Group management

Key performance indicators

HUGO BOSS aims at sustainably increasing its enterprise value. The Group’s internal management system is intended to support the Managing Board and the management of the respective business units to focus all business activities on this objective. In order to increase its enterprise value, the Group focuses on maximizing free cash flow over the long term. By consistently generating positive free cash flow, the Group is confident to safeguard the independence and liquidity of HUGO BOSS at all times.

Increasing sales and operating profit (EBIT) is key for improving free cash flow over the long term. In addition, a strict management of trade net working capital and a value-oriented capital expenditure approach support the development of free cash flow. HUGO BOSS has therefore identified a total of four key performance indicators for increasing free cash flow: sales, EBIT, trade net working capital, and capital expenditure.

While fiscal year 2022 was overall characterized by high levels of geopolitical and macroeconomic uncertainty, HUGO BOSS recorded a particular strong top- and bottom-line performance. This development was driven by the rigorous execution of our “CLAIM 5” growth strategy introduced in 2021.

“CLAIM 5” aims at driving superior top-line growth in the years to come, thereby significantly increasing the market share of BOSS and HUGO. At the same time, our strategy is intended to ensure a sustainable increase in profitability as well as above-average free cash flow generation. All initiatives aimed at driving sales growth are therefore also measured by their potential to sustainably grow operating profit (EBIT). As part of “CLAIM 5”, comprehensive brand, product, and digital investments are to be compensated by strong efficiency gains realized by optimizing our global store network as well as leveraging operating overhead. Group Strategy

For HUGO BOSS, trade net working capital is the most important performance indicator for managing the efficient deployment of capital.

Management of inventories as well as trade receivables is the main responsibility of our subsidiaries and the respective operating central departments. The latter are also responsible for managing trade payables. These three balance sheet items are primarily managed by reference to the days of inventories outstanding, days of sales outstanding, and days of payables outstanding. Besides this, there is a specific approval process for the purchase of inventories for our retail business in order to optimize inventories. This process takes into account sales quotas as well as expected sales growth and markdown levels.

The senior management of HUGO BOSS is jointly and directly responsible for driving profitable growth. As a result, the short-term incentive program (STI) of managers at all four management levels is linked to the achievement of specific sales and EBIT targets. The ratio of trade net working capital to sales is the third component of the STI. The compensation scheme for management at the two levels below the Managing Board also includes a long-term incentive program (LTI), whose design matches that for the Managing Board. The LTI includes both financial and non-financial performance criteria.

Investment activity is focused on both our own retail network and the digitalization of our business model. As part of our strategic claim “Rebalance Omnichannel,” we are pushing ahead with the further optimization and modernization of our global store network with the vast majority of our own stores being redesigned by the end of 2024. In line with our claim “Lead in Digital,” digital investments are planned along the entire value chain – from digital trend detection and product development to AI-enabled pricing and the global rollout of digital showrooms. A specific approval process exists for material investment projects. Apart from qualitative analyses, e.g., with respect to potential store locations, this also includes an analysis of each project’s net present value. Financial Position, Capital Expenditure, Group Strategy

In light of the anticipated strong top- and bottom-line growth, HUGO BOSS is confident to continue generating significant free cash flow. This is to be supported by improved management of trade net working capital and the efficient use of capital expenditure. The majority of expected accumulated free cash flow will either be reinvested into the Company or distributed to shareholders via regular dividend payments. In doing so, HUGO BOSS is pursuing a profit-based dividend policy aimed at allowing shareholders to participate appropriately in the Group’s earnings development. The Company’s payout ratio until 2025 is projected to be in a range of between 30% and 50% of net income attributable to shareholders (2022: 33%). In line with our vision of being the leading premium tech-driven fashion platform worldwide, we are also considering strategic investments in the areas of product and brand, sales, and digital expertise. In the event of excess liquidity, we also consider special dividends and share buybacks as viable alternatives to return cash to our shareholders. We analyze our balance sheet structure at least once a year to determine its efficiency and ability to support future growth and to simultaneously provide sufficient safety in the event that the Company’s business performance falls short of expectations. Financial Position, Capital Structure and Financing

Core elements of the Group’s internal management system

The Group’s planning, management and monitoring activities focus on optimizing the key performance indicators described above. The core elements of our internal management system are Group planning, Group-wide, IT-enabled financial reporting, and investment controlling.

Group planning at HUGO BOSS generally refers to a rolling multiyear period and is prepared as part of the annual, Group-wide budget process, taking into account the current business situation and the underlying “CLAIM 5” strategy. Based on targets set by the Managing Board, our Group’s subsidiaries prepare earnings and investment budgets as well as forecasts for trade net working capital for their respective markets or divisions. On this basis, our product development and sourcing units derive mid-term capacity planning. Group Controlling reviews all of these plans for plausibility and aggregates them to form the overall Group planning. The latter is updated on a regular basis, taking into account the actual business performance as well as any opportunities and risks.

Additionally, HUGO BOSS regularly conducts liquidity assessments, based on the expected cash flow development for any given year. This aims to identify financial risks at an early stage and to take appropriate measures concerning financing and investment requirements. Financial Position

On a monthly basis, the Managing Board and management of Group subsidiaries are informed about the operational business performance through standardized, IT-enabled reports of varying detail, supplemented by ad hoc analyses. Actual data compiled by our Group-wide, IT-based reporting system is compared against budget data on a monthly basis. Any deviations are analyzed and planned countermeasures are discussed. In addition, developments with a significant impact on the Group’s net assets, financial position, and results of operations are immediately reported to the Managing Board.

The Company is particularly focused on monitoring early indicators suitable for obtaining an indication of future business performance. In this context, the sales performance in our own retail business, the wholesale order intake and the performance of our replenishment business are analyzed on a weekly basis. In addition, benchmarking against relevant competitors is performed at regular intervals. The continuous monitoring of early indicators is intended to enable us to identify deviations from the budget at an early stage and take appropriate countermeasures.

The Group’s investment controlling appraises planned investment projects with respect to their contribution to our Company’s overall profitability targets. This ensures that projects are only launched in case of an expected positive contribution to enhancing the Group’s economic profile. In addition, subsequent analyses are conducted at regular intervals to verify the profitability of projects that have already been realized. Appropriate countermeasures are taken in the event of any negative deviations from the initial profitability targets.

In light of heightened levels of geopolitical and macroeconomic uncertainty, in 2022 there was a particular close dialog between the Managing Board, Group Controlling, the management of our central divisions, and our Group’s subsidiaries. Corporate planning was regularly reviewed and updated throughout the year. In doing so, both the stronger than initially anticipated top- and bottom-line performance as well as the various negative macroeconomic factors and their potential business implications were regularly taken into account. Report on Economic Position, Comparison of Actual and Forecast Business Performance