HUGO BOSS confirms sales and earnings outlook for 2019

Quarterly Statement for Q1 2019

Metzingen, May 2, 2019

HUGO BOSS confirms sales and earnings outlook for 2019

• Currency-adjusted Group sales up 1% in the first quarter
• Retail sales on a comp store basis 4% above the prior year
• Online business up 26%, adjusted for currency effects
• Efficiency measures, timing of marketing spend, and currency effects weigh on earnings in the short term
• Operating profit (EBIT) in Q1 therefore 22%* below prior year level
• Outlook for 2019 unchanged: Sales expected to grow at a mid-single-digit percentage rate; EBIT to increase at a high single-digit percentage rate

“The ongoing momentum in our strategic growth market China and in the important online business shows that our strategy is taking effect,” says Mark Langer, Chief Executive Officer of HUGO BOSS AG. “At the same time, the U.S. market proved to be weaker than expected. Moreover, investments in the digitization of our business model and in the organizational structure weighed on our operating result in the first quarter. However, they will help us to further accelerate important operational processes and to significantly improve our cost efficiency in the current year. I am very confident that we will achieve our targets for the full year and beyond.”

In the first quarter, HUGO BOSS increased currency-adjusted sales by 1% to EUR 664 million. This corresponds to an increase in sales of 2% in the reporting currency. However, there were significant regional differences. While in the Americas, the challenging U.S. market and the ambitious comparison base of the prior year in particular led to a currency-adjusted sales decline of 8%, currency-adjusted sales in Asia once again increased disproportionately, by 4%. In Mainland China in particular, where HUGO BOSS recorded double-digit growth on a comp store basis, the momentum of previous quarters continued. In Great Britain, the Group once again achieved double-digit retail sales growth, adjusted for currency effects. Business in Germany developed stable. In total, sales in Europe were up 2% compared to the prior year.

Overall, retail sales on a comp store basis increased by 4% in the first quarter. With currency-adjusted growth of 26%, the Group’s own online business again increased disproportionately. In addition to double-digit growth of the Group’s own online store, hugoboss.com, the further expansion of the concession model in the online business also contributed to the increase. However, sales in the wholesale business decreased, as expected. This development was mainly due to delivery shifts compared to the prior year.

At EUR 55 million, the operating profit (EBIT) was 22% below the prior year’s level.*
In addition to investments in the digital transformation of the business model, higher expenses in connection with reorganization measures in particular led to an increase in administration expenses in the first quarter. These measures are intended to further accelerate important operational processes and lead to efficiency gains in the organization. In addition, marketing expenses increased, largely due to phasing effects compared to the prior year. This development is expected to be offset in the course of the remainder of the year. The appreciation of the U.S. dollar against the euro also had a negative impact on earnings.

Despite the decline in earnings in the first quarter, HUGO BOSS confirms its sales and earnings outlook for the full year 2019. The Group continues to expect currency-adjusted sales to increase at a mid-single-digit percentage rate in 2019. Main driver should be the Group’s own retail business, which is expected to contribute with comp store sales growth in the mid-single-digit percentage range, adjusted for currency effects. In addition, the Group expects the intensification of partnerships with online retailers in the concession model and the renovation of strategically important BOSS stores over the course of the year to significantly drive growth.

For the remainder of the year, HUGO BOSS expects a substantial acceleration in earnings development. Positive effects from the reorganization measures completed in the first quarter and the offsetting of phasing effects related to marketing expenses should significantly contribute to this. In addition, the efficiency program launched in November should yield its first positive results. Furthermore, currency effects should ease over the course of the year. For 2019, HUGO BOSS therefore continues to expect EBIT to increase at a high single-digit percentage rate (excluding the anticipated effects of IFRS 16). The predicted increase in gross profit will also contribute
to this.

Q1 sales development by segment

• In the first quarter, sales developed differently by region. While the Group recorded sales growth in Europe and the Asia/Pacific region, the challenging market environment in the U.S. negatively impacted business in the Americas.
  • In Europe, robust sales growth in the Group’s own retail business was partially compensated by a decline in the wholesale business. The latter was negatively impacted by delivery shifts compared to the prior year. In Great Britain,
    HUGO BOSS recorded currency-adjusted sales growth of 5%. Against the background of the ongoing challenging market environment in Germany, sales developed stable there. In the Benelux countries, sales were also at the prior year’s level. In France, sales growth in the Group’s own retail business could not compensate for a decline in the wholesale business. Overall, sales in France were 7% below the prior year level. 
  • Sales development in the Americas was negatively impacted primarily by the challenging market environment in the U.S. In addition to the ongoing high level of competition, it was above all a lower local demand compared to the prior year that led to a decline in sales. Also, delivery shifts had a negative impact on sales in the wholesale business as against the prior year. Consequently, on a currency-adjusted basis, both the Group’s own retail business and the wholesale business in the U.S. decreased. Overall, sales in the U.S. were down by 10% on a currency-adjusted basis.  

  • In Canada, sales also were below the prior year level. By contrast, Latin America recorded growth at a mid-single-digit percentage rate.

  • Sales in the Asia/Pacific region once again developed positively in the first quarter. In Mainland China in particular, where HUGO BOSS recorded double-digit growth on a comp store basis, the momentum of previous quarters continued. In Hong Kong and Macau, however, the market environment was more challenging. Overall, sales in China grew by 4% on a currency-adjusted basis. With currency-adjusted high single-digit sales growth, Japan and Southeast Asia also contributed to growth in the region.

Q1 sales development by channel

• Sales in the Group’s own retail business (including outlets and online stores) showed currency-adjusted growth of 3% in the first quarter.
  • On a comp store and currency-adjusted basis, sales grew by 4%. In Europe and Asia/Pacific, the Group achieved growth at mid-single-digit and high single-digit percentage rates, respectively. In the Americas, however, sales declined slightly on a comp store and currency-adjusted basis.
  • Overall, sales in the Group’s own retail business in Europe were up 5% on a currency-adjusted basis and came to EUR 221 million (Q1 2018: EUR 210 million). Sales in the Americas amounted to EUR 78 million (Q1 2018: EUR 76 million), which corresponds to a decline of 4% on a currency-adjusted basis. In Asia/Pacific, currency-adjusted sales grew by 4% to EUR 99 million (Q1 2018: EUR 91 million).
  • With a currency-adjusted sales increase of 26%, the own online business once again recorded above-average growth. Alongside growth in the Group’s own online store, hugoboss.com, the expansion of the concession model in the online business also contributed to this.
• The decline in sales in the wholesale business is mainly attributable to delivery shifts compared to the prior year in Europe and the Americas. Slight growth in the replenishment business, allowing HUGO BOSS to react to short-term demand from wholesale partners, only partially compensated for this.
  • At EUR 204 million, wholesale sales in Europe decreased by 1% on a currency-adjusted basis (Q1 2018: EUR 206 million). In the Americas, sales decreased by 15% on a currency-adjusted basis to EUR 38 million (Q1 2018: EUR 41 million). The Asia/Pacific region recorded a currency-adjusted sales decline of 4% to EUR 8 million (Q1 2018: EUR 8 million).
• Thanks to growth in all product groups, above all in fragrances, sales in the
  license business rose by 8% to EUR 18 million (Q1 2018: EUR 16 million).

Q1 sales development by brand and gender

• In the first quarter, sales of the BOSS brand were on the prior year level. Sales growth in casualwear and athleisurewear compensated for a slight decline in sales in businesswear.
• The HUGO brand benefited from double-digit sales growth in casualwear. This development was partly compensated by declining sales in businesswear.
• Sales in menswear were slightly above the prior year level due to growth in casualwear and athleisurewear.
• The decline in sales in womenswear is attributable to lower sales from businesswear. Growth in casualwear could only partially compensate for this.

Q1 earnings development

• The slight decline in gross profit margin in the first quarter is attributable to negative currency effects and is related to the appreciation of the U.S. dollar against the euro. Positive effects from the growing share of sales from the Group’s own retail business could only partially compensate for this.
• Operating expenses were above the prior year level, both in absolute terms and as a percentage of sales. Currency effects had a negative impact on selling and distribution expenses in particular.
  • A different phasing, which will likely be made up for during the rest of the year, also contributed to the increase in selling and distribution expenses. As a result, marketing expenses in particular were significantly above the prior year level. The intensification of digital marketing activities also contributed to the increase in marketing expenses.
  • In addition to investments in the digital transformation of the business model, higher expenses in connection with reorganization measures led to an increase in administration expenses. These measures are expected to further accelerate important operational processes and create future efficiency gains in the organizational structure.
• The higher operating expenses led to a decline in operating result (EBIT) in the first quarter. Consequently, the EBIT margin also decreased. Currency effects had an overall slightly negative impact on earnings development.
• Higher interest expenses resulting from the first-time application of IFRS 16 led to an increase in the financial result in the first quarter. Excluding the effects of IFRS 16, the financial result was at around the prior year level.
• As a result of the increase in operating expenses, the Group’s net income was also below the prior year level.

Q1 profit development by segment

• Starting in fiscal year 2019, EBIT replaces EBITDA before special items used by the Group up through 2018 as one of the key performance indicators. As such, from now on, segment profits will also be presented on the basis of EBIT. The corresponding prior year’s figures therefore deviate from the figures reported in 2018.
• The segment profit in Europe was below the prior year level. Higher sales could only partially compensate for an increase in operating expenses. The EBIT margin decreased by 200 basis points to 25.0% (Q1 2018: 27.0%). Excluding the effects of IFRS 16, EBIT also decreased by 6% to EUR 106 million, which corresponds to an EBIT margin of 24.9%.
• In the Americas, in addition to lower sales, an increase in operating expenses due to negative currency effects also led to a decline in the segment profit. At 3.0%, the EBIT margin was down 350 basis points on the prior year (Q1 2018: 6.5%). Excluding the effects of IFRS 16, EBIT of EUR 4 million was 45% below the prior year level. The corresponding EBIT margin was 3.6%.
• The segment profit for the Asia/Pacific region was slightly above the prior year level. Here, the positive sales development more than offset an increase in operating expenses. At 23.7%, the EBIT margin was down 50 basis points on the prior year (Q1 2018: 24.2%). Excluding the effects of IFRS 16, EBIT increased by 7% to EUR 26 million. This corresponds to an EBIT margin of 24.1%.
• The license segment profit was up on the prior year due to the increase in sales. The first-time application of IFRS 16 did not have any effect on the segment profit.

Net assets and financial position
 

• The development of trade net working capital (TNWC) primarily reflects the increase in inventories. In terms of the latter, the Group was able to achieve a further improvement compared to the end of 2018 as a result of the continued strict focus on inventory management. Over the course of the remainder of the year, the Group anticipates a further normalization of inventory development.
• The first-time application of IFRS 16 led to a significant increase in net financial liabilities due to the first-time inclusion of leasing liabilities. Excluding the effects of IFRS 16, net financial liabilities amounted to EUR 79 million and were therefore only slightly up on the prior year. This is mainly attributable to the development of free cash flow of the last twelve months.
• A step-up in renovations of existing retail stores and the expansion of the IT infrastructure in the course of the further digitization of the business model led, as expected, to a significant increase in capital expenditure in the first quarter.
• Taking into account the effects of IFRS 16, free cash flow came to EUR 2 million in the first quarter. Excluding the effects of IFRS 16, however, there was a decline in free cash flowto minus EUR 60 million. This development reflects above all the significantly higher capital expenditure compared to the prior year.

Network of freestanding retail stores

• The number of own freestanding retail stores remained virtually unchanged in the first quarter.
  • Five newly opened BOSS stores, mainly in Asia, contrasted with the closures of seven stores with expiring leases.
  • Also, a HUGO store with its own store concept opened in Mexico. On the other hand, one HUGO store with an expiring lease has been closed.

Outlook 2019

• The Managing Board confirms the financial outlook for the full year.
• As such, HUGO BOSS continues to anticipate an increase in Group sales in 2019 at a mid-single-digit percentage rate on a currency-adjusted basis. This forecast is based on the assumption that comp store and currency-adjusted retail sales will also increase at a mid-single-digit percentage rate in full year 2019.
• As a result, the Group continues to expect an increase in EBIT (excluding the anticipated effects of IFRS 16) at a high single-digit percentage rate in 2019. Above all, the predicted increase in gross profit will contribute to this.
• A detailed presentation of the outlook for 2019 can be found in the Annual Report 2018.

*Without taking into account the effects of IFRS 16. A detailed description of the effects of IFRS 16 on the Group’s earnings in the first quarter can be found on page 8 of this quarterly statement.

Financial calendar and contacts

May 16, 2019
Annual Shareholders’ Meeting

August 1, 2019
Second Quarter Results 2019 & First Half Year Report 2019

November 5, 2019
Third Quarter Results 2019
 

If you have any questions, please contact:

Dr. Hjördis Kettenbach
Head of Corporate Communications
Phone: +49 7123 94-83377
Email: hjoerdis_kettenbach@hugoboss.com

Christian Stöhr
Head of Investor Relations
Phone: +49 7123 94-87563
Email: christian_stoehr@hugoboss.com