Material external risks
HUGO BOSS is subject to a variety of external risks, mainly in connection with macroeconomic, political and social developments as well as environmental and health aspects.
As a global company, HUGO BOSS is exposed to macroeconomic risks in terms of global economic trends. This means that an economic downturn usually results in a decline in demand for premium and luxury goods that may have a negative effect on the sales and earnings growth of the Group. The effects of macroeconomic developments can occur globally as well as limited to one region and may influence each other.
In order to reduce the impact of economic fluctuations, HUGO BOSS aims at a balanced regional distribution of sales. The Group continuously keeps a close eye on macroeconomic trends as well as the industry environment in order to identify risks at an early stage and be able to respond to them quickly. Internal early indicators are also analyzed regularly, which makes it possible to forecast the impacts of potential macroeconomic risks. Group Management
Some of the possible responses to a cyclical decline in demand include a reduction in production and sourcing activity, an even tighter management of trade net working capital, increasing cost controlling, price adjustments and adjustments in the Group’s own retail network.
In its publication of January 20, 2020, the IMF anticipates global economic growth to slightly accelerate in 2020. The outlook is based on the assumption of the continued robust growth of many significant emerging markets. At the same time, growth in many mature countries and in China is expected to slow down further in 2020. Increasing geopolitical tensions and a further escalation of global trade conflicts are considered to represent significant risks to the development of the global economy. The potentially negative effect of economic trends on Group sales and earnings may be significant, despite the measures described. Management judges the likelihood of occurrence as likely. Outlook
Political and social risks
HUGO BOSS is exposed to political and social risks as a result of the global nature of its business activities. For example, changes in the political and regulatory environment, geopolitical tensions, military conflicts, changes of government or terrorist attacks can have a negative impact on the consumer climate.
The Group does not expect global uncertainties regarding political and social developments to decrease in 2020. A potential escalation of geopolitical tensions in the Middle East, a resurgence of political unrest in Hong Kong and the ongoing danger of terrorist attacks, for example, represent significant risks for the premium and luxury goods industry, and therefore also for the Group’s business performance.
There are also still uncertainties with regard to Brexit on January 31, 2020. For example, it remains uncertain what final form any future tax and customs regulations will take. The potential levy of import duties could lead to higher costs for the Company. HUGO BOSS has initiated a working group that is closely monitoring the exit process and coordinating all local and worldwide risk mitigation measures. The Company generally also includes price adjustments among the possible responses to any decline in demand due to economic factors or to a levy of import duties. The Management has assessed the remaining risks associated with Brexit for 2020 as unlikely overall and as having a low impact.
Due to the high likelihood that its significance will increase, HUGO BOSS assesses the risk resulting from political and social changes as an “emerging risk”. It raises strategic questions, for example regarding the influence of demographic changes on consumer behavior and the supply chain. This reveals the close link between the social risk and the industry risk and the risks associated with the suppliers and sourcing markets. In evaluating and handling the risk, the risk experts and risk owners in the Group work in interdisciplinary teams on the ongoing analysis and monitoring of current political and social developments and their influence on the Group’s own business activity. The central risk management coordinates and supports this process.
The Group’s global distribution in more than 120 countries is intended to provide a natural hedge against adverse developments in individual countries or regions. Unexpected developments in important sales markets can have a high financial impact. The Management considers this risk to be possible.
Environmental and health risks
The HUGO BOSS Group’s global value chain is subject to environmental and health risks that may result from pandemics or environmental and natural disasters as well as the consequences of climate change.
At the time this report was prepared on February 20, 2020, the business of HUGO BOSS was significantly impacted by the spread of the novel coronavirus and the associated restrictions on public life, first and foremost in mainland China. In addition to the closure of a number of stores in China, the Company also recorded a noticeable decline in the sales generated from Chinese tourists in other key markets. In addition to lost sales opportunities, which would ultimately also negatively impact the Group’s profitability, there are also risks associated with suppliers and sourcing markets. In principle, further escalation or restrictions lasting longer than expected could lead to temporary production stoppages for one or more suppliers in the region. This could disrupt the Group’s supply chain, which would pose additional risks for sales. Although no significant impacts on the Group’s supply chain were observed at the time this report was prepared, the Company is making every effort to ensure it is as well prepared as possible, and is in close contact with its partners in the region. Overall, the Management assesses the risks in this regard above and beyond the financial impacts already taken into account in the outlook for 2020 as being likely in principle. The effect on earnings performance is classified as low. Outlook, Subsequent Events, Material Operational Risks
Risks as a result of climate change, such as increasing water scarcity, are classed as unlikely for fiscal year 2020, and are associated with low possible loss. In the future, however, this risk could become more significant for HUGO BOSS. In the long term there is a risk that an increasing scarcity of water could have negative consequences on the cultivation of cotton, leading to a reduced availability of cotton fibers and higher material costs as a result. Cotton is by far the most used material in the Company’s products.
HUGO BOSS has a central emergency management system in order to be able to react promptly and appropriately to an environmental or natural disaster occurring. Its structural organization pools cross-functional skills needed to handle emergencies and is intended to ensure efficient coordination with clear decision-making paths. Overall, in 2020 the Management anticipates that the environmental and health risks will have possible significant effects on the net assets, financial position and results of operations.