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 sales risks. 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 2022, both the largest external supplier as well as the largest single external production site accounted for 5% of the total sourcing volume (2021: 7% and 3%, respectively).
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 this context, the expansion of the Company’s own production capacities at the Izmir (Turkey) site in 2022 represented an important milestone. In addition to closer proximity to its most important sales markets enabling HUGO BOSS a faster replenishment process, the Company will also benefit 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 (Turkey) 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 economies, 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 profit margin and ultimately on the profitability of the Group. In particular during the COVID-19 pandemic, global value chains have been exposed to particular stress. Challenges include shortages in terms of global sourcing and production capacities and a related increase in material and production costs. 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 review 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 and on further increasing the flexibility of merchandise management across distribution channels and markets. In this context, HUGO BOSS is developing a “digital twin” of its value chain – a smart and technology-driven business operations platform. Using real-time data, it will provide the Company with important information from demand planning over production status to intelligent inventory allocation. In addition, HUGO BOSS aims to harmonize purchasing and sales more closely in the future by further shortening the collection development times, thereby enabling the Company to respond even better to market trends and customer needs.
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 countermeasure inevitably has a negative impact on the gross profit margin and ultimately on the Group’s profitability, and are therefore constantly monitored by the Group Controlling department. A centrally managed pricing policy, differentiated retail formats, and collections tailored to these are aimed at achieving 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. As part of the process, system-based analyses of movement rate, range of coverage, and net realizable value are applied across the Group. 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 the wholesale channel, HUGO BOSS pays close attention to ensuring a balanced customer structure in order to avoid a potential overdependence on individual customers. The Group Controlling department constantly monitors key performance indicators such as the order intake, sales, and supply rates and reports these on a regular basis to the Managing Board. In this way, countermeasures can be initiated promptly in the event of any potential risks arising. 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 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, 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. 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. Research and Development, Sourcing and Production
Logistics risks
HUGO BOSS is exposed to logistics risks that relate, on the one hand, 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 addition, the temporary downtime or loss of warehouse locations or conveyor systems may lead to missed sales opportunities. The storage of inventories is centered on selected sites directly operated by HUGO BOSS. The 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.
As a consequence of the COVID-19 pandemic, competition for global transport and logistics capacity has intensified noticeably. On the one hand, this has led to a significant increase in freight costs in 2022 compared to pre-pandemic levels. At the same time, risks exist with regard to disruptions or significant delays in product availability. Thanks to its resilient value chain and timely and forward-looking actions, HUGO BOSS was largely able to secure sufficient product availability during the pandemic, which is also reflected in the Company’s strong business performance in 2022. The Company particularly benefited from its well-balanced global sourcing mix, the flexibility of its own production sites, long-term strategic partnerships with suppliers, and the successful onboarding of new partners. HUGO BOSS will continue to use all means at its disposal also in the current fiscal year to ensure sufficient product availability at the point of sale, while, at the same time, expects at least a partial easing in global transportation and supply chains, particularly in the second half of 2023. However, significant interruptions in product availability and related lost sales opportunities cannot be completely ruled out. Sourcing and Production
Ensuring sufficient warehouse capacity and a seamless delivery of goods also forms an essential aspect as part of Company’s strategic claim “Organize for Growth.” In this context, 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 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.