Hugo Boss Finacials

• Hugo Boss AG manufactures clothing and accessories for the mid-range luxury fashion market through its BOSS and HUGO brand lines. Though Hugo Boss was originally a men’s business wear company, it has since expanded into women’s clothing (13% of 2008 sales) and leisure and sportswear. As of the end of fiscal 2008, the British private equity firm Permira owned 88% of Hugo Boss’s common shares and 55% of its preferred shares, bringing its total ownership stake to about 72% of the company’s total capital

• Despite a 3% increase in sales in 2008, Hugo Boss reported a 27% decrease in net income for the same period, reflecting the difficulty facing luxury manufacturers in an economic downturn. Europe and the Americas, the hardest hit regions in the 2008 financial crisis, accounted for over 88% of 2008 sales, exposing Hugo Boss to the weak conditions in these markets. Additionally, the U.S. dollar, Hong Kong dollar, and British pound were all relatively weaker than the euro until mid-2008, meaning that each dollar or pound spent converted to a smaller number of Euros, Hugo Boss's reporting currency. As a result of these unfavourable exchange rates, fiscal 2008 sales (in Euros) grew by just 3%, despite the fact that sales in local currencies (before converting to Euros) were up 6%.

• Hugo Boss has expanded its offerings to include women's clothing, though menswear still brought in 87% of all sales in 2008, while only 13% of sales were attributable to women’s wear. Despite the relatively small contribution of women’s wear to total sales, the segment has expanded rapidly (from sales of $86 million in 2004 to $322 million in 2008) and has been a major source of the company's growth. In 2008, another driver of sales growth was the shoes and leather accessories segment (launched in 2005), whose sales jumped 15% to $303 million (12% of total sales).

• One factor driving this trend has been the company's shifting of manufacturing to lower-cost regions. Hugo Boss manufactures most of its own products in factories located in the U.S., Poland, Italy, and Turkey (the company's single-largest production site). In 2006, the average hourly wage for Turkish workers in the textile and leather manufacturing sectors was $2.31 per hour, much less than comparable wages in Germany, Hugo Boss's home country.


• In addition, all of the company's handbags are manufactured in China, where the average wage for workers in the manufacturing sector was just $0.67 per hour in 2004. Hugo Boss also announced in September 2008 that it would be partnering with Indian firm Pokarna Ltd to manufacture high-end men's dress shirts.

• Though most of Hugo Boss's sales are made through third-party retailers, sales at its directly operated stores (DOS) have been growing at double-digit rates since 2003. Overall DOS sales have more than tripled from 2003-2008, increasing from 8% to 16% of the company's total sales. While there are upfront costs associated with establishing new DOS locations, Hugo Boss estimates that they reach break-even profitability within two years and repay the initial costs within 4-5 years, making DOS a longer-term investment in earnings growth. Additionally, Hugo Boss cites better presentation of its brands and higher-quality customer feedback as advantages to the DOS model. As such, the company has been increasing the number of its DOS steadily since 2001, from 51 to 330 as of 2008.