HUGO Boss - Quarterly Statement for Q2 2020
HUGO BOSS successfully executes its measures to protect cash flow
- Temporary store closures weigh on Q2 financial performance
- Momentum in online business strongly accelerates – sales up 74% in Q2
- Sales in mainland China return to double-digit growth in June
- Strong free cash flow generation of EUR 39 million in the second quarter
- Operating result (EBIT), excluding non-cash impairment charges1, amounts to minus EUR 124 million
“The second quarter was as challenging as expected. Our relentless focus on executing our measures to protect the financial stability of HUGO BOSS has yielded strong cash flow generation in Q2,” says Yves Müller, Spokesperson of the Managing Board of HUGO BOSS AG. “It is equally encouraging to see that the momentum along our strategic growth drivers China and Online has either returned quickly or further accelerated. Now, we will put all our effort behind the further recovery of our operations in order to return to top- and bottom-line growth as soon as possible.”
In the second quarter of fiscal year 2020, both the retail sector and the apparel industry were severely impacted by the global spread of COVID-19. Temporary lockdowns resulting in widespread store closures, a sharp deterioration in consumer sentiment, as well as international travel restrictions weighed on global industry sales.
Temporary store closures weigh on Q2 sales performance
With approximately 50% of its global store network closed on average during the course of the second quarter, business of HUGO BOSS was significantly impacted by the pandemic. This was particularly evident in Europe and the Americas – by far the Company’s largest regions. In both regions, the vast majority of the Company’s stores and shop-in-shops were closed from mid-March until the end of May, thus significantly weighing on sales and earnings development. Besides the severe disruption of its own retail operations, the Group’s global wholesale business also faced a challenging quarter. Large-scale temporary closures of wholesale points of sale resulted in significantly lower deliveries to wholesale partners, particularly during the months of April and May.
Consequently, Group sales declined to EUR 275 million in the second quarter, corresponding to a decrease of 59% against the prior-year period, both in reporting currency and currency-adjusted (Q2 2019: EUR 675 million). While own retail sales decreased 58%, wholesale revenues fell 64%, both currency-adjusted.
Momentum in the Group’s own online business accelerates strongly
The Group’s own online business, however, continued to enjoy very strong momentum in the second quarter. At a growth rate of 74%, currency-adjusted sales on hugoboss.com and self-managed offerings on important partner websites further accelerated in Q2. This development was due to significant double-digit sales improvements across all three regions – Europe, the Americas, and Asia/Pacific. In doing so, the period from April to June marks the strongest quarterly performance out of eleven consecutive quarters with significant double-digit online sales growth for HUGO BOSS.
Sales in mainland China return to double-digit growth trajectory
From a geographical perspective, the sales performance varied across regions as different markets were experiencing different stages of the pandemic. Currency-adjusted sales in Europe and the Americas declined 59% and 82%, respectively, as temporary store closures and sharp declines in tourism flows weighed on both regions. In addition, unrest and demonstrations in May and June put an additional strain on the Group’s U.S. business.
In Asia/Pacific, currency-adjusted sales were down 36%. While most of the region’s markets were also severely affected by the economic consequences of the pandemic, mainland China stood out positively, as it continued its gradual recovery that started already towards the end of March. After returning to growth in May, the month of June has seen a further acceleration with currency-adjusted sales in this strategically important market up double-digits. This development was driven by an overall improvement in consumer sentiment, a robust conversion in brick-and-mortar retail, as well as a strong performance in the market’s own online business, where sales more than doubled in the three-month period.
Successful execution of comprehensive measures to protect cash flow
In the wake of COVID-19, protecting its financial flexibility and stability was a top priority for HUGO BOSS in the second quarter. Already back in May, the Company therefore announced comprehensive measures with a total volume of around EUR 600 million to secure its cash flow. Over the course of the second quarter, HUGO BOSS has made significant progress in implementing these measures by strongly focusing on reducing operating expenses, postponing all non-essential investments, and substantially reducing inventory inflow. Overall, this strongly contributed to the generation of free cash flow amounting to EUR 39 million in the second quarter, hence significantly cushioning the impact of the sales and earnings decline on free cash flow (Q2 2019: EUR 133 million).
In addition, HUGO BOSS has taken further steps to safeguard its financial flexibility as it has successfully exercised the increase option of its existing revolving syndicated loan. The latter now totals EUR 633 million, of which EUR 212 million was utilized at the end of June. In this context, the Company has also agreed with its syndicate banks to suspend the financial covenant under the syndicated loan until the end of June 2021. On top of that, HUGO BOSS has secured further credit commitments totaling EUR 275 million, provided by six international banks and partially backed by KfW, Germany’s state-owned development bank. The credit commitments have a maturity until June 2022. At the end of the reporting period, these credit facilities were not drawn.
Economic consequences of COVID-19 weigh on EBIT development in Q2
Besides the severe sales decline, substantial inventory valuation effects impacted the Group’s earnings development. In addition, impairment charges in the amount of EUR 125 million entirely related to the pandemic’s impact on the Group’s retail business weighed on the operating result (EBIT). The impairment charges, however, are non-cash in nature and do not affect the Company’s liquidity. When excluding those impairment charges, EBIT amounted to minus EUR 124 million (Q2 2019: plus EUR 80 million). Various expense-reduction measures initiated at an early stage enabled HUGO BOSS to considerably cut its operating expenses in the second quarter, thereby cushioning the earnings decline to some extent. When including the impairment charges, EBIT for the second quarter amounted to minus EUR 250 million.
HUGO BOSS expects gradual improvement for the second half of 2020
As the further development of the pandemic in many key markets remains uncertain, HUGO BOSS is not able to provide a reliable sales and earnings forecast for full year 2020. Nevertheless, the Company remains optimistic that the global retail environment will continue to gradually improve. This should also positively impact the Group’s sales and earnings development in the second half of the year and allow HUGO BOSS to make further progress along its overall recovery, which has started at the beginning of May. Retail sales trends during the second quarter have shown a sequential improvement month by month. This positive trend has also continued so far in Q3, as HUGO BOSS has recorded further improvements in its global retail operations during the month of July.
1 HUGO BOSS recorded non-cash impairment charges in the amount of EUR 125 million in Q2, that were entirely attributable to the pandemic’s negative impact on the Group’s retail business.