Quarterly Statement for Q1 2020
Metzingen, May 5, 2020
HUGO BOSS resolutely tackles the challenges posed by the pandemic –
healthy balance sheet structure and comprehensive measures ensure liquidity
- Protecting employees and financial stability have top priority
- Temporary store closures lead to a decline in currency-adjusted sales of 17% in the first quarter
- Ongoing strong momentum in online business – sales increase 39%
- Operating result (EBIT) amounts to minus EUR 14 million
“The COVID-19 pandemic is an unprecedented exceptional situation for our company too. Protecting our employees, customers, and business partners is our top priority,” says Mark Langer, Chief Executive Officer of HUGO BOSS AG. “We have done our utmost to ensure the financial flexibility and stability of our company. I am absolutely convinced that together we will safely navigate HUGO BOSS through this unusual time.”
HUGO BOSS continues to fulfill its social responsibility also in this exceptional situation. The company is protecting the health and safety of its employees, customers, business partners, and other stakeholders through a number of initiatives:
- Already at an early stage, HUGO BOSS set up a crisis team that closely monitors the development of the pandemic and comprehensively coordinates all of the Group’s actions to protect its employees. Almost all corporate employees have been enabled to work from home. Where this is not possible due to operational conditions, appropriate precautions have been taken. This applies in particular to employees in production, logistics, and retail.
- In accordance with official regulations, in mid-March HUGO BOSS temporarily closed nearly all of its own retail stores as well as points-of-sale at important partners in Europe and the Americas. The Asia/Pacific region and China in particular were also affected by extensive temporary closures during the first quarter. In order to protect customers and employees, currently more than 75% of the Group’s more than 1,000 own points-of-sale globally remain closed.
- At the end of March, HUGO BOSS temporarily dedicated the production facility at its headquarters in Metzingen, Germany, to the production of face masks. A total of around 200,000 re-usable masks are being produced at the site, before being donated to public institutions. The latter will also receive functional clothing that is produced in-house.
COVID-19 pandemic weighs on business development in the first quarter
In the wake of the COVID-19 pandemic and the related temporary closures of retail stores, the global apparel industry, including the upper premium segment, faced significant challenges in the first quarter of 2020. For HUGO BOSS, this inevitably resulted in a decline in sales, profitability, and cash flow in the first three months of the year. Sales of HUGO BOSS decreased 16% overall to EUR 555 million (Q1 2019: EUR 664 million). This corresponds to a currency-adjusted decline of 17%. After a very encouraging start to the new year, the global spread of the coronavirus led to a significant impact on the business. In the Asia/Pacific region, the effects began to be noticeable from late January, and currency-adjusted sales were down by a total of 31% in the first quarter. On the other hand, the decline in currency-adjusted sales in Europe and the Americas was less pronounced at 14% and 17%, respectively. In both regions, the increased spread of the virus only began around one month later.
While the vast majority of the own store network of HUGO BOSS was affected by temporary closures in the first quarter, the Group’s own online business continued to enjoy strong momentum. With encouraging currency-adjusted growth of 39%, the first three months of 2020 marked the tenth consecutive quarter of strong double-digit growth of the own online business. In total, retail sales decreased 17% in the first quarter, while wholesale revenues declined 18%, both currency-adjusted.
The double-digit sales decline significantly weighed on earnings. In the first
quarter, the operating result (EBIT) amounted to minus EUR 14 million (Q1 2019: EUR 57 million).
Gradual recovery in mainland China
Unlike in Europe and the Americas, where business is still significantly impacted as a result of the pandemic and the continuing closures of points-of-sale, HUGO BOSS is currently seeing steady improvements in mainland China. Since the end of March all own retail stores and shop-in-shops have been reopened over there, and the sales achieved in April were only around 15% to 20% below the prior year level. HUGO BOSS expects that consumer behavior and store traffic will continue to improve gradually in this strategically important market for the company. In addition, the momentum of the Group’s global online business saw a further strong acceleration in April, as sales generated via the own online store hugoboss.com as well as important partner websites more than doubled versus the prior year period.
Comprehensive measures taken to secure free cash flow
Thanks to its healthy balance sheet structure, HUGO BOSS is well prepared for the financial challenges associated with this global crisis. In addition, at an early stage, the company initiated comprehensive measures with a total volume of around EUR 600 million to secure its free cash flow:
- With a view to its operating expenses and its strict cost management, HUGO BOSS targets additional cost savings of at least EUR 150 million over the course of the year. In the context of the respective legal framework, measures were taken to reduce the working hours and personnel costs for the Group’s national and international subsidiaries. For a large number of the employees in Germany, for example, a reduction in working hours initially until May 31 was agreed with the works council. At the same time, HUGO BOSS will voluntarily supplement the short-time working compensation to at least 80% of the regular level. In doing so, the company aims at securing the jobs of its employees while at the same time increasing its financial flexibility. The Managing Board of HUGO BOSS AG will also participate in the measures out of solidarity, and is voluntarily waiving 40% of its basic remuneration for the months of April and May 2020. Significant cost savings are also targeted in selling and distribution expenses during the course of the year. In this regard, HUGO BOSS maintains a close and trusting relationship with its landlords in all the affected markets. In each case, mutual solutions to reduce rental expenses appropriate to the situation are being sought in a spirit of partnership.
- Besides this, all non-business-critical investments are being postponed for the time being. In particular, planned renovations and openings of retail stores will be suspended until further notice. Overall, the initial investment budget for 2020 of around EUR 150 million will be reduced by around one third from today’s perspective.
- In order to limit the increase in trade net working capital, HUGO BOSS is working together with its suppliers to reduce the inflow of inventories. At the same time, the company has adjusted its own production level to account for the currently lower demand. In total, HUGO BOSS aims at reducing the inventory inflow in fiscal year 2020 by at least EUR 200 million versus its initial plan.
- In addition, as already communicated, the Managing Board and Supervisory Board of HUGO BOSS AG will propose to the Annual Shareholders’ Meeting on May 27, 2020 that the dividend payment for fiscal year 2019 will be suspended, except for the legal minimum dividend of EUR 0.04 per share. By retaining the net profit, the company is strengthening its internal financing capability.
Protecting its financial flexibility and stability remains a top priority for HUGO BOSS. At the end of the first quarter, the Group had cash and cash equivalents of EUR 102 million. In addition, a revolving syndicated loan in the amount of EUR 450 million is available to the company. Of this, EUR 122 million was utilized at the end of the first quarter.
Reliable outlook for the full year not possible under current circumstances
The temporary closure of a large number of stores of HUGO BOSS will noticeably weigh on the Group’s sales and earnings development for the full year. However, as the further development of the pandemic in many important markets remains uncertain, a reliable forecast for sales and earnings development in 2020 is currently not possible.
At the same time, HUGO BOSS expects both sales and earnings declines in the second quarter of 2020 to be more pronounced than those recorded in the first quarter. This will mainly be a result of the continuing closures of the Group’s own stores as well as points-of sale at important partners in Europe and the Americas. Overall, these two regions combined usually contribute around 85% to Group sales. In total, HUGO BOSS hence expects currency-adjusted Group sales to decrease by at least 50% in the second quarter. Nevertheless, the company is confident that from the third quarter on, the retail environment will gradually improve. This should also positively impact the Group’s sales and earnings development in the second half of the year.
In order to ensure the safety of its shareholders and employees, HUGO BOSS will hold its Annual Shareholders’ Meeting entirely virtually for the first time on May 27, 2020. All information about the Annual Shareholders’ Meeting can be found at shareholdermeeting.hugoboss.com. The Investor Day, originally scheduled for June 18 and 19, 2020, has been postponed considering the current situation. The company will announce a new date in due time.