External risks

Macroeconomic risks

Like any company with global activities, the HUGO BOSS Group is exposed to risks arising from the uncertainty of future developments of macroeconomic conditions. A decisive factor in this context is the development of the global economy, which can lead to reduced demand for apparel and accessories in the premium and luxury segments. Its dependence on consumer behavior exposes the consumer goods industry in general to risks that can impact budgeted sales and/or margins. The effects of macroeconomic developments can occur globally or in individual markets, and can have knock-on effects. However, the advance order intake and the development of the Group’s own retail business, provide the HUGO BOSS Group with early warning indicators that permit an early forecast of the consequences of potential macroeconomic risks. The HUGO BOSS Group has taken several measures to mitigate the impact of turns in the business cycle. This includes a clear brand profile geared towards the expansion of the market share in a highly competitive environment. A business model designed for international growth also taps the potential of new consumer groups and serves to compensate for potential decreases in demand in individual markets. A further objective is to achieve a balanced distribution of sales across different regions to avoid overdependence on individual markets. Looking at fiscal year 2016, the Group generally expects the global economy to continue to grow. It is anticipated that, in the best case scenario, the premium and luxury goods industry will see a modest rise in sales. Adverse macroeconomic developments can have a moderate impact on planned business growth, however, regardless of the measures taken. Management considers the occurrence of this risk as possible given the persistent uncertainties surrounding the euro debt crisis, the slowdown in economic growth in China, and the prospect of further appreciation of the US dollar and a tighter monetary policy in the United States. Subsequent Events and Outlook, Outlook

Geopolitical developments

A company with international activities, HUGO BOSS is also exposed to risks in connection with the development of individual sales markets. This risk can be triggered by changes in the political or regulatory environment or by socioeconomic developments. As is the case with any company, the Group’s net assets, financial position and results of operations are exposed to the risk of terrorist activities. The tragic events in Paris made it all too clear that attacks such as these can have an adverse impact on business and demand beyond regional borders. If a tougher line is taken against terrorist organizations, there is the danger this could lead to further attacks.

2015 was shaped by growing geopolitical tensions. In addition to the extension of sanctions against Russia in the wake of the Ukraine conflict, developments in the Near and Middle East have shown that conflicts of interest are increasingly leading to military hostilities. Syria and Iraq are the hotbed of the conflicts, and the influence exerted by allies, neighboring countries and NATO members in these countries harbors the danger that political frictions could arise between the parties involved. Further trade restrictions imposed in this context could have a detrimental effect on the states concerned and thus influence purchasing habits. The lower oil price is also fueling domestic and foreign policy tensions; depending on the break-even point per barrel of oil, the contribution made by oil to state revenues and the prevailing financial situation, oil-exporting states are going to come under more and more pressure.

Given the increasing importance of geo(political) risks in recent years and the likely continuation of this trend, HUGO BOSS has defined this as a long-term emerging risk. In view of this definition, a special focus will be placed on risks belonging to this sub-category, meaning that all developments will be monitored and analyzed to assess their potential impact on HUGO BOSS. During these analyses, risk experts work together in interdisciplinary teams, supported and advised by central risk management where necessary.

Global distribution in more than 120 countries at Group level provides a natural hedge against adverse developments in individual countries or regions. No significant changes in the regulatory or sociocultural environment are expected in the HUGO BOSS Group’s key markets. Unexpected changes in country-specific business conditions in key markets may generally lead to low financial effects. However, from the Managing Board’s point of view this is currently classed as unlikely due to the measures taken.

Product piracy

Businesses offering high-quality branded articles, particularly in the premium and luxury segment, have always been affected by product piracy. A global increase in the distribution of fake goods is being recorded due to online sales. In addition to legal protection and close collaboration with public agencies worldwide, HUGO BOSS has taken far-reaching organizational measures to be able to discover instances of product piracy quickly and pursue them rigorously. The risk of direct sales losses due to fake articles being widely offered is currently evaluated as low and unlikely. However, in view of the latent risk of downstream image losses, HUGO BOSS constantly reviews developments and will take further protective measures as required.

Environmental and health risks

A global value chain is always subject to a number of risks that may arise due to environmental disasters, epidemics and the consequences of climate change. The unforeseeable wide spread of the Ebola virus in West Africa in the year 2014 illustrates the risk potential of such events. In order to respond rapidly and adequately to the impact of natural disasters, the HUGO BOSS Group has overhauled the emergency management system at its headquarters and added a special organizational structure that bundles the cross-functional skills needed to master emergencies and guarantees single leadership with clear decision-making paths. Nevertheless, low effects on target realization cannot be entirely ruled out, although management considers this situation to be unlikely. The risks resulting from climate change, such as water scarcity, are deemed to be unlikely for fiscal year 2016, and the potential loss is assessed as low. Over a medium- to long-term observation period, the risk posed by water scarcity increased in significance for HUGO BOSS, resulting in a moderate expected impact in the medium term. There is the risk that water scarcity will affect the agricultural sector in the long term. Cotton farming and, consequently, the reduced availability of special cotton fibers could lead to higher material costs. Given the medium- to long-term observation period, it will be possible to identify changes in the risk assessment at an early stage, meaning that measures can be prepared and implemented in good time.

Competitive environment

The competition with other premium and luxury goods manufacturers for the trust and loyalty of consumers essentially also means a competition for the best retail selling spaces, highly qualified personnel and presence in the right media. Rising competitive pressure can lead to higher costs or lower sales in increasingly saturated markets. However, the HUGO BOSS Group considers itself to be very well positioned in the international competitive arena, so that the financial impact associated with this risk should not rise above a low level. The Managing Board currently regards it as unlikely that such an impact will materialize.