Hugo Boss Q2 Profit Surges

Hugo Boss Q2 Profit Surges

The FINANCIAL -- HUGO BOSS made good progress in the second quarter of 2017. Comp store sales in its own retail business picked up significantly in all three regions, with online business likewise growing in the second quarter.

Sales in the wholesale business fell short of the prior year due to delivery shifts as compared to the prior year. The core markets of Great Britain and China again performed well, while U.S. business expanded for the first time in two years. Despite increased marketing expenses and spending on the digital transformation of the business model, operating profit remained at the prior year’s level. On this basis, HUGO BOSS is confirming its target of stable full-year sales and earnings in 2017, according to HUGO BOSS.

At today’s Investor Day at its head office in Metzingen, the Company provides an update on the progress that it had achieved since announcing its strategic realign- ment last November. This is to generate sustained profitable growth from 2018. Main topic addressed at the Investor Day is the implementation of the two-brand strategy with the focus on BOSS and HUGO. The previously independently managed BOSS Orange and BOSS Green lines have been integrated into the BOSS core brand.

The Spring/Summer 2018 collections which were presented recently reflect the focus on the BOSS and HUGO brands for the first time. The increased profile of the two brands was showcased at impressive fashion shows: HUGO in June at Pitti Immagine Uomo in Florence, and BOSS in mid-July at the New York Fashion Week. A broad audience was able to follow the shows via livestreams provided on the website and on social media.

Wholesale partners reacted positively to the new Spring/Summer 2018 collections. Above all, they welcomed the increased clarity of the BOSS brand message. Orders for the brand’s athleisure wear increased at double-digit rates, partly compensating for more difficult trends in the brand’s businesswear. Orders for HUGO are up solidly compared to the prior year period, driven by a strong double-digit increase in casualwear in particular. Across both brands, order remained broadly stable year- over-year, outperforming the global wholesale market.

The first parts of the new collections will be available in stores from the end of this year. To tie in with this, the Company is also aligning its distribution activities more closely to customers’ needs. Thus, HUGO BOSS is widening its range in the commer- cially important entry-level price ranges, continuing to expand its omnichannel services and systematically investing in sales staff training and development. In addition, it will be enhancing the shopping experience from Fall 2017 with the step- by-step roll-out of new store concepts for BOSS and HUGO.

Against this backdrop, HUGO BOSS will be pursuing its goal of growing sales and earnings in 2018. Looking ahead to 2019 and beyond, HUGO BOSS assumes that sales will grow more strongly than the relevant market segment and that the operating margin will increase again.

Sales in Europe remained stable. However, the wholesale business was burdened by delivery shifts as compared to the prior year. In Great Britain and in the Benelux the Group's own retail business in particular provided for sales increases of 11% and of 4%, respectively. Especially Great Britain benefited from solid local demand and robust business with tourists. In contrast, sales decreased by 4% in Germany and by 11% in France. However, in Germany the Group's own retail business also posted gains.

The increase in sales in the Americas is mainly due to a 2% growth in the U.S. market. This growth was underpinned likewise by the favorable development of the Group's own retail business and wholesale business. In the prior year, negative effects from measures to enhance distribution in the BOSS core brand had burdened wholesale sales. In Canada sales were also up but they decreased in Latin America.

In the second quarter, sales in Asia/Pacific benefited again from the ongoing upswing on the Chinese market. Hence, sales rose by 14% in China. With double- digit sales growth on a like-for-like basis the Chinese mainland continued to per- form significantly better than Hong Kong and Macau. Sales were also up in Japan.

Sales development in the Group's own retail business (including outlets and online stores) accelerated in the second quarter.

On a comp store and currency-adjusted basis, sales increased by 3%, mainly due to mid-single digit growth in Asia/Pacific. In Europe and the Americas sales rose at a low single-digit rate on a comp store and currency-adjusted basis.

Overall, sales in the Group’s own retail business in Europe climbed by 4% to

EUR 246 million (Q2 2016: EUR 242 million). Sales in the Americas amounted to EUR 100 million (Q2 2016: EUR 92 million). This is equivalent to a currency- adjusted increase of 6%. In Asia, sales grew by 12% in local currencies to EUR 90 million (Q2 2016: EUR 81 million).

Sales generated in freestanding stores and shops-in-shops were 2% and 7% respectively above the prior year´s figures on a currency-adjusted basis. Outlet sales rose by 10%. In its online business, HUGO BOSS achieved a 9% increase in sales. Consequently, the measures focused on increasing customer footfall and commercially optimizing the website showed first signs of success.

In the wholesale business, delivery shifts as compared to the prior year burdened sales in Europe in particular.

At EUR 126 million, wholesale sales in Europe were 7% lower than in the prior year (Q2 2016: EUR 136 million). In the Americas, sales on a currency-adjusted basis fell by 3%. As in the prior year, they came to EUR 49 million (Q2 2016:

EUR 49 million). The Asia/Pacific region recorded a decrease of 1% in local currencies with sales amounting to EUR 7 million (Q2 2016: EUR 7 million).

Sales in the license business grew substantially, rising by 27% to EUR 18 million in particular due to higher license income from fragrances (Q2 2016: EUR 14 million).

Sales of the BOSS core brand particularly benefited from the double-digit growth in the athleisure offering, which in 2017 is still sold under the BOSS Green brand.

A growing wholesale presence as well as growth in the Group's own retail business supported the sales performance of HUGO.

Menswear benefited from the favorable performance of the HUGO brand and the BOSS Green brand line. Womenswear sales reflected declines in both BOSS and HUGO.

The slight increase in the gross profit margin resulted from the rising share of sales in the Group’s own retail business. Negative currency effects associated with the devaluation of the British pound, however, offset this effect to some extent.

The unchanged strict cost management limited the increase in operating expenses. In the course of this, reduced expansion activity and positive effects from renegotiated leases in the Group’s own retail business ensured stable selling expenses. An expansion of brand communication activities led to an increase in marketing expenses of 5% as compared to the prior year. Higher personnel expenses and higher depreciation and amortization following prior year’s IT infrastructure investments resulted in an increase in administration expenses.

The net income arising from other operating expenses and income is related to the store closures agreed upon as part of the Group’s catalog of measures. The company was able to achieve more favorable conditions compared to the original plans for the early termination of leases. Consequently, it was possible to reduce the provisions that had been recognized in the second quarter of 2016.

EBIT and the Group's net income were thus substantially above prior year levels.

EBITDA before special items was unchanged over the prior-year period. The increase in gross profit was offset by higher operating expenses.

Segment profit in Europe was lower due to wholesale sales burdened by delivery shifts as compared to the prior year. Operating expenses were stable. The adjusted EBITDA margin contracted by 140 basis points to 28.6% (Q2 2016: 30.0%).

In the Americas, higher sales and a limitation of the increase in operating expenses resulted in a higher profit. At 24.0%, the adjusted EBITDA margin was 30 basis points up on the prior-year figure (Q2 2016: 23.7%).

Segment profit in Asia/Pacific benefited from sales growth as well as a dispropor- tionately low increase in selling and distribution expenses. At 23.3%, the adjusted EBITDA margin was up 340 basis points on the prior year (Q2 2016: 19.9%).

Earnings in the license segment also exceeded the prior year’s level thanks to the positive sales development.

As compared to the prior year, trade net working capital (TNWC) was reduced substantially. The positive development of inventories was primarily attributable to declines in the Americas and in Asia/Pacific.

The increase in free cash flow over the last twelve months led to a decline in net financial liabilities compared with the prior year.

The modernization of the Group’s own retail network, spending on selected new openings and investments in the IT infrastructure formed the focus of capital expenditure in the second quarter. The decline compared to the prior year primarily results from a different phasing of the investment budget.

In addition to the substantial increase in earnings, reduced capital expenditure as well as the decline in trade net working capital resulted in an increase of free cash flow.

In the first half of the year, the number of the Group’s own freestanding retail stores declined by a net figure of four to 438 (December 31, 2016: 442). As at June 30, 2017, five of the around 20 store closures agreed upon in fiscal year 2016 had been completed.

In Europe, new stores were opened in Moscow and Newcastle amongst others. There were a total of four new openings and six closures. In most cases, the Group made use of expiring leases.

In the Americas region, the number of freestanding retail stores decreased as a result of two closures in the United States. In comparison, there was one new opening in Mexico.

The size of the store network in Asia/Pacific was also reduced by one store. There were five new openings in Korea and Singapore among other places and six closures in various markets.

Including shop-in-shops and outlets, total selling space of the Group’s own retail business rose slightly to around 155,000 sqm (December 31, 2016: 154,000 sqm).

Selling-space productivity in the Group's own retail business amounted to around EUR 11,000 per sqm in the past twelve months (December 31, 2016: EUR 10,900 per sqm).

The Managing Board reconfirms the full-year outlook for sales and earnings.

With the stepwise introduction of a new store concept from fall 2017,

HUGO BOSS postpones part of the renovation of its own retail stores originally planned for 2017 to the next year. Consequently, HUGO BOSS now expects capital expenditure of between EUR 130 million and EUR 150 million in 2017 (previously: EUR 150 million to EUR 170 million).

In this connection, the Group now projects an increase in free cash flow over the prior year to around EUR 250 million (previously: more or less stable compared to the prior year, 2016: EUR 220 million).