Annual Report 2023

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HUGO BOSS faces operational risks, which are mainly associated with suppliers and sourcing markets, sales and distribution, quality, as well as logistics.

Risks associated with suppliers and sourcing markets

Risks associated with suppliers and sourcing markets relate to possible dependencies on individual suppliers or production sites, a possible increase in product costs, and a possible divergence between production and sales.

HUGO BOSS attaches great importance to the careful selection of suppliers and the establishment and maintenance of long-term strategic partnerships. However, there is a risk that production may be temporarily interrupted at one or more suppliers due to supplier-related or regional events, the latter including implications of trade conflicts and restrictions introduced by governments. Excessive dependence on individual suppliers or production sites could lead to disruptions in the Group’s supply chain and thus to an operational shortcoming. HUGO BOSS therefore continues to pursue the goal of a regionally balanced strategic sourcing mix, in order to minimize risks such as local or regional capacity shortfalls as far as possible. In this context, the production and sourcing process is coordinated centrally by Business Operations. Supplier relationships are regularly monitored and evaluated with the aim of identifying risks in a timely manner and initiating appropriate measures to ensure product availability. In fiscal year 2023, both the largest external supplier as well as the largest single external production site accounted for 4% of the total sourcing volume (2022: 5% each).

In the medium term, within the framework of “nearshoring,” HUGO BOSS is pursuing the strategic ambition of relocating parts of its sourcing volume closer towards its largest sales markets EMEA and the Americas, thus further strengthening their respective share of the global sourcing mix. In 2023, 52% of our merchandise was sourced in EMEA, representing a noticeable increase compared to last year (2022: 46%). In this context, our own production in Izmir, (Turkey), meanwhile accounting for 15% of the global sourcing and production volume (2022: 12%), plays a key role. In addition to closer proximity to its most important sales markets, enabling HUGO BOSS a faster replenishment process, the Company also benefits from greater independence from external factors. Sourcing and Production

In view of earthquake risks and possible risks due to political uncertainties, particularly comprehensive measures have been implemented at the Company’s largest production site in Izmir in order to limit the impact of a production downtime on Group revenues. For the majority of the production volume, contingency plans are in place to transfer production to external suppliers. In addition, the financial risk in the event of an earthquake is partially covered by insurance policies.

Wage increases in production, in particular in emerging markets, and a rise in the price of relevant raw materials such as cotton, wool, and leather, may lead to higher production costs and thus have a negative impact on the gross margin and ultimately on the Group’s profitability. HUGO BOSS counters these risks with margin-based collection planning, measures to improve efficiency in the production and sourcing processes, continuous optimization in the use of materials, and regular reviews of its pricing policy.

The forecasting of sales volumes, planning of production capacities, and allocation of raw materials and finished goods as part of the sourcing process involves scheduling risks. Deviations from the appropriate allocation can lead to over-scheduling resulting in high inventory levels, on the one hand. On the other, it can also lead to under-scheduling with the risk of missed sales opportunities. In order to reduce scheduling risks, HUGO BOSS is working on constantly improving its forecasting quality. This it to be achieved primarily by further increasing the transparency along the value chain while, at the same time, growing flexibility of merchandise management across distribution channels and markets. In this context, in 2023, HUGO BOSS further pushed ahead with the implementation of its Digital TWIN initiative – a smart and tech-driven business operations platform aimed at strongly enhancing real-time data utilization. By creating a digital copy of our supply chain and using artificial intelligence, we aim to further improve demand planning and better align our various planning activities. This, in turn, is intended to provide the most accurate procurement of products and fabrics, both in terms of timing and quantity. Sourcing and Production

Sales and distribution risks

Sales and distribution risks exist in connection with the Group’s own retail activities, in particular with regard to inventory management as well as the duration of storage and consequently the recoverability of merchandise. In the wholesale business, sales and distribution risks mainly relate to a possible dependence on individual wholesale partners as well as bad debt losses.

The aim of the Company’s centrally organized inventory management is to ensure the forward-looking, optimal allocation of Group-wide inventories while, at the same time, maintaining flexibility in order to be able to respond to increases or decreases in demand at short notice. Material downturns in demand or misjudgements of sell-through rates can have a negative impact on inventory turnover. HUGO BOSS therefore strives to continuously improve its inventory management. Granting additional discounts as a potential countermeasure for excess inventory inevitably has a negative impact on the gross margin and ultimately on the Group’s profitability, and is therefore constantly monitored by the central Business Planning & Analysis department. A centrally managed pricing policy, differentiated retail formats, and collections tailored to these aim to achieve a constant improvement in efficiency in own retail.

Inventory risks may result from increased storage periods and a related potential reduction in the marketability of inventories. In line with the principle of net realizable value, impairments on inventories are recognized accordingly and reviewed on a monthly basis. Following the implementation of an advanced merchandise model, including a redefinition in product life-cycles, HUGO BOSS implemented a change in how impairments on inventories are recognized in fiscal year 2023. This refined estimate uses a seasonal approach, reflecting a better devaluation factor. As of the reporting date, in the opinion of the Managing Board, sufficient allowances were recognized. Notes to the Consolidated Financial Statements, Note 12

In its wholesale business, HUGO BOSS pays close attention to ensuring a balanced customer structure in order to avoid a potential overdependence on individual customers. Business Planning & Analysis constantly monitors key performance indicators such as the order intake, sales, and delivery quotas and reports these on a regular basis to the Managing Board. This allows countermeasures to be initiated immediately if potential risks arise. Group Management

In light of the potential insolvency of individual wholesale partners, as well as potential cumulative losses resulting from an economic slowdown in individual markets, the Group is exposed to the risk of bad debt losses. The Group-wide receivables management follows uniform rules, for example regarding credit rating checks and the setting of, and compliance with, customer credit limits, monitoring of the aging structure of receivables, and the handling of doubtful receivables. In individual cases, this means that deliveries are only made upon prepayment or business is discontinued with customers with an unsatisfactory credit rating. The Internal Audit department regularly reviews compliance with the respective Group guidelines. As of the reporting date, there was no concentration of default risks due to significant outstanding receivables from individual customers. Notes to the Consolidated Financial Statements, Note 13

Quality risks

When sourcing materials and manufacturing its products and materials, HUGO BOSS places the highest emphasis on quality. Thus, we always strive to use high-quality materials and new, innovative manufacturing techniques in order to meet our own high standards of quality and fit. Intensive quality controls at all stages of production and the incorporation of customer feedback are intended to contribute to the continuous improvement of the production process and mitigate inherent risks. In addition, both the Company’s own production sites as well as those of its partners are regularly monitored to ensure strict compliance with central quality guidelines. Incoming goods inspections as well as intensive quality tests at the Group’s headquarters in Metzingen are designed to ensure the high quality standards of HUGO BOSS. Generally, HUGO BOSS also incorporates risk criteria into its product development, as this can have a direct positive impact on the business performance of HUGO BOSS. A further improvement in product quality, for example, can have a positive impact on the return rate and thus on the sales development. Product Development and Innovation, Sourcing and Production

Logistics risks

HUGO BOSS is exposed to logistics risks that relate to potential interruptions in the transport of goods, for example due to a possible shortage of sea and air freight, or insufficient warehouse capacity. This directly involves risks of a general increase in freight costs as well as significantly delayed product availability.

In the wake of the ongoing military conflict in the Middle East and its impact on the important sea freight route in the Red Sea, competition for global transport and logistics capacity has intensified noticeably towards the end of 2023, leading to an increase in sea freight rates and an extension of the sea freight route from Asia to Europe by several weeks. Although HUGO BOSS does not anticipate any significant impact on product availability in 2024, it expects the overall increase in sea freight rates to weigh on its input cost to some extent. The Company continues to closely monitor the situation and will take appropriate adjustment measures if necessary. Irrespective of this, however, significant interruptions in product availability and related lost sales opportunities can never be completely ruled out. Sourcing and Production

In addition, the temporary downtime or loss of warehouse locations or conveyor systems may lead to missed sales opportunities. Ensuring sufficient warehouse capacity and a seamless delivery of goods forms an essential aspect as part of Company’s strategic claim “Organize for Growth.” The storage of the Company’s inventories is centered on selected sites, with most of them directly operated by HUGO BOSS. The Group’s own central distribution centers for hanging goods, flat-packed goods, and the Company’s online business, all located in proximity to the headquarters in Metzingen, form the core of the Group-wide logistics network. Overall, capacity bottlenecks caused by strong top-line growth represent a noticeable risk as they may lead to a delayed delivery of goods or interruptions in product availability at the point of sale. With the aim of constantly improving the efficiency and flexibility of its logistics setup while minimizing the associated risks as far as possible, HUGO BOSS will continue to work on further optimizing its global logistics platform in the future. In this context, the strategic expansion of one of our key logistic hubs was initiated in late 2023. This multiyear project aims to significantly increase both shipping as well as storage capacity while also focusing on the further digitalization and automation of key processes. In addition, compliance with comprehensive fire protection and safety measures is continuously monitored at all warehouse locations. HUGO BOSS has also taken out insurance to cover the direct financial risk from a loss of goods or equipment stored in warehouses. Sourcing and Production