Group management

Key performance indicators

HUGO BOSS aims at sustainably increasing the enterprise value. The Group’s internal management system is intended to support the Managing Board and the management of the respective 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 independence and liquidity of HUGO BOSS at all times.

Increasing sales and operating profit (EBIT) is key 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 a total of four key performance indicators for increasing free cash flow: sales, EBIT, trade net working capital, and capital expenditure.

Although fiscal year 2021 was once more impacted by the implications of the COVID-19 pandemic, HUGO BOSS recorded a noticeable recovery in global business activity over the course of the year. This led to significant improvements in sales, EBIT, and free cash flow. In addition to the swift return to sales and earnings growth, this year’s management activities focused on the implementation and successful execution of the “CLAIM 5” growth strategy.

“CLAIM 5” aims at substantially accelerating sales growth and significantly increasing the market share of BOSS and HUGO over the next five years. At the same time, HUGO BOSS is striving to sustainably increase its profitability as part of “CLAIM 5”, and therefore attaches particular importance to profitable sales growth. By 2025, value creation will shift from the previous approach of relative margin improvement to superior sales growth, absolute profitability improvement and above-average free cash flow generation. All initiatives aimed at driving sales growth will therefore also be measured by their potential to sustainably grow operating profit (EBIT). Comprehensive investments in both brands, BOSS and HUGO, the further digitalization of the business model as well as its global store network will be compensated by strong efficiency gains to be realized by optimizing the Company’s global store network as well as leveraging operating overhead. Group Strategy

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 main responsibility of the Group’s subsidiaries and the respective operating central departments. The latter are also responsible for managing trade payables. These three balance sheet items are primarily 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 own retail business in order to optimize inventories. This process takes into account sales quotas as well as expected sales growth and markdown levels.

The management of HUGO BOSS is jointly and directly responsible for driving profitable growth. As a result, the short-term incentive program (STI) of managers at all four management levels is linked to the achievement of specific sales and EBIT targets. The ratio of trade net working capital to sales is the third component of the STI. The compensation scheme for management at the two levels below the Managing Board also includes a long-term incentive program (LTI), whose design matches that for the Managing Board. The LTI includes both, financial targets relevant to the Group strategy as well as non-financial sustainability targets.

Investment activity will continue to focus on the Group’s own retail network and the digitalization of its business model. As part of the strategic claim “Rebalance Omnichannel”, HUGO BOSS is pushing ahead with the further optimization and modernization of its global store network. Around 80% of the Company’s own stores are to be redesigned over the next three years. In line with the claim “Lead in Digital”, digital investments are planned along the entire value chain – from digital trend detection and product development to AI-enabled pricing and the global rollout of digital showrooms. A specific approval process exists for material investment projects. Apart from qualitative analyses, e.g. with respect to potential store locations, this also includes an analysis of each project’s net present value. Financial Position, Capital Expenditure, Group Strategy

In light of the anticipated strong top- and bottom-line growth, HUGO BOSS is confident to continue generating significant free cash flow. This is to be supported by improved management of trade net working capital and the efficient use of capital expenditure. The majority of expected accumulated free cash flow will either be reinvested into the Company or distributed to shareholders via regular dividend payments. In doing so, HUGO BOSS is pursuing a profit-based dividend policy aimed at allowing shareholders to participate appropriately in the Group’s earnings development. Following the pandemic-related reduction of the dividend to the legal minimum amount of EUR 0.04 per share in the last two fiscal years, the Company’s payout ratio until 2025 will be in a range of between 30% and 50% of net income attributable to shareholders. 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 safety in the event that the Company’s business 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 at HUGO BOSS generally refers to a rolling multi-year period and is prepared as part of the annual, Group-wide budget process, taking into account the current business situation and the underlying “CLAIM 5” strategy. Based on targets set by the Managing Board, the Group’s subsidiaries prepare earnings and investment budgets for their respective markets or divisions. A similar planning model is used for trade net working capital. On this basis, the development and sourcing units derive mid-term capacity planning. Thereupon, Group Controlling reviews all of these plans for plausibility and aggregates them to form the overall Group planning. The latter is updated on a regular basis, taking into account the actual business performance as well as any opportunities and risks.

Additionally, HUGO BOSS regularly conducts liquidity assessments, based on the expected cash flow development. This aims to identify financial risks at an early stage and to take appropriate measures concerning financing and investment requirements. Financial Position

On a monthly basis, the Managing Board and management of Group subsidiaries are informed about the operational business development through standardized, IT-enabled reports of varying detail, supplemented by ad hoc analyses. 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 discussed. Developments with a significant impact on the Group’s net assets, financial position and results of operations are immediately reported to the Managing Board.

The Company is particularly focused on monitoring early indicators suitable for obtaining an indication of future business performance. In this context, sales development 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 deviations from the budget at an early stage and take appropriate countermeasures.

The Group’s investment controlling appraises planned investment projects with respect to their contribution to the Company’s overall profitability targets. This ensures that projects are only launched in case of an expected positive contribution to enhancing the Group’s economic profile. 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 initial profitability targets.

Due to the ongoing high level of uncertainty regarding the further development of the COVID-19 pandemic and its impact on the business of HUGO BOSS, there was a close dialog between the Managing Board, Group Controlling, the management of the central divisions, and the Group’s subsidiaries also in 2021. Corporate planning was regularly reviewed and updated throughout the year in order to take the dynamic evolution of the pandemic into account. Scenario analyses were used to simulate different pandemic developments and their potential impact on the Group’s key performance indicators.