Hugo Boss AG SWOT & PESTLE Analysis

Strength

1. Strong Financial Performance: The overall sales in FY2017 rose by 3% as compared to FY2016.. Assets rose and liabilities fell due to lower income tax rate . Group’s free cash flow recorded a 6% increase to EUR 220 million in 2016. It grew by 28.9% in first 3 quarters of 2017 as compared to same period in 2016. The overall sales increased in 2017 by 8% in its freestanding stores and shops-in-shops. Its own retail business grew by 5% in 2017 and licenses sales increased by 14% in 2017. The net sales grew from EUR 2,693 in 2016 to EUR 2,733 in 2017. In 2016, gross profits grew by 4%. Gross Profits grew consistently in 2017 from EUR 419.2 million in Q1 FY2017 to EUR 416.2 million in Q3 FY2017. Net income rose from EUR 48 million to EUR 80.3 million in this period. Strong financials are a result of solid retail sales and fast growing online business.

2. Swift changes to maintain exclusivity of its premium products: Hugo Boss is a pioneer in premium apparel and accessories range where consumer tastes and preferences change fast. To keep pace with these changes, keeps benchmarking with its competitors. It has a dedicated team of designers who are trained to innovate & transform sketches into final product with perfect fitting and best material quickly with technology. It is done with industrial production viability in perspective. They also make further enhancements to products in 4 sites viz Metzingen, Moorrovalle (Italy) , Radom (Poland) and Izmir (Turkey). Its efficient logistics ensure timely delivery in a span of just 24 hours because of these distribution centres in premium locations. Customers are given tailor made options which creates personalization in their products. It maintains individuality as well as exclusivity through such offers.

3. Strong footing In Asia-Pacific markets: The sales in Asia-Pacific region grew by 12.5% to $9 million in 2016 as compared to same period in 2015. Sales grew by 6% in FY20147. This growth was driven by double digit increase in its comp retail stores. Chinese and Japanese markets led Asia-Pacific sales growth which rose by 10% . Macau and Hong Kong led the Chines markets in 2017 with double digit growth in Q2 and Q4. This growth was led by strong local demand catered by 500 points of sale, less discounting, better price/value proposition, extensive marketing and heavy tourist footfall. In 2017, strong growth numbers were reported in all quarters. There was an increase in sales by 41% , 10% , 4% and 10% in Q1, Q2, Q3 and Q4 FY2017 respectively.

4. Strong Brand image with core brands Hugo & Boss: Hugo Boss has a very strong brand image in the premium and upper premium segment. Its net sales in menswear as well as womenswear have grown in 2017. Boss sales grew by 13% and Hugo sales increased by 32%. Boss focusses on upper premium apparels for various occasions and Hugo is focused on apparels at affordable and entry level prices especially casual wear and athleisure. Some of Hugo’s Fall and Winter 2018 collection was sold online. Various marketing drives with Lewis Hamilton, James Marsden, etc. have strengthened these brands. Hugo’s sale of Bread & Butter by Zalando collection immediately after the show received excellent response. Gallery Collection by Boss in July was also received well. The online presence of these brands and capsule collections has led to greater consumer base which had positive impact on its earnings in 2017.

5. Solid strategic Fields of Action for long term success: Hugo Boss has four major strategic fields of action to realign its brand portfolio, drive digitization, modify distribution strategy and innovate. It is restructuring by integrating previously independently managed brands with its core brands Hugo and Boss. It is using differential pricing and collection for these two to leverage growth potential and is re positioning these brands for adding new customers. Improvements in retail sales’ productivity and increasing number of distribution channels has increased its market share. It is endeavouring to launch collections to suit short-term trends which will allow for restocking of the best-selling products within the season. This will enable profitable growth by deriving its benefits even in long term due to underpinned customer-oriented approach.

Weakness

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Opportunity

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Threat

1. Adverse impact of Environmental Changes: Fashion industry is exposed to vagaries of nature for the procurement of raw material. Environmental disasters, epidemics and climate change affect the availability of raw materials Hugo Boss needs. Water scarcity will negatively affect the long term agricultural output. It uses very fine quality cotton which requires certain stipulated conditions. A fall in cotton farming will reduce cotton fibre availability. Low supply will increase cost of input and reduce gross profit margins. Likewise, other fibre crops’ yield will be negatively impacted due to climate change which will increase their production costs and affect earnings. In case of earthquake, production sites have to be relocated which implies large costs.

2. Threats due to operational failure: In 2016, the risk exposure to operational factors was 55.3%. It includes the operational failures in logistics, sales and distribution. Sourcing premium inputs and delivering the finest product requires efficient supply chain management. To maintain high standards, it has limited warehouses for raw materials and finished products which have high maintenance costs. Concentration implies greater potential loss in case of an outage, fire, security breach etc. Inaccurate demand forecasts may lead to unplanned inventory accumulation & thus, higher discounting which implies lower profit margins. Its wholesale partners may accumulate backlogs and increase Hugo Boss’s insolvency. Failure in leveraging supply chain will negatively affect the group.

Political

1. Impact of Brexit on sales: Brexit weakened the business environment in Europe. The referendum burdened the economy & affected Europe sales as the economy grew by 1.7% in 2016 which was slower than 2015. UK profits fell in 2016 post Brexit referendum by 9% to £20.5 million and sales fell by 4% EUR 317 million in 2016. 10-12 % of Hugo Boss’s sales are to UK thus overall balance sheet was also negatively affected. The weak pound increased the tourist footfall & purchases however, it did not offset the negative impact of adverse retail business. Its share prices also fell which created more uncertainties. Brexit will increase the raw material procurement costs going from EU. 12% of its sourcing is done from Europe, thus there may be increase in costs which would reduce its earnings in case Hugo Boss is not able to adapt to these changes that would be enforced in 2018-19.

2. Political Uncertainties Worldwide: This includes geopolitical changes and uncertainty around governance and compliance that may affect its business. In 2016, the risk exposure to external failures was 14.6%. Political uncertainties around the world may increase economic nationalism, tax rate and trading barriers. Fashion choices may be influenced by emotions that arouse due to political factors which can reduce demand for its luxury products even in individual sales market. Its sales were negatively affected at the time of terrorist attack in France and Belgium which led to change in buying behaviour and hence, demand. It may also lead to supply chain problems in case of internal conflicts like in 2014 Ukraine’s military conflict when quick relocation is required. Hugo Boss may have to modify its operating model in case of such changes.

Economic

1. Impact of Interest Rate: The fluctuations in interest rates affect the group’s cash balances, future interest income, payments , profitability and liabilities. An increase of 100 basis points in market interest rate implies a decline in its net income and equity by EUR 0.1 million. A dip of 10 basis points increases its net income and equity by EUR 0.1 million. By hedging and trading derivatives, the fair value and cash flows of the group become volatile. Low interest rate environment in Europe in 2016 had positive impact on its earnings then. However, an increase in interest rate will have adverse impact on its financial health. The cash flow risk grew from EUR 0.3 million in 2015 to EUR 0.6 million in FY 2016. The risk from derivates also grew 5 times from EUR 0.1 million to EUR 0.5 million in this period. Hence, interest rate instability renders volatility to the business.

2. Impact of Exchange Rate Fluctuations: Hugo Boss has operations globally which imply transactions in different currencies. Exchange rate risks arise due to movement of net assets beyond the eurozone and intercompany orders . The exposure to this risk is high as Hugo Boss does not hedge it. The risk as of 30 December 2016, was EUR 3.7 million. Depreciation by one standard deviation in Turkish Lira (prime centre for logistics and production) would have led to a EUR 2.1 million decreases. If it had appreciated by this amount then there would have been a EUR 2.1 million increase in Hugo Boss’s equity. Thus, this impacts its financial foreign receivables and liabilities and loans.

Social

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Technological

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Legal

1. Strict Compliance with Government Laws: Hugo Boss has ensured compliance with the norms of the Fair Labor Association (FLA), the German Federal Government’s Partnership for Sustainable Textiles (“Textiles Partnership”) and the Bangladesh Accord on Fire and Building Safety. It also complies with the laws for waste management which may be hazardous for the environment as well as the safety of its workers. It follows norms laid International Labour Organization (ILO) and the United Nations Universal Declaration of Human Rights. Compliance ensures all-encompassing and benign working conditions, workable employee-employer relationship, environmental protection in supply chain and occupational safety. It adheres to the social compliance with fair wages norms for both males and females. However, minimum wage law may act as a deterrent for workers who might work less than their potential and may increase Hugo Boss’s costs. Non-Compliance with government laws implies high penalties, chaos among employees and stalls production as operations are disrupted.

Environmental

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