Financial position

Principles and goals of financial management

Group-wide financial management is controlled centrally by the Group’s central Treasury department. The goals pursued include securing financial flexibility and stability, securing Group-wide liquidity and the management of financial risks. Group-wide financial management comprises Group financing, cash and liquidity management, the management of market price risks and the management of counterparty risks. Treasury principles which are applied Group-wide govern all matters relevant to treasury, such as the approval of banking relationships, the handling of financing agreements, liquidity and asset management as well as the management of currency and interest rate risks.

Within Group financing factors such as market capacity, cost of financing, covenants and terms to maturity are taken into account when selecting financial instruments. External loans for Group financing are taken out centrally and primarily in the Group’s reporting currency (euro) within the framework of an “inhouse bank” concept. To cover the financing needs of the Group companies, funds are made available in the form of intercompany loans. This allows the Company to increase economies of scale and to minimize the cost of capital. Occasionally, credit lines are also agreed with local banks in order to take account of legal, tax or other framework conditions. The Group’s financial liabilities are generally unsecured and may be subject to customary market obligations, which are reviewed on a quarterly basis.

The most important source of liquidity for the Group is the cash inflow from its operating activities. The Group’s central Treasury department optimizes and centralizes payment flows through its cash and liquidity management. Generally, Group companies transfer excess liquidity to the “inhouse bank”, e.g. as part of a cash-pooling procedure. In doing so, the excess liquidity of individual Group companies can be used to cover the financial needs of others. This intercompany financial offsetting system reduces the external financial requirement and thus brings down net interest expenses.

The management of market price risks is intended to limit the impact of interest and currency risks on cash flow. The use of hedging instruments, including forward foreign exchange transactions, currency swaps and interest swaps, is intended to secure the Group against unfavorable price developments. Risk Report, Material Financial Risks

The counterparty risk with regard to banks mainly results from the investment of liquid funds as part of cash and liquidity management and from the use of derivative financial instruments as part of interest rate and currency management. With regard to trading transactions, the Group aims for the broadest possible distribution of volumes and ensures that financial instruments are generally only contracted with counterparties that have very good credit ratings.

Capital structure and financing

HUGO BOSS is safeguarding its financial flexibility by means of a revolving syndicated loan of EUR 450 million, maturing in October 2022. The syndicated loan agreement contains a standard covenant requiring the maintenance of financial leverage, defined as the ratio of net financial liabilities to EBITDA before special items. At 0.2, the ratio was still substantially below the maximum permissible as of the reporting date (December 31, 2018: 0.0). The determination of financial leverage originally specified in the syndicated loan agreement and the level to be observed expressly excludes the impact of any changes in accounting standards on the indicator. Thus, it remains unaffected by the impact of IFRS 16, which applies from 2019 onwards, on EBITDA before special items. As of the reporting date, the syndicated loan was not utilized (December 31, 2018: utilization of EUR 35 million). Notes to the Consolidated Financial Statements, Note 15

To ensure further liquidity, the Group has bilateral credit lines at its disposal with a total volume of EUR 227 million (December 31, 2018: EUR 217 million), of which EUR 215 million was utilized due to favorable interest rates as of December 31, 2019 (December 31, 2018: EUR 134 million). The variable-interest financial liabilities amounting to EUR 115 million (December 31, 2018: EUR 138 million) included therein are largely subject to a short-term fixed interest rate. As of the reporting date, EUR 7 million of these liabilities were hedged against an increase in interest rates using interest rate swaps (December 31, 2018: EUR 8 million). Risk Report, Material Financial Risks, Notes to the Consolidated Financial Statements, Note 20

In addition to the unused credit lines in the amount of EUR 462 million (December 31, 2018: EUR 498 million), the Group had at its disposal cash and cash equivalents in the amount of EUR 133 million (December 31, 2018: EUR 147 million). Financial Position, Statement of Cash Flows

The Group’s liabilities totaled EUR 1,887 million at the end of the fiscal year. This corresponds to a 65% share of total assets. Current and non-current lease liabilities recognized in the course of the first-time application of IFRS 16 accounted for EUR 957 million of this. The lease liabilities primarily relate to the rental of retail store locations as well as logistics and administration properties. Current and non-current financial liabilities totaled EUR 218 million (December 31, 2018: EUR 176 million). Excluding the effects of IFRS 16, total liabilities amounted to EUR 984 million, corresponding to a 49% share of total assets (December 31, 2018: EUR 878 million or 47%). Net Assets, Notes to the Consolidated Financial Statements, Note 8 and 9

Statement of cash flows

Free cash flow, measured as the total of cash inflow from operating activities and cash outflow from investing activities, amounted to EUR 457 million in fiscal year 2019. Excluding the effects of IFRS 16, free cash flow was EUR 207 million and thus 22% above the prior year level (2018: EUR 170 million). The increase is largely attributable to improvements in trade net working capital.

As a result of the first-time application of IFRS 16, the cash inflow from operating activities increased significantly in 2019. Even without taking into account the effects of IFRS 16, the cash flow from operating activities was EUR 402 million, 25% above the prior year level (2018: EUR 322 million). This was mainly due to a significant reduction in cash outflow from the change in trade net working capital. Inventories remained on the prior year level, which had an especially positive effect. This more than compensated for the lower operating result.

The cash outflow from investment activities was EUR 195 million, 28% above the prior year level (2018: EUR 152 million). This is mainly attributable to higher capital expenditure in property, plant and equipment compared to the prior year. Financial Position, Capital Expenditure

The first-time application of IFRS 16 led to a significant increase in cash outflow from financing activities. Even excluding the effects of IFRS 16, at EUR 223 million, cash outflow from financing activities was significantly higher than in the prior year (2018: EUR 139 million). This is mainly attributable to repayments of current and non-current financial liabilities during the reporting period (2018: cash inflow from taking on current and non-current financial liabilities). At EUR 186 million, the cash outflow in the course of the dividend payment was slightly above the prior year level (2018: EUR 183 million).

Net financial liabilities

Net financial liabilities, measured as the total of all financial and lease liabilities less cash and cash equivalents, was EUR 1,040 million at the end of fiscal year 2019. The application of IFRS 16 led to a significant increase in net financial liabilities due to the first-time inclusion of lease liabilities. Excluding the effects of IFRS 16, at EUR 83 million, net financial liabilities were slightly higher than in the prior year (December 31, 2018: EUR 22 million). This is mainly attributable to higher financial liabilities towards financial institutions. The latter also increased due to the take-over of a loan as part of the full acquisition of a leasing property company that had previously been under the joint control of HUGO BOSS and another party. Net Assets, Notes to the Consolidated Financial Statements, Note 8

Capital expenditure

In fiscal year 2019, HUGO BOSS invested EUR 192 million in property, plant and equipment and intangible assets (2018: EUR 155 million). Capital expenditure was thus substantially higher than in the prior year, mainly due to higher investments in the modernization of the own retail network and selective store openings.

With capital expenditure of EUR 134 million, the own retail network was a focus of investment activities (2018: EUR 89 million). Of this, EUR 77 million was spent on the renovation and modernization of existing stores (2018: EUR 45 million). The focus was on the continuous optimization of the global retail network and the associated consistent modernization of BOSS stores. Since last October, the largest BOSS flagship store globally on the Champs-Élysées in Paris has also been displaying the latest store concept. In addition, EUR 56 million has been invested in selectively opening new retail stores (2018: EUR 44 million). Of this, a high double-digit figure was spent for the construction of the largest HUGO BOSS outlet globally at the Metzingen site, which opened in September 2019.

Capital expenditure on administration came to EUR 44 million in the past fiscal year (2018: EUR 54 million). This mainly includes investments of EUR 34 million in the IT infrastructure (2018: EUR 36 million) and capital expenditure on the modernization of administrative facilities, including as part of the project “New Ways of Working”. Employees

Other capital expenditure on the production, logistics and distribution structure and on research and development in 2019 amounted to EUR 15 million (2018: EUR 12 million). The increase over the prior year is mainly attributable to investments in the expansion of logistical capacities, including in connection with the expansion of online partnerships in the concession model.

Accumulated depreciation and amortization on property, plant and equipment and intangible assets, including own capitalized cost, totaled EUR 1,237 million in fiscal year 2019. Excluding the effects of IFRS 16, accumulated amortization and depreciation was EUR 1,017 million (2018: EUR 963 million). Existing obligations from investment projects totaled EUR 0 million as at December 31, 2019 (December 31, 2018: EUR 9 million). Notes to the Consolidated Financial Statements, Note 8