Group management

Key performance indicators

HUGO BOSS aims at sustainably increasing the enterprise value. The Group’s internal management system is intended to help the Managing Board and the management of the business units to focus all business processes on this objective. In order to increase its enterprise value, the Group focuses on maximizing free cash flow over the long term. Consistently generating positive free cash flow is expected to safeguard the HUGO BOSS Group’s independence and solvency at all times.

Increasing sales and operating profit (EBIT) are the main levers for improving free cash flow. In addition, strict management of trade net working capital and a value-oriented capital expenditure approach support the development of free cash flow. HUGO BOSS has therefore identified four key performance indicators all aimed at maximizing free cash flow over the long term: sales, EBIT, trade net working capital and capital expenditure.

HUGO BOSS is striving to sustainably increase its profitability and therefore attaches particular importance to profitable sales growth. All initiatives aimed at increasing sales will therefore also be measured by their potential to generate a sustainable increase in EBIT and EBIT margin (ratio of EBIT to sales).

To increase the EBIT margin, the Group focuses on improving the gross profit margin and executing its Group-wide efficiency program. The latter aims at improving the profitability of the Group’s own retail business, using marketing expenditures more effectively, and further optimizing the organizational structure. Group Strategy, Medium-term Increase in Profitability

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 operating central departments. 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. Besides 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. This process takes into account future sales quotas as well as expected sales growth and markdown levels.

The management of the HUGO BOSS Group is directly responsible for profitable growth. As a result, their short-term incentive program (STI) is linked to the achievement of the targets for sales and EBIT. The ratio of trade net working capital to sales is the third component of the short-term incentive program. The compensation scheme for management at the two levels below the Managing Board also includes a long-term incentive program (LTI), the design of which corresponds to that of the Managing Board. Compensation Report, Performance-related (Variable) Compensation Components

The investment activity is focused on the renovation and modernization of existing retail locations, selective new openings and the expansion of the IT infrastructure in the course of the further digitization of the business model. A specific approval process exists for major 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. Financial Position, Capital Expenditure

HUGO BOSS pursues a profit-based dividend policy that is intended to allow the shareholders to participate appropriately in the Group’s earnings development. The free cash flow generated by the Group is primarily used to fund the dividend distribution. Between 60% and 80% of net income is to be distributed to shareholders on a regular basis. 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. Financial Position, Capital Structure and Financing

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 prepared as part of the annual, Group-wide budget process, taking into account the current business situation and the medium-term goals of HUGO BOSS. Based on targets set by the Managing Board, the Group companies prepare complete earnings and investment budgets for their respective markets or divisions. A similar planning model is used for trade net working capital. Building on this, the development and sourcing units derive mid-term capacity planning. Group controlling checks all of these plans for plausibility and aggregates them to form the overall Group planning. The latter is updated at regular intervals to factor in the actual business performance and any opportunities and risks.

Additionally, regular liquidity outlook reports are also prepared, based on the expected cash flow. This aims at 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 significant impact on the Group’s net assets, financial position and results of operations are reported to the Managing Board without delay.

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

Central investment controlling appraises planned investment projects with respect to 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.