Annual Report 2021

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HUGO BOSS is subject to a variety of external risks, mainly in connection with macroeconomic, political and social developments, environmental and health aspects, and competition.

Macroeconomic risks

As a global company, HUGO BOSS is exposed to macroeconomic risks in terms of global economic trends. This means that an economic downturn is generally accompanied by a decline in demand for premium and luxury goods, which can have a negative impact on the Company’s sales and earnings performance. Economic effects can occur globally as well as regionally, and may influence each other.

In order to reduce the impact of economic fluctuations, HUGO BOSS aims to balance regional distribution of sales. The Group continuously monitors the macroeconomic environment as well as industry developments in order to identify risks at an early stage and be able to react immediately. Internal early indicators are analyzed regularly to allow the impact of potential macroeconomic risks to be forecast. Group Management

Possible responses to a cyclical downturn in demand include, in particular, reducing production and sourcing activity, stricter managing trade net working capital, increasing cost controlling, and implementing price adjustments.

In its publication of 25 January 2022, the IMF anticipates global growth to slow to 4.4% this year (2021: 5.9%), half a percentage point less than forecast in October still. The main reason for this is the global spread of the Omicron virus variant towards the end of 2021 and its impact on economies. The outlook is also based on the assumption that current global challenges will persist in 2022. For example, the emergence of new COVID-19 variants could prolong the pandemic and lead to renewed economic disruptions. Ongoing geopolitical tensions, such as the Ukraine conflict, pose a further risk to overall economic development. In addition, ongoing disruptions to global supply chains, the volatility of freight costs and energy prices, as well as the further increase in wages, are expected to result in a relatively high level of global inflation in the foreseeable future. Monetary countermeasures, such as key interest rate hikes, are likely to slow the economy, thus representing additional risks to financial stability, capital flows and currencies. The potential negative impact of macroeconomic developments on Group sales and earnings performance in 2022 could be generally high. Management estimates the likelihood of occurrence as possible. Outlook, Risk Report, Environmental and Health Risks

Political and social risks

HUGO BOSS is exposed to political and social risks due to the global nature of its business activities. For example, changes in the political and regulatory environment, geopolitical tensions, military conflicts, changes in government, or terrorist attacks can have a negative impact on the consumer climate.

Global uncertainties in the context of political and social developments are expected to increase further in 2022. In particular, persistent geopolitical tensions such as the Ukraine conflict, an escalation of trade-policy conflicts or the ongoing threat of terrorist attacks pose significant risks for the global apparel industry and thus also for the Group’s business development.

Due to its likely increasing importance, 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 suppliers and sourcing markets. In evaluating and managing the risk, the risk owners and risk experts in the Group work in interdisciplinary teams on the ongoing analysis and monitoring of current political and social developments and their impact 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 is intended to provide a natural hedge against adverse developments in individual markets or regions. Unexpected developments in important sales markets can have a high financial impact. The Management currently considers the likelihood of this risk to be possible.

Environmental and health risks

The global value chain of HUGO BOSS is subject to environmental and health risks that may result from pandemics or environmental and natural disasters as well as the consequences of climate change.

The further course of the COVID-19 pandemic will continue to pose material risks for HUGO BOSS in 2022. The main uncertainties at the time of preparing this report relate primarily to the duration of the pandemic – for example with regard to new virus variants and related renewed waves of infection as well as potential setbacks in vaccination campaigns – and the negative implications of the various restrictions on public life, especially regional lockdown measures. With regard to the latter, there is a material risk of renewed temporary store closures in markets important to HUGO BOSS during the course of the year, which are currently unforeseeable. This is accompanied by the risk that a deterioration in consumer sentiment or a slower than expected recovery in international tourism could have a material impact on business performance. In addition to lost sales opportunities, the occurrence of the described risks would ultimately have a negative impact on the Group’s profitability and cash flow.

In addition, there are fundamental supplier and sourcing market risks connected to the pandemic. Challenges include shortages in global production and logistics capacity, as well as a related increase in material, production and freight costs. For example, in the event of a further deterioration of the situation in sourcing markets that are important for the Group, the production of individual suppliers or multiple suppliers may be temporarily interrupted. This could lead to disruptions in the Company’s value chain and thus to additional sales risks as a result of delayed product availability. Although no significant impact of the pandemic on the Group’s supply chain were observed at the time this report was prepared, the Company remains in close contact with its partners to ensure it is well prepared for any restrictions that may arise. Sourcing and Production, Risk Report, Material Operational Risks

Already at an early stage of the pandemic, HUGO BOSS established various task forces and crisis teams to carefully monitor and mitigate the various impacts of COVID-19, with a focus on employee health and safety as well as business continuity. At Group level, there is an interdisciplinary coronavirus crisis team which closely monitors the course of the pandemic and comprehensively coordinates all measures taken by the Group to protect its employees. In addition, as part of Group management, a particularly close and regular exchange between the Managing Board, Group Controlling and the management of the corporate divisions and the Group companies has been taking place since the beginning of the pandemic. Group Management

Overall, Management considers the risks above and beyond the financial impacts already taken into account in the “Outlook” section for 2022 to be unlikely. The potential effect on earnings performance is classified as high. Outlook, Risk Report, Material Operational Risks

Risks, as a result of climate change, such as increasing water scarcity, are considered as unlikely for fiscal year 2022, and are associated with low possible losses. In the future, however, this risk could become more significant for HUGO BOSS. In the long term there is a risk that an increasing scarcity of water could have negative consequences on the cultivation of cotton, leading to a reduced availability of cotton fibers and higher material costs. Cotton is by far the most used material in the Company’s products.

HUGO BOSS has a central emergency management system in order to be able to react promptly and appropriately to an environmental or natural disaster occurring. Its structural organization pools cross-functional skills needed to handle emergencies and is intended to ensure efficient coordination with clear decision-making paths. Overall, the Management considers that environmental and health risks are unlikely to occur in 2022, but as having a high potential impact on the Group’s net assets, financial position and results of operations.

Competitive risks

The competitive environment of HUGO BOSS is generally highly dynamic. Changes in the competitive environment can influence the Company’s success, particularly in the medium to long term. On the one hand, HUGO BOSS competes directly with well-known apparel companies in the premium and luxury segments for customers, but also for production capacity, retail space in preferred locations, and brand ambassadors. In addition, in the highly competitive casualwear segment, BOSS and HUGO are competing with a large number of global and regional brands with strong links to casualwear and streetwear aimed at younger consumers in particular. Intensive competition for customers may in principle lead to harmful competitive behavior, such as persistently intense discounting.

The Group is convinced that further increasing the relevance of its two brands, BOSS and HUGO, is the most important factor for its long-term success. Therefore, as part of its “CLAIM 5” strategy HUGO BOSS places customers and their needs at the center of its actions. All strategic initiatives are aimed at sustainably increasing the brand strength of BOSS and HUGO, with the goal of becoming one of the top 100 global brands. In this context, the Company started to renew its brand identity and significantly expand its marketing investments in 2021. From a sales perspective, as part of “CLAIM 5”, the Company will further optimize its distribution and significantly advance its omnichannel activities in the coming years in order to offer its customers a seamless brand experience across all touchpoints. Although HUGO BOSS considers itself generally well positioned in international competition, the competitive risks considered as possible have moderate financial implications. Group Strategy