example regarding the influence of demographic changes on consumer behavior and the supply chain. This reveals the close link between the social risk and the industry risk and the risks associated with the suppliers and sourcing markets. In evaluating and handling the risk, the risk experts and risk owners in the Group work in interdisciplinary teams on the ongoing analysis and monitoring of current political and social developments and their influence on the Group’s own business activity. The central risk management coordinates and supports this process.
The Group’s global distribution in more than 120 countries provides a natural hedge against adverse developments in individual countries or regions. Unexpected developments in important sales markets can have a significant financial impact. The Management considers this risk to be possible.
Environmental and health risks
The HUGO BOSS Group’s global value chain is subject to environmental and health risks that may result from environmental and natural disasters or pandemics as well as the consequences of climate change. Risks as a result of climate change, such as increasing water scarcity, are classed as unlikely for fiscal year 2019, and are associated with low possible loss. In future, however, this risk might become more significant for HUGO BOSS, meaning that the impact is expected to be moderate in the medium term. In the long term there is a risk that an increasing scarcity of water either locally or regionally will have negative consequences on the cultivation of cotton, and so may lead to a reduced availability of cotton fibers and higher material costs as a result.
HUGO BOSS has a central emergency management system in order to be able to react promptly and appropriately to any environmental or natural disaster. Its structural organization pools the cross-functional skills needed to handle emergencies and guarantees efficient coordination with clear decision-making paths. Nevertheless, a significant impact on the net assets, financial position and earnings development cannot be entirely ruled out, although Management considers the occurrence of this to be unlikely.